雅保公司 (ALB) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Albemarle Corporation earnings conference call. My name is Shinay and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions)

I would now like to turn the presentation over to your host, Mr. Lorin Crenshaw, Director of Investor Relations and Communications. Please proceed, sir.

Thank you, Shinay. And welcome, everyone, to Albemarle's second quarter 2012 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 investors section at Albemarle.com. Joining me on the call are Luke Kissam, Chief Executive Officer; John Steitz, President and Chief Operating Officer; and Scott Tozier, Chief Financial Officer.

As a reminder, some of the matters discussed during this conference call and webcast 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 will you find reconciliations in our press release which is posted on our website at Albemarle.com.

With that I will turn the call over to Luke.

Thanks, Lorin. And good morning, everyone. We appreciate the opportunity to share our second-quarter financial results with you today. I will begin by commenting on the Company's quarterly results and sharing updates related to some of our capital expansions. As well as touch on our views for the rest of the year. John Steitz will then walk you through business segment performance before Scott Tozier reviews select financial highlights. As usual at the end of our prepared remarks we'll open it up for your questions.

I'm pleased to report second-quarter results that reflect the continuation of our solid start to 2012 across each of our segments. For the quarter, our net income before special items was $111 million, or $1.24 per share, up 1% year-over-year. Net sales were $685 million, down 8% year-over-year. Year to date, our earnings have exceeded levels achieved in 2011 despite what I would characterize as a more challenging economic environment this year. EBITDA for the quarter, before special items, was $181 million, up 2% year-over-year. And for the first six months, EBITDA was $357 million before special items, also up 2% year over year.

In the first half of 2012, volume gains in FCC Catalyst and Performance Catalyst Solutions, coupled with strategic pricing moves and great cost management and execution on the manufacturing side, offset lower volumes in Polymer Solutions and HPC Catalyst. Allowing us to deliver a better financial performance than in the first half of 2011. As John will discuss in more detail later, during the second quarter record Fine Chemistry results reflected continued strength in our bromine derivatives. And continued growth in our contract manufacturing franchise. Polymer delivered its second straight quarter of meaningful sequential earnings and margin improvement.

Catalyst delivered year-over-year earnings growth. But slipped sequentially and versus our expectations at the beginning of the year as HPC Catalyst saw more pronounced seasonal decline in volume of fresh catalysts than usual. As we've said frequently over the years, the relatively long sales cycle, ranging from between 18 months to three years, depending on the customer, and large nature of HPC orders, makes forecasting inherently complex quarter to quarter. It's important to note that we maintained our HPC market share during the second quarter. Where we were the incumbent supplier we supplied the vast majority of refills in the quarter. We even picked up a couple of hundred met tons in situations where we were not the incumbent. This was simply a quarter when not many of the units we supply were up for refill. Fundamentally, our Catalyst franchise overall is maintaining market share, remains healthy, and continues to enjoy excellent competitive positioning and growth prospects.

At this time, I would like to elaborate a little on the special item we reported this quarter related to approximately $95 million, $74 million after tax, or $0.82 per share, of charges related to our previously-announced plans to exit the phosphorus flame retardant business. The cash outlay related to this exit is expected to be in the $5 million to $15 million range with a payback in approximately one year. Earning-wise, full-year 2013 should benefit by somewhere between $0.10 and $0.13 per share from this action. We have a history of managing assets that are not meeting our performance targets. And our sites in Avonmouth and Nanjing were disadvantaged from a location, scale, and product mix standpoint. The charges taken should be sufficient to cover all exit costs. And this decision will not impact our ability to achieve Vision 2015.

Although our most recent deep dive portfolio review is complete, you should expect us to remain vigilant to ensure that all of our businesses meet the challenging return hurdles that we have set. I would like to emphasize that we remain committed to Project Gemini, a phosphorus-based flame retardant with applications in high-end servers and other attractive markets. In fact, we're scheduled to launch our Project Gemini product toward the end of this year. Shutting down Nanjing and Avonmouth will have no impact on our ability to launch or grow this exciting new proprietary technology.

With regard to our major capital projects, we continue to proceed with the first two phases of our bromine expansion in Jordan. The initial phase for the bromine expansion should be completed this summer and will double the elemental bromine capacity in Jordan. While the second phase, which will double capacity for completion fluids in HBr is also on track for completion by year end. However, we have recently decided to delay the third and final phase of the expansion that would double our tetrabrom capacity.

Since we first announced this expansion project last spring, we have consistently reiterated our commitment to being good stewards of bromine and to bring this capacity on-line as needed to meet market demand. At this point it appears that the long-range forecasted demand for brominated derivatives can be supplied by the current bromine balances in Magnolia in Jordan. Of course, we retain maximum strategic flexibility and a competitive advantage as the only company with readily-expandable assets in both of the world's most prolific bromine-producing regions. We are at a point where the design package for tetrabrom expansion is complete, so it's a logical place to hold. We will be able to restart the expansion in relatively short order, as warranted.

With respect to the three performance catalyst solutions related expansions we've commenced, the TEA joint venture in Saudi Arabia, the catalyst center in Korea, and the specialty catalyst capacity expansions in the US all are on track, within budget, and projected to come on-line by year end. The investment rationale supporting these efforts is quite strong, with long-running industry and mega trends driving market capacity. The US and Korean expansions will allow us to maintain our leading global position in organometallics and advance our competitive positioning within electronic materials. While the world scale TEA joint venture in Saudi will be the first aluminum alkyl facility in the Middle East, satisfying demand and a need for a security of supply in that region of the world.

Coming into 2012, we knew we would face a tough year in terms of growth given our exceptional 2011 results, an uncertain global economic outlook, fragile consumer confidence, and questions surrounding rare earth prices. Six months into the year, these head winds have persisted and we expect to continue effectively managing through them.

During the second quarter, we saw a deterioration of certain of the indicators we use to gauge the health of the markets our business serves, particularly with respect to electronics. Among the many indicators we monitor include the IPC book-to-bill ratio which remained above parity at 1.02 in May. But has trended down the past two months. This contrasts with the reading three months ago of 1.04 that had been trending up for three straight months. We also monitor global connector confidence as published by the Bishop Report. Three months ago this report showed a March reading of 65.4 with four straight months of increases. By contrast, the June reading registered 44.1 and has fallen sharply in the past two months.

As a result, our current thinking is that the likelihood of a second half electronics recovery has substantially diminished over the past three months. Instead, a plateau seems more likely, as best we can tell at the present time. In which case, assuming we don't see further deterioration in these key end markets, we would expect second half Polymer Solutions performance levels to resemble the first half rather than show further sequential improvement.

Other indicators for our business continue to show strength and bode well for the balance of the year, including international offshore and Gulf of Mexico rig counts. Although I would note that most recently the deepwater rig count in the Gulf was still only 19 versus the 33 deepwater rigs that were in service before the BP oil spill. Refinery margins remain fairly solid in most areas of the world. And refinery conversion capacity growth seems to be trending up. And to date, bromine prices are holding up well.

In closing, we previously talked about our expectations for global economic expansion in the second half. That now does not appear to be the case. As a result, we expect that our businesses will generate earnings for the full year flat to modestly higher than in 2011. And end the year having made further progress toward the strategic goals we outlined as a part of Vision 2015. This would set us up nicely for 2013 when the impact of the major investments I discussed earlier should become positive contributors to our financial results.

With that I will turn the call over to John to discuss our operational performance for the quarter.

Thanks, Luke. I will begin with Catalyst which reported second-quarter net sales of $229 million, down 14% year-over-year. Segment income of $67 million, up 2% year-over-year. And segment margins of 29.3%, up 470 basis points year-over-year. HPC revenues were down $60 million in the second quarter compared to both second quarter of last year and the last quarter. This is without doubt the reason for the Company's revenue decline this quarter. We are encouraged that we will have a stronger second half, resulting in growth for our HPC business this year. We are also encouraged by an increasingly sour crude slate and trends of improving global air quality. For example, recently Russia has instituted a 10 ppm sulfur standard for gasoline and diesel to be in place by the end of 2014 with incentives for early adoption.

FCC's fundamentals were quite strong with double-digit volume gains compared to a weak second quarter of last year. We experienced a combination of improved operating rates among certain large US customers, along with growth in emerging markets. Higher base pricing is improving the bottom line. And the available crude slate continues to become heavier, more complex, and more inconsistent. FCC will continue, however, to face second-half top-line head winds due to lower rare earth pricing.

Our Performance Catalyst Solutions business continues to deliver strong results year to date. And during the quarter saw operating profits rise 26% year-over-year. Unit volumes up mid single digits year-over-year and profitability step up by 500 basis points. The PCS division's results were principally driven by the core polymer catalyst group where operating profits rose over 30%, driven by a continuation of long-term trends driving growth including capacity expansions among customers to meet increased demand for plastics in developing markets, in particular. And continued conversion of capacity among customers in developed markets working towards higher value specialty plastics, which require our high-performing matallocene activators.

Moving on to Polymer Solutions, we were pleased to see a continued profit recovery in this business. And broad-based sequential volume growth across most end markets. Net sales for the quarter of $247 million were down 15% year-over-year. And rose 8% quarter-on-quarter. While segment income of $64 million was down 17% year-over-year compared to a record, but rose 20% versus the prior quarter. Although the first half year-over-year comparisons have not shown gains given the strength of the comparable period, sequential volume and profit gains were fairly broad-based across our fire safety portfolio. With connectors, wire and cable, and the construction end markets exhibiting a good tone. While printed wiring board demand, which impacts our tetrabrom sales remained sluggish.

As a result, overall, while brominated flame retardant sales and operating profits were down 17% and 10% year-over-year, respectively, they rose 11% and 19% sequentially. And mineral flame retardant profits were also stronger sequentially, up nearly 20% as strength in Asia and the Middle East offset softer European construction in automotive end markets. As we enter the third quarter the July order book trends indicate an improvement over last year. Overall it appears to support our current view that volumes are more likely to be flat to up modestly in the third quarter. We remain focused on closely tracking our customer needs and managing our cash employed.

Fine Chemistry has established an impressive growth in profitability pace year to date. And generated record net sales of $209 million this quarter, up 13% year-over-year. And record segment income of $44 million, up 17% year-over-year. Segment margins of 21% also represented an all-time record and were up 80 basis points year-over-year. Fine Chemistry services results were particularly strong with sales up 33% and operating profits up 67%. While performance chemical sales were up 5% and operating profits down 5% from last year's record quarter for this division.

The outstanding year-over-year growth in Fine Chemistry services was mainly driven by record custom service profits, which nearly doubled year-over-year. New contracts and growth of existing contracts across high-viscosity lubricants, ag intermediates, and specialty pharma contributed to this growth. Upside was also attributable to increased demand for our NBPT product for use as a fertilizer stabilizer. Overall the level of inquiries and estimated size of our current pipeline has never been higher within Fine Chemistry services, which bodes well for the balance of the year and 2013.

Performance chemicals drivers this quarter included sequential improvement in clear brine fluid volumes, which continued gaining momentum, as international offshore rig counts remain at healthy levels. Growth remains biased towards developing markets. While the eventual tail wind of a rejuvenated Gulf of Mexico is still expected to be more second half weighted. This division also benefited from record performance within our specialty bromide derivatives portfolio, reflecting excellent growth. And in some instances new product traction across our food safety, water treatment, and industrial cleaning businesses. We entered 2012 with the view that Fine Chemistry would deliver the greatest percentage earnings growth among all of our GBUs. The business has certainly delivered through the first half and maintains a positive outlook for the balance of the year.

So with that I will turn it over to Scott to discuss our financial results in greater detail.

Thank you, John, and good morning, everyone. In light of the current environment, we are pleased to have delivered first-half financial results that show improved earnings generation and profitability levels year-over-year. With operating profits and EBITDA, excluding special items, up low single digits. And profitability, as measured by EBITDA margins, up 244 basis points to 26.4%. Let me start by highlighting a few P&L items.

R&D expense is up 6% year-over-year through the first half of the year, reflecting our investment in organic growth opportunities, including the strategic adjacency initiatives we have outlined as part of Vision 2015. As a percent of revenue, R&D costs were up 25 basis points to 2.9% versus 2.6% for the comparable period in 2011. Through six months, SG&A expense is down slightly on a year-over-year basis, principally driven by lower personnel-related costs and sales commissions. Year to date as a percentage of sales these costs are up slightly by 28 basis points to 11.1%. Pension expense has risen over $5 million year to date on a year-over-year basis due to a decline in the discount rate used to measure our pension obligations and lower-than-forecasted asset performance in 2011. We continue to expect pension expenses to rise roughly $20 million on an annualized basis this year, as we have noted throughout the year. However, our funded status remains quite strong, nearly 100%. And we do not expect to need to make any meaningful cash contributions to our plans until 2014 at the earliest.

Our effective tax rate for the quarter, excluding specials, was 26%, up 430 basis points compared with the year-ago rate of 21.7%. Driven primarily by increased profitability at higher tax rate countries, most notably in the US, and changes in tax regulations. At this time, we continue to expect our full-year rate, excluding specials, to be around 25.7%.

Finally, from a foreign exchange standpoint, we estimate that year to date the strengthening of the dollar, primarily against the Euro, has resulted in approximately $15 million lower revenue and $2 million lower operating profits. If it persists near current levels through the end of 2012, we estimate that the second half impact would be on the order of approximately $35 million lower revenue and $5 million lower operating profit.

Although EBITDA, excluding special items, grew during the quarter, cash generation slowed due to higher working capital levels. Specifically, net working capital rose $55 million during the quarter, and is up $94 million versus year end, or 18% due to higher inventory levels built in anticipation of increased market demand and plant shutdowns due to turnarounds and CapEx project. Particularly in HPC catalysts and flame retardants. We also saw higher accounts receivables levels given our strong June sales. Net working capital was 21% of revenue at quarter end, down 155 basis points year-over-year. But up 358 basis points from year end.

With our expectations for second-half recovery having been revised, we will tightly manage inventory levels through the balance of the year to reflect end market realities. This may result in some degree of lower factory utilization, vis-a-vis our prior second-half expectations. Receivables remain good quality, with our past dues at only 8%. And of note our European customers are paying on time with no indication that this trend will change. Overall, our balance sheet remains in excellent shape with net debt of $274 million, excluding $19 million in non guaranteed debt from our JBC joint venture. This is up $58 million quarter over quarter mainly due to the higher working capital.

Net debt to EBITDA ended the period at only 0.4 times. And net debt to cap was 14%. Our strong cash and low leverage continued to give us options and tremendous flexibility as we work toward Vision 2015.

Free cash flow, defined as cash flow from operations, adding back pension and post retirement contributions, and subtracting capital expenditures, was $63 million through the first six months, excluding special items. Down $71 million year-over-year due to a combination of the higher working capital and higher CapEx. Specifically, cash from operations to date of $190 million is down $12 million year-over-year or 6%, mainly due to higher working capital spending. While CapEx to date of $127 million is up $59 million year-over-year, reflecting continued investment in the major strategic projects we've commenced in South Korea, Jordan, and here in the US. With the delayed third phase of the Jordanian expansion, we now expect CapEx to be approximately $275 million for 2012, with roughly $75 million attributable to that expansion. Finally, we made $18 million in dividend payments during the quarter, up 19% year-over-year. And completed $14 million in share repurchases.

With that, I will turn the call back over to Lorin for Q&A.

Shinay, at this time I would like to you open the lines for questions.

(Operator Instructions) David Begleiter with Deutsche Bank.

Luke, with respect to your lowered guidance, can you go through by segment where the biggest deltas are versus what you gave us back in April?

Yes. I think if you really look at Catalysts, we've got really tough comp. We talked about 80, 80, 80, if will you remember that. Those are the kind of numbers. I think, as we build back toward the fourth quarter, we'll get there. I think we'll be a little bit lower than that in the third. Hopefully we can work to get up there, but we will be lower in the third and probably at that or above in the fourth as we build on that HPC volume back.

I think that we'll also see -- I'm confident in Fine Chemicals to be able to be around that 40 range. And then it remains to be seen what's going to happen with polymers. We're seeing a different -- if you listened to my comments, we're seeing different end market indices movement. And the trends are different than they were in the first quarter. So it remains to be seen what that recovery is. We think it's going to be flat rather than continue to sequential improvement. So I think the polymer would probably be closer to what it is to the first half, and we wouldn't see that continued sequential growth.

And, John, with respect to bromine F4 pricing, I know the deck says overall pricing is holding. Spot pricing for bromines have been a little bit weaker. Any sign of weakness in your bromine F4 pricing, even in pockets?

Yes, David, Let me give you a little commentary on that because overall it's a very positive story for us. If you look at the entire brominated flame retardant portfolio, prices are up both year over year and sequentially, a hair over 10%. If you strip out tetrabrom, our prices are up year-over-year just under 20%. So I think we're really positioning the business very well when volume resumes at the more normalized levels. Tetrabrom is down a little bit sequentially but we're talking in the 2% to 3% range, so it's really held up very well.

And just lastly, FCCs I know was a weak quarter a year ago but are you gaining any share in FCCs?

David, to answer your question, no. I think our particular situation, if you compare it to last year, we had a number of large customers who had significant down time, and that really affected our volumes last year. So we're seeing now positive trends year-over-year for certain. And normal seasonal sequential improvements, as well. And I think the overall market is being aided a bit by this ethanol situation related to corn, too. I think there's a higher amount of gasoline and diesel from petroleum bases, rather than a lot of the ethanol that had been used previously.

Thank you very much.

PJ Juvekar with Citi.

In Catalyst, your top line was down 14% but margins were up. Can you just discuss how much of the top line decline was from lower HPC volumes and lower rare earth prices?

Yes, PJ, this is John. Really, if you look at the decline, both sequentially and year-over-year, it's really all HPC. With HPC, we had a unique set of circumstances. We had metal prices declining. That was a part of it. We had an exceptionally profitable order go out in the second quarter of last year. So mix was a bit of an issue for us. And then we had volume declines year-over-year. We also had a pretty good-sized order slip because of some bureaucratic issues in the Middle East, slipped into July. But it was really all HPC. Now, FCC, we did have rare earth indexing on pricing impact. That's between $10 million and $15 million of year-over-year declines. So hopefully that kind of frames it up for you but overall we're very pleased with the margin holding up at 29%-plus, so that was very positive. I think positions us well for the future.

And, John, would you say that your margins in HPC and FCC are comparable at this point?

Yes, I would say that all three businesses in our Catalyst portfolio have comparable margins at this point, PJ.

And just on bromine and electronics, I know you don't sell merchant bromine, but can you tell us what's happening to merchant bromine prices in China? And then what's happening to clear brines pricing?

Pricing in China is down a bit compared to where it was last year. Our bromine, our elemental bromine pricing is heading very steady, around $4,000 a ton. So again, I think we're positioned when we see some volume improvement across the portfolio. In clear brines, we've had some really nice traction in terms of pricing. Year-over-year pricing is up about 14%, and sequentially about 10%. So once again positioned very well for continued improvement.

Thank you.

Laurence Alexander with Jefferies.

Two questions. First, how much of an earnings head wind do you think you will get in the back half of the year from better working capital management? And how much do you expect to reduce your working capital days?

Yes, let me take the first half. It's always difficult to say exactly what we're going get a headwind from a volume variance, because that's what we're talking about. And if you look at that range, it could be somewhere in the range from anywhere from $20 million to $35 million range of a volume variance in the second half for us to manage to the working capital levels that we think are appropriate going forward. I would say that part of that, I have to be mindful that in HPC catalysts, where we've built some inventory, that was done, and it had to be done to meet the fourth quarter demand, as well as the first quarter of 2013 demand, because we've got some turnarounds at our own units. And we've got some capital projects that are going to benefit us in the long run to give us more flexibility in those assets. We knew those units were going to be down. We always anticipated that we were going to be building that inventory and it would be worked down over the course of the fourth quarter.

We were also, if you will remember, end of the first quarter, thought we were going to have an increase in the electronic demand. That's what the indices were tracking. We now see that. So where it's going to hit us really is going to be in Polymers, and maybe a little ripple back into fine Chemicals for the bromine production. But that would be the kind of range, Laurence, that we think we will see in the second half.

And then can you speak a little bit about trends in curatives and stabilizers, and whether you think there's going to be any destocking impacting that in the back half?

Laurence, stabilizers and curatives, I think we're in a really good position on curatives. If you look at the business sequentially, volumes were up sequentially about 10%, which is a good sign. I think we went through a fir amount of destocking in additives in the back half of last year. So we always had a view that we could grow the business year-over-year this year in both stabilizers and curatives, and that's still our position. It hasn't changed. So I think we're pretty well positioned there and have worked through the destocking issues of the back half of last year.

Thank you.

Bob Koort with Goldman Sachs.

This is Neal Sangani on for Bob. I had a question on the Fine Chemistry. Were the positive trends you saw in the quarter pretty consistent month to month or were there any changes?

No, I would say pretty consistent. It's a business that we can predict with a fair amount of accuracy. The only exception to that is clear brines tends to be fairly lumpy. But I think that was more heavily weighted in June compared to the other months. And then Fine Chemistry services was pretty much pretty steady. Our ag businesses, specialty ag, and the NBPT product, pretty steady through the course of the quarter. This bioterror drug, smallpox drug, for SIGA, pretty much we produced that through the course of the quarter, and made more shipments in June. But we had always expected that. So pretty steady in that business.

And how would have things looked without the huge driver from the clear brine fluids?

I thought one of the real bright spots was our Fine Chemistry services business. And especially custom services, Neal. I think they're very equally proportioned this quarter.

Great. Thanks.

Kevin McCarthy with Bank of America Merrill Lynch.

John, just to follow up on Fine Chemistry services, would you expect profit in that business in the back half of the year to be flat, down, or up relative to the front half of 2012?

I would say it's pretty steady compared to the first half, Kevin. We have a heavier orientation towards some ag intermediates that begins in September, October. And that business is continuing to do pretty well. I know you're very familiar with drought and the corn issues. I think farmers are trying to do anything they can to hold these crops in line, especially corn. So we're seeing a pretty strong ag and specialty ag and ag intermediates business. And the NBPT product that we do for a fantastic company, who is really driving it globally, is a great insurance policy in drought conditions. And we're seeing that product really grow around the world. And, as a matter of fact, we're working on our third expansion which will include a new plant for that business. So we're very excited about it overall.

Okay. And then if I may shift gears to Catalysts, with regard to HPC, it sounds like you've maintained share and have a fairly positive outlook in that product line for the back half of the year. So is it the case that the 2Q volume weakness was strictly a function of order timing and customer maintenance schedules? Or has there been, in your view, any structural change with regard to the level of competitive intensity?

I don't think there's been any competitive change to the level of intensity, Kevin. As I tried to say, where we were the incumbent, we won what we would expect to win. Where we weren't the incumbent, we picked up a little bit. So overall, we won the units that we expected to win, and we would have hoped to have picked up some other ones where we weren't the incumbent, but we didn't. So I don't think there's any change in the dynamic. I don't believe the market share has changed at all. I think we're winning the units where we're the incumbents. And where we're not, just like we've always said, it's a tough sled to get in there. So I feel strong about this business. If you look at fourth quarter we're going to be building -- I don't know if fourth quarter is going to be a record but I think it's going to be close. So I feel like you are going to see two book ends in the first and fourth quarter of HPC volumes for the year. They're going to be really strong. Second is going to be weaker, and we are going to build in the third toward that record in the fourth.

Good to hear. Thanks for that, Luke. Final one, if I may, just a quick update on your lithium extraction project in Arkansas.

Sure. As we talked about the last time, we're working on a new technology that could be a game changer for us in terms of cost. That would get us at a cost place where we need to be. We're conducting those experiments in the lab, in pilot scale. And as always, we're finding a little bit of problems that we weren't quite sure about, but we're working through those and we're making nice progress. And I think we're still on track for the type of getting to the market in that 2014, 2015 time frame that we've talked about.

Okay, thank you.

Mike Ritzenthaler with Piper Jaffray.

My first question, I just wanted to make sure I have something correct around the strength in Fine Chemistry. Would it be correct to say that the clear brines have yet to see a real resurgence after a mediocre start to the year?

That's dead on, Mike. We saw sequential improvement, but it's still a ways away from some of the record sales levels we've had. So you're dead on there.

Okay. Then just on the rig counts and things like that, does this resurgence, does it bode well for the timing of the phase 2 start-up later this year for JBC?

Yes. Go ahead, John.

I was just going to say, Kevin, I think that positions us really well for the long term, especially with the global diversity of that business.

Okay. And then just within Polymer Solutions, if I could explore the lower charges for the non controlling interests in JVC, I'm a little confused about what that is and the magnitude of the impact on operating income.

Yes, Mike, this is related to our overall production levels within JBC being lower on a year-over-year basis. Remember, last year we had record first half production, and obviously this year we're still coming out of a trough. And as a result of that, the minority interest that goes to our equity partner is lower than prior year.

Okay. That's it for me. Thanks.

Jeff Zekauskas with JPMorgan.

Obviously ethylene prices and oil prices have come down, which would influence the prices of the polymers that you blend your flame retardants into. And so presumably your customer base would really want to decrease its inventory level so that it buys its polymers more cheaply. Is that something that's affecting your bromine profile? And do you disentangle that from your macro indicators that are showing weakness?

Yes, Jeff, let et me take a crack at that, and also just add a little commentary about our raw material and energy situation today. In 2012 compared to 2011, we're seeing roughly about $105 million of raw material and energy decreases. About $10 million of that is energy, natural gas and utility related. Another $85 million of that is metals and rare earth. So it's rare earth, moly, cobalt, and nickel. And then you have the balances, about $10 million, which is all petrochemical related. So hopefully that corrals it for you. It's not as great for us as it would seem right now. But to your question, though, when I look at -- and everybody's got an opinion on this -- but when I look at the book-to-bill ratio in electronics being reasonably steady, and then when I look at the Bishop Index, which is a confidence index, that has gone down dramatically. So my view is that there's a fair amount of destocking going on also in our supply chain, to answer your question. So I don't think it's as much raw material related as more just confidence and uncertainty.

Okay. Can you give us an update on bromine uses for mercury removal, both in the US and China? And are you selling any material amount of product at this juncture? And how do you see the next 12 months playing out?

I'll take a crack at that, and Luke might add in. Our mercury control business right now is still a very niche business. Our volumes are up, both year-over-year and sequentially, low double digits. So it's doing pretty well. It's still, though, in those states that have regulations around mercury levels. We're still hopeful over the long haul that it will grow. But, as you know, there's a lot of pressure on coal, and coal production is down dramatically. So we've got to keep a close eye on it. But I think the fascinating thing to me is it's such a cost-effective economical solution for these utilities. And so we're continuing to work that side of it long term.

I haven't heard, there hasn't been any update from the case that was filed against the EPA on the regulations related to mercury removal. So that is still, the status hasn't changed since the first quarter. And I think there's some uncertainty whether that will push the implementation time back some, Jeff, for the implementation of those regs. China is still seems to be, as we talked in the first quarter, where they have been testing a different product and understanding their mercury emissions from the coal-fired power plants. That's obviously the biggest opportunity. We haven't seen a change in that. So over the next 12 months, while I would expect to still see moderate growth, I don't think you are going to see any kind of step-out until you get federal regulations being implemented, as well as regulations in China being implemented. So it may be pushed back a little bit but nothing fundamentally has changed from where we were on the last call.

Which market do you think will open up first for you? The US or China?

That's a really interesting question, given the US court systems. I would anticipate that the US would open up sooner. And I think you've got China, you are going to see what the next five-year plan is and if they make that a priority. It would seem to me all indications are that they would, but I still think the US will beat them by a little bit.

And then lastly, in the previous conference call, you seemed very optimistic about your opportunities to make acquisitions, and acquisitions of some size. Do you continue to be optimistic on that front, or how do you see the acquisition environment?

Yes, what I would say about acquisitions is, there are opportunities out there. Multiples are high, and there are a lot of bidders. So again, as I said at the investor day, while we will be looking for acquisitions, we certainly are out there in the marketplace doing it, they're difficult to do. We've got to make sure we do the right one. And I'd much rather be on this call in 2016 explaining why we fell short of doubling the business because we didn't do an acquisition than on this call explaining why we did a bad acquisition. So we are going to remain diligent in looking for opportunities to return value to our shareholder, but we're not going to reach to try to do a bad deal, Jeff.

Okay, thank you very much.

Mike Sison with KeyBanc Capital Markets.

In terms of bromine operating rates, where did you end up in the second quarter? And, Luke, when you think about the third and the fourth, given your outlook of second half being similar to the first half, does that operating rate go down, stay flat? Can you give us a feel on that?

Yes. I'm talking now from a bromine standpoint, from the elemental bromine standpoint, Mike. We were in that mid-70s range, 70s to 80s range. And I would expect that to last for the remainder of the year.

And the derivatives?

The derivatives, if you look at our performance chemicals that have been operating at higher rates than that, and if you look at brominated flame retardants, they would have been operating at a lower rate than that. But you have got to really look at, you've got to understand it product by product almost. So when John talked about tetrabrom volumes being down, when tetrabrom is not running hard, which we didn't, it has a fairly significant impact on those operating rates. So we were down below that for overall, for brominated flame retardants. But tetrabrom was the leader in that.

Okay. And then when you think about your confidence in the outlook that electronics stays flat versus, let's say, getting worse, can you give us a feel? Are your customers telling that you? Or are inventory levels fairly lean that give you some confidence there? Given where some of the semis have reported, it seems lake a bold forecast thus far.

Yes, Mike, let me take a crack at that. I think our customers are running very lean inventories because of the uncertainty that you just described. If I look at connectors, volumes have been fairly sluggish. Our 80/10 business, primarily into enclosures and TVs, has been what I describe as moderate. And tetrabrom has been pretty weak. So I think the tetrabrom inventory is the first to go down and it's the first to come up, and both situations usually happen very rapidly. So we're really trying to keep a close eye on it. But once we see tetrabrom volumes pick up, that will be, I think, a good indicator for us.

Okay. And last question. You have a lot of capacity coming on into '13 and some other positives. Can you give us some of the areas of growth that you see, Luke, in '13 that is relatively visible for you as we close out the year?

Sure. If I look at 2013 going forward from a growth standpoint, I think Fine Chemistry will continue to grow. We've got some big opportunities in custom manufacturing. You'll see the rig count in the Gulf of Mexico picking up. And that will allow, should allow, that lag time to complete that well, good for our completion fluids business. So I see Fine Chemistry continuing to grow year over year in 2013. Catalyst should have a step-out year in 2013. We've got the TEA joint venture coming on-line in Saudi. We've got the greenfield site coming on-line in Yeosu City, Korea that gives us opportunity for custom manufacturing of single-site catalyst, as well as electronic material growth in that area of the world. Our HPC business should start off the year strong in 2013. And we've got what I believe will be a number of good refills. And we'll be passed all of this rare earth surcharges and we could continue to see strong growth in our FCC business. So I think those two businesses particularly have some strong growth. John, do you have something to add to that?

I'm just going to add a couple things. We've got a biodiesel refill next year. And we just landed an order for some new technology for a new refinery that helps avoid the use of HF through catalysis. This is in Asia and it's a big order. We're really excited about it. I really think, just to reinforce what Luke said, 2013 can be a step-out year for us.

Great. Thank you.

Steve Schwartz with First Analysis.

First question just around HPC. What are your current growth expectations for volume this year? I think prior you had expected in the mid single digits.

Yes, we're still hoping to achieve that, Steve, mid single digits. You bet.

Okay. And, Luke, when you mentioned fourth quarter could be a record in HPC, is that just for fourth quarters given the seasonality that sometimes exists there? Or could it be even stronger than the first quarter you had this year, which was, I think, exceptionally strong?

We're looking at numbers, and if everything breaks right, we could be looking at first quarter 2012 type numbers.

First quarter 2012. Okay, very good. And then, just lastly, regarding SG&A, and in the press release, you mentioned performance-based incentive compensation. Perhaps this is a question for Scott. I know you guys basically look at your potential performance for the year, and then you accrue that compensation across the year. What was your assumption for that expense in the first quarter? And what is your assumption for 2012 now?

Steve, right now, between first quarter and second quarter, we're holding our expectations on that accrual at target. So it's a really limited change in outlook.

But as our headcount goes up and down --

It does get it up there.

I might add, Steve, that the bigger impact was on commissions, and that's almost directly related to HPC volumes.

Okay. So can you give us some guidance then on corporate expense for the second half of the year? And, in line with that, what SG&A might look like?

Corporate expense should be probably back in the low $20 million range. So I would call it $20 million to $22 million. And then I would expect SG&A to be in the $80 million to $82 million range for the third and fourth quarter.

Okay, very good. Thank you.

Dmitry Silversteyn with Longbow Research.

I was just wondering if you can provide a little bit of a detailed breakout in each of the businesses between price/volume mix. You talked about the individual moving pieces within each business but it's still hard for me to come out to an overall divisional volume versus price versus foreign exchange component.

Let me start and then I'm going to turn it over to John. In our business, it is exceptionally difficult to talk about price and volume and that mix impact on the volume. If you look at, for instance, in Fine Chemistry, even within Fine Chemistry we can have a clear brine, which is a high volume, can move the volume one way or not. But we're also selling Fine Chemistry service, something that for a lot of money per kilo, or a lot of money per gram. So it's not as meaningful as you have in certain commodity companies where you have similar types of volumes and that. Same thing in Polymer Solutions where you've got mineral flame retardants with a much higher volume than brominated flame retardants. But brominated flame retardants are more profitable. And same thing in Catalyst. But with that, John will give it a shot.

I think it's more important to think sequentially, Dmitry. If you want some year-over-year numbers, we can go into that. But I'll try to answer your question fairly quickly. In Fine Chemicals, unit volume was actually up in the 5% to 6% range.

Sequentially, right?

Sequentially, right. Performance Chemicals was an important driver there with more improved volumes in clear brines. We had our ag intermediates business, as I said, was reasonably strong, too, in the second quarter compared to the first. So that was also aided by the mix impact with our custom services business, some of which, as Luke pointed out, are very little unit volume. So it was aided by that mix.

In Polymers, you had actual unit volume up about 4%. What's interesting, if I strip out phosphorus flame retardants out of that equation, our unit volume was actually up about 6%. So it's not as bad as it seems. And that was aided by mix because, compared to the first quarter, our bromine business, as I mentioned, in terms of pricing, held in there pretty well. In Catalyst, volumes sequentially were down a bit, and that was all HPC. So that has both a mix and an actual unit volume impact because FCC was up sequentially about 4% or 5%. So hopefully that frames it up for you. Performance Catalyst Solutions was roughly flat, up nicely year-over-year.

Got it. That is helpful. Drilling down a little bit more in the Polymer Solutions business, probably one of your more complex businesses when it comes to different product lines and the different market exposures that they have. Can you talk about volume and pricing in a little bit more detail? You mentioned connectors and automotive markets being okay, and the printed volume board market being down a little bit. So can you give us a breakdown between brominated flame retardants, mineral, curatives antioxidants? And then also talk about what you're seeing in terms of pricing trends in those markets? And if your outlook is significantly different for the second half of the year than the performance was in the first half.

Brominated flame retardants were up a little bit sequentially, which was we think pretty good. It was down year-over-year pretty significantly, because last year in the first half, it was really overheated, in my opinion. We were selling at record volumes and producing at record volumes. But on the encouraging side, both sequentially and year-over-year, brominated flame retardant pricing for the whole portfolio is up 10%. In mineral flame retardants, it was roughly flat year-over-year, but volumes were up by 5% sequentially. Pricing was down in that business but mostly euro-related. There's been a lot of stability in our two key product lines here in our polymers business in terms of pricing. As I mentioned, the phosphorus flame retardants, getting that out of the portfolio, will be a nice upside for us for next year. And that volume, by the way, was down pretty significantly year-over-year as we exit that enterprise. Stabilizers and curatives, pricing flat, up a little bit year over year. So it's flat sequentially, up a little bit year-over-year. And volumes were roughly flat year-over-year, but up nicely about 10% sequentially. So hopefully that gives you a little bit of flavor for it.

It does. Thank you very much. I appreciate that level of detail. And then a final question. As you move from being an organometallics and zeolite supplier to becoming more of finished polymerization catalyst supplier, this market has established players in there. As you get bigger in it, do you expect to see some kind of a competitive response? Or maybe you're already seeing some competitive response either from the majors that license their technology or some of your catalyst merchant competitors out there?

No, Dmitry, I really don't. You work at such an intimate relationship between the supplier and the customer on this basis. Pricing is very unique to the application. We've done a fair amount of licensing with some of the majors to expand our portfolio. And then to expand into the high purity metal organics is a perfect adjacency for us. And that pricing, by the way, is priced on a per-gram basis, not a per-kilo basis. As that market really picks up, and this LED market really grows, I think we're going to be in a really good position. And the last thing I would say about that LED market is the pricing for the end products has come down so dramatically. I think we will begin to see a lot more volume growth globally in that business. So I think with Korea coming up we will be really well positioned for it.

Got it. Thank you very much.

Edward Yang with Oppenheimer.

Just on Polymer Solutions and tetrabrom, tetrabrom really didn't see any recovery in the first quarter and it was fairly weak this quarter, as well. So what accounts for that relative weakness?

To me, Ed -- and you know these indices awfully well -- the book-to-bill ratio has held in there. But that confidence index has gone down. And this is a product line where a customer is pretty comfortable with the supply chains around the world. So they can fairly dramatically increase their off take, if they need. And so it tends to be, I would say, more volatile than most of our other businesses. So I believe that there's been a lot of de-stocking this year as opposed to last year at this tame where there could have been a fair amount of overstocking, if you will.

And, John, how confident are you that destocking has run its course? Your outlook for Polymer Solutions in general is for flattening out or plateau. But historically that business has been up a lot or down a lot.

Yes. We're just anticipating flat to slightly improving volumes in the third quarter, Ed. We feel pretty confident about our ability to hit that. I think it's a far different situation compared to last year at this time, where most of the issues, at least for us, related to mineral flame retardant volumes. And in Europe we saw the typical seasonal slowdown at this time of year. But with all the Italian and Greece and Spain issues last year hitting a real crescendo, we saw the confidence factor of our customers continue to decline. And we had a lot of de-stocking in that business in the back half. So we don't see that happening. Our order back in that business continues to hold up pretty well. To answer your question, I think our confidence level is moderate to reasonably high that we can achieve what we told you today.

On the tetrabrom side, is there any impact from structural issues, PCs to tablets or smartphones, or anything like that?

I really don't believe there's been any secular issue like that. It's such a global economy. Tetrabrom is so cost-effective in these applications. The newer niche products has got a very small penetration to date. We're talking 5%, 6% of the total tetrabrom market. So we're not hearing any of that type of issue from our customer. But with that said, we're excited about introducing our new Gemini generation of products, And for us, that would be an entry into the real high-end Apple iPad type market. So we're excited about that.

Got it. And just finally on Catalyst, it sounds like you're expecting some pricing pressure, degradation in the second half, mostly related to rare earth. Is that all going to be just tied to rare earth's pricing? And what would be the magnitude of the price declines or pressures you would see from that?

Great question, Ed. In the last quarter I mentioned to PJ's question we saw about $12 million to $15 million in decline in the second quarter. We're probably looking at some where in the $7 million to $10 million decline in the third quarter. But we're working to offset that by other cost-reduction activities, base price increases, really based on performance. And overall, lowering the rare earth percentages in our formulation. So with that we really hope we can moderate any additional profit hit this year and really set the stage for a robust 2013. So we're excited about that.

Okay, thank you.

Chris Shaw with Monness.

Just a quick one. I was just hoping for a little more color on FCCs in terms of, you spoke a little about the geographies, that the US operating rates were up and emerging markets are strong. But why were the operating rates up in the US? And then just a little more color on what countries were strong and maybe what Europe was doing in FCCs.

Yes, Chris this is John. FCC, last year in the first half, we had a couple of major customers who were operating at really low rates. They were really struggling, both on the East Coast and in the Southwest. So it really hurt our volumes last year at this time. So with that said, the obvious suspects in terms of your question still exist. Europe continues to be slow, but it's offset with some growth in India and the Middle East. And then, this might be a little bit surprising, but our Asian customer base continues to do quite well as they continue to build their petrochemical base businesses. So our higher propylene yield in Catalyst in FCC continued to do pretty well.

Okay, great, thanks.

At this time we'd like to just thank everyone for their interest, and encourage you to call with any further questions.

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