雅保公司 (ALB) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 Albemarle Corporation earnings conference call. My name is Carissa and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's call, Mr. Lorin Crenshaw, Director of Investor Relations. Please proceed.

Thank you Carissa. Welcome everyone to Albemarle's third-quarter 2012 earnings conference call. Our earnings were released after the close of the market yesterday. And you'll 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 today are Luke Kissam, Chief Executive Officer, and Scott Tozier, Chief Financial Officer. As a reminder, some of the statements made during this conference call about the future performance of the Company may constitute forward-looking statements within the meaning of federal securities laws.

Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. Finally, reconciliations related to any non-GAAP financial measures discussed on this call may be found in our press release or earnings presentation which are posted on our website.

With that, I'll turn the call over to Luke.

Thanks, Lorin, and good morning everyone. We appreciate the opportunity to share our third-quarter results with you today. I'll begin by commenting on the Company's quarter results and then Scott will review select highlights related to business segment performance and financial results. As usual, at the end of our prepared remarks, we'll open it up for your questions. We are going to limit your questions to two per person at one time so everyone has a chance. Then feel free to get back in the queue for follow-ups if time allows. Given the challenging economic environment we faced in the quarter, I'm pleased with our results and encouraged by the earnings power the Company continues to demonstrate. Although our income was significantly impacted by macroeconomic and metal trends in the year-over-year drop in the Rare Earth Price Index, our overall profitability is proving resilient and cash generation was excellent.

Third quarter net sales were $661 million and net income was $99 million, or $1.10 per share. Segment income was $146 million and segment margins remain strong at 22%. While all of those metrics were down year-over-year, they were achieved against a much tougher economic environment. If you look at each [DB use] performance in the third quarter, Polymer Solutions, which was our business most negatively impacted by the global economic slowdown, reported net sales of $217 million, segment income of $44 million and segment margins of 20%. Much stronger performance in polymers than was the case the last time we faced similar economic conditions back in the 2009 timeframe.

Catalyst had net sales of $251 million, segment income of $61 million and segment margins of 24%. As we explained in the second-quarter call, second half year-over-year comparisons would be (inaudible) given the precipitous decline in Rare Earth Index pricing and the impact of that decline on our results. But we're also down sequentially and year-over-year in Performance Catalyst Solutions due primarily to some customers reducing their inventories during the quarter and others having scheduled turnarounds. We expect that to be a one-quarter issue.

Fine Chemistry continued to deliver high growth and excellent profitability this quarter with net sales of $193 million, segment income of $42 million and segment margins of 22%. Income was up 39% year-over-year and margins were up 487 basis points year-over-year. The business got a late quarter boost from strong clear brine fluid volumes in September due to some increased drilling activity in the Gulf of Mexico.

There are a couple of factors impacting our results that are worth noting. First of all, as it relates to Polymers, throughout the quarter, there was a continuation of the broad-based deterioration in electronics end markets and that was signaled throughout the supply chain indicating a weaker second half. In addition, construction activity overall and in particular in Europe fell off substantially, impacting our Mineral Flame Retardant business and HBCD volumes and pricing. We indicated in our second-quarter earnings call that the second half outlook for Polymer Solutions had weakened considerably since the first quarter when we thought that the prospects for a second half recovery looked more promising and had begun to build inventory in anticipation of that recovery. The outlook has continued to get worse if you look at the indicators that we typically discuss.

The IPC book-to-bill ratio is a US-only ratio, but is nevertheless a decent proxy for our Printed Wiring Board Business. At the time of our first-quarter call, the March reading of this indicator registered 1.05 and it trended up for four straight months. The July reading was 1.0 and was the fourth straight month of decline. The most recent reading ticked up to 1.02 but the trend since March of this year has clearly been downwards sloping. The most recent Gartner data on year-over-year global PC shipments indicated the decline during the third quarter of over 8%. While the most recent data from iSuppli calls for a 5% decline in global TV shipments for 2012 with the trends most sluggish in developed markets where we tend to see reasonable fire safety standards offset by growth in developing markets which tend not to have as stringent of fire safety standards.

The Bishop Report is a global indicator that historically has also proven to have a good correlation with the volumes of our Connectors business. Back in April, this report showed a reading of 65.4 and four straight months of increases. By contrast, the August reading was 39.3, the lowest it has been since the middle of 2009, and in continuing what is now a six-month downward sloping trend. For comparison, in 2010, the reading dipped below the mid-80's only once. In Construction, Dow's Macroeconomic Heat Index, released with their second-quarter earnings, reflected a downward outlook for construction within Western Europe from yellow to red to reflect slowing or negative demand growth, which proved an accurate leading indicator for the trends we ultimately saw during the quarter. This trend had a negative impact on mineral flame retardants, as well as on HBCD, one of our brominated flame retardants.

Notably, the impact of recalibrating our inventory levels to be more in line with market realities was a $16 million hit to Polymer Solutions during the quarter, due to less favorable cost absorption, and is expected to have an impact on the order of $30 million to $35 million on this GBU for the second half of the year. For historical comparison purposes, it is noteworthy that volumes for some of our more profitable flame retardant products have fallen to levels approaching those seen in the first half of 2009. As some of you will recall, that's when Polymer Solutions basically broke even, generating just $3 million in segment income during the six-month period ending June 2009. By contrast, Polymers generated $44 million in segment income this quarter. Therefore, while we are positioning this business for a prolonged period of economic slowdown, its earning power is much greater than at any point in its history due to the actions that we've taken since 2009. As a result, when the economy picks up, the contribution we get from each additional pound of product in this GBU will drive exceptional profitability.

In Catalyst, the rare earth impact masked an otherwise good quarter. From a revenue perspective, this rare earth price decline impacted the quarter by roughly $40 million year-over-year and is projected to impact the fourth quarter by about $45 million year-over-year at current index price levels. In terms of the year-over-year decline in Catalyst's profitability, the majority of the $40 million year-over-year Delta was attributable to FCC and this dynamic about -- around rare earth surcharges. While FCC volumes were up double digits year-over-year, rare earth surcharges dropped dramatically year-over-year from an average of $115 a kilogram to an average of $24 a kilogram. The profit impact came from a combination of our cost of inventory that was being sold in the third quarter of 2011 being lower relative to the Rare Earth Index used for calculating our price to our customers, our own inventory management decisions, and the timing of the customer contract surcharges. The reverse was true this quarter when our inventory on hand cost more than the Rare Earth Index due to the index's precipitous drop at the beginning of 2012.

Over the full cycle of the rare earth pricing bubble, we would expect this profit impact to net to zero, but the second half of 2012 will show the largest year-over-year negative impacts. It is simply a matter of timing and has no material impact on the overall strength of our business. In fact, FCC volumes were up significantly year-over-year and base pricing remains strong. Earlier this year, we shared with you that we had begun studying available options aimed at reducing earnings volatility related to our pension expenses and reducing the risk of the Company being required to make further large cash contributions to our pension plan in future years.

We recently took an important step toward our goal by announcing a plan to migrate US non-union participants in our defined benefit plan to a defined contribution plan. Specifically, our current defined benefit plan will be totally frozen by December 31, 2014, after which no additional growth in years of service, our final average pay will be recognized. This action is in the best interest of moving the Company towards a more sustainable strategy of managing our pension obligations. In connection with this change, we are also evaluating investment strategies and accounting methods that would allow us to increase earnings transparency and reduce the volatility of future cash contributions. We would expect to complete this evaluation before year end.

With regard to our major capital projects, the first two phases of our bromine expansion in Jordan are currently on track to commence production in the first half of 2013, doubling JBC's elemental bromine completion fluids and HBr production capacity. With our current clear brine assets running at very high utilization rates and a strong outlook for that business, we need that additional capacity to better serve our customers and capture our fair share of this growing market. The outlook for HBr and elemental bromine is also encouraging, Driven by growth in agricultural, pharmaceutical, and bromobutyryl applications.

As I have previously stated, we will bring volumes to the market as needed to meet demands. We will not need 100% of the incremental capacity on day one, but the expansion allows us to drive incremental opportunities in the short term and meaningful opportunities in the immediate term as favorable trends in these markets drive growth that would otherwise exceed our current capacity. Upon commercial completion in the coming months, what is already the world's low-cost bromine sourcing platform, will be readily able to satisfy current demand and future opportunities as global economies eventually improve and the growth in new applications for bromine continues.

The three Performance Catalyst Solutions-related expansions we've commenced, the greenfield sites for our TEA joint venture in Saudi Arabia, the Catalyst center in Korea, and additional special capacity in the US, all remain on track, with Saudi projected to come online by year end, Korea during the first quarter of 2013, and the domestic capacity stage between this quarter through mid-2013. We also recently announced plans to expand the new Korean facility with capacity that will be dedicated to producing our pure growth line of high purity organometallics, which are used in the process of manufacturing chips for semiconductors and LEDs. These expansions would allow us to maintain our leading global position in TEA, organometallics and Single Site Catalyst, as well as advance our competitive positioning within electronics materials. Upon completion, we will be able to provide a reliable local supply for these critical products in areas of the world which are expected to enjoy this sustained growth and demand for these products over the next decade.

Finally, in terms of new investments, throughout the year, Fine Chemistry services has reported robust results with profitability tripling year-to-date. The transformation of this business reflects the impact of evolving our Customer Services portfolio toward a diverse pipeline of opportunities across the agricultural, lubricant, electronics materials, renewable chemistry, and specialty pharmaceutical sectors that we've targeted for growth. As the current rate of growth is projected to outstrip our existing capacity, we recently announced plans to double capacity of our Tyrone, Pennsylvania facility. We're excited about this project which will require a capital outlay of approximately $30 million. The growing impact of our custom business has been a key factor behind Fine Chemistry, delivering 20-plus segment margins in 2012. This investment will expand our base of highly flexible assets to support continued growth from a robust pipeline.

In terms of our outlook for the balance of the year, we currently expect the fourth quarter to be weaker than third-quarter results. Although Catalyst should be strong, the sequential growth there is expected to be offset by weaker Polymer Solutions and Fine Chemistry results. Specifically within Refinery Catalyst, FCC volumes should remain healthy but face ongoing metal surcharge headwinds and HPC is poised to finish very strong. The PCS order book and customer checks suggest that operating rates should rebound from the [third] quarter given fewer customer turnarounds.

While Fine Chemistry should benefit from continued strength in clear brine volumes, we will likely see softer customer service profits due to campaign timing associated with a few large contracts that have simply run their course for 2012, asset retooling, and a sequentially higher negative volume variances across the portfolio. We are seeing nothing in the economic indicators or our order book that would lead us to believe that we will see marked improvement in the markets served by our Polymer Solutions business in the fourth quarter. There's been no meaningful change in the competitive or structural dynamics or our markets. As these macro headwinds stabilize and ultimately improve, so should Polymer's financial results.

Meanwhile, we expect the fourth quarter to be tougher than the third for Polymers with the next demand signpost expected to occur post-Chinese New Year when customer order patterns and discussions will give us a more confident view on how 2013 is likely to shape up. We are in the middle of our planning process and look forward to sharing our 2013 earnings outlook during our fourth-quarter call in January. However, we remain optimistic that, in 2013, we will see a resumption of growth with the structural drivers for Catalyst and Fine Chemistry more clear today than is the case with Polymer Solutions. In any case, we look forward to sharing more thoughts about 2013 with you in January.

With that, I will turn the call over to Scott who will shed further light on our segment performance and touch on a few financial highlights.

Thanks Luke. I'll start with the details on each segment and then close with the financial highlights. Let's begin with Catalyst where sales were down 16% and segment income fell $41 million year-over-year to $61 million as the financial results of an otherwise fine fundamental Refinery Catalyst quarter were largely obscured by the dynamics around metal surcharges as described by Luke earlier, and a weak quarter for our Organometallics business. The bulk of the decline in revenue and profitability during the quarter was attributable to FCC where revenue was down 17% and operating income fell over 40%. However, volumetrically, FCC is doing great, up 17% year-over-year and 23% sequentially as customers are using more fresh catalysts and optimizing their output now that rare earth prices have stabilized. The core fundamentals are excellent as the direction of the crude slate continues to move toward more complex feeds, which is really our sweet spot within this business.

HPC volumes improved 50% sequentially as expected and profit improved in line. Year-over-year, HPC volume were slightly down with an unfavorable customer mix. We also saw a reduction in metal surcharges in HPC of about $5 million as the cost of certain metals like moly, nickel and cobalt came down; however, this had only a minimal impact on profit. A quarter of the overall drop in Catalyst profitability was due to Performance Catalyst Solutions, which reported weak results with revenue and operating profits down double-digits due to extended customer shutdowns and customer inventory management. We also had some larger orders in 2011 that were one-time in nature.

Finally, we also have started to see costs associated with the Saudi joint venture in the equity income line, which is nearing completion but will not produce any revenue until production commences in 2013. Customer operating rates in PCS have resumed to more normal levels in the early weeks of this quarter. As a result, we expect PCS to finish the year stronger and expect Catalyst overall to close the year strong and well prepared for growth into 2013. Polymer Solutions faced tough macro trends and delivered revenue 11% lower than 2011 and segment income that was 20% lower. Brominated Flame Retardant sales were down 13% during the quarter year-over-year on 7% lower volumes. These declines and unfavorable fixed cost absorption impacts resulted in a 22% year-over-year operating profit decline for polymers overall. On both the year-over-year and sequential basis, broad weakness was evident across each major electronics end market as connectors, enclosures and printed wiring board all reported double-digit volume declines.

HBCD, our flame retardant in the construction segment, was also down over 30% due to a slowdown in the pace of European construction orders. Mineral Flame Retardant sales fell 9% year-over-year and profits were down 20% due to lower pricing in an especially challenging construction and automotive environment in Europe. We believe that this trend has started to stabilize but are watching the construction market closely. We are on track to exit our Phosphorus business by year end. 4 percentage points of Polymer's third-quarter revenue decline was due to shipments winding down in this business. On the other hand, we have segment income benefit in the quarter versus last year. We expect to see the full benefit of our exit strategy starting in the early 2013.

Finally, Stabilizers and Curatives revenue was up 3% year-over-year and profits were down 15% year-over-year on 6% higher volumes. Antioxidant and volume growth was offset by price weakness within antioxidants, in China in particular, and generally sluggish infrastructure demand trends. We also face some fixed cost absorption headwinds as we reduce inventory in this business. Overall, we expect Polymer Solutions to [slog] through another tough period in the fourth quarter with profitability lower than the third quarter as volumes come down further and we manage our factories to reduce inventory.

Fine Chemistry continued what has been a tremendous year with third-quarter sales up 8% and segment income up 39%. Fine Chemistry Services results continued to be strong year-over-year with sales up 18% and operating profits nearly doubling. These exceptional results within this division continue to be driven by outstanding Custom Service performance as this business reported its second highest quarterly profit level ever, up three times the level of a year ago, attributable to the growth of new and existing contracts in each of our focus areas for growth, especially pharmaceuticals, lubricants and ag intermediates.

You may recall that a year ago around this time, we began an expansion of NBPT capacity for use in fertilizer stabilizers. We are benefiting from the incremental earnings related to that investment this quarter. As a result of plans for our customer to expand distribution of this product globally in a more aggressive manner, we recently received approval to double NBPT capacity again with an anticipated start-up with the new assets in the second half of 2013. This business also benefited from shipments to SIGA during the quarter which will not repeat in the fourth quarter, and finally, we showed nice growth from our Amherst contract in Q3 that will start to wind down in Q4.

Performance Chemicals saw sales up 2% and operating profits up 3% on high single-digit year-over-year volume growth. These results were driven in part by record clear brine profits driven by broad-based demand in the Middle East and Southeast Asian geographies and a pick-up late in September in Gulf of Mexico well completions. Growth was also driven by our portfolio, especially the bromide derivatives, where sales were up 3% and profits were up 9% to a new record, driven in part by continued traction within Food Safety which saw increased installations of our various antimicrobial products into the meat and poultry markets. Our Water Treatment and Industrial Solvents businesses also performed well. Overall, although we are optimistic about the prospects for Fine Chemistry growth in 2013, the fourth quarter will be weaker as Luke stated earlier due to the timing of certain custom services contracts and higher fixed cost absorption related to lower bromine utilization rates, more than offsetting further growth in performance chemicals and clear brine fluids.

Turning to total Company financial results, the pressure on our results was evidenced in EBITDA, excluding special items which declined 12% year-over-year to $165 million and in profitability as measured by EBITDA margins which fell 108 basis points to 25%. However, stepping back and looking at our results historically, it's worth noting that comparatively speaking, during the last period that we saw similar operating conditions, pick any quarter of 2009, EBITDA margins were in the mid- to high-teens, a stark contrast to current levels. So overall, while the returns our businesses generated against the current macro backdrop can be further improved, they provide evidence that the Company's earnings power is considerably higher than it's ever been before.

Let me elaborate on the two special items we reported this quarter. One relates to a $4.1 million after-tax charge, or $0.05 per share, associated with our supplemental executive retirement, or SERP, plan in connection with the retirement of our former CEO and Chairman. This charge arose as a result of recent lump-sum payouts, triggering accelerated recognition of certain expenses under our SERP plan. The other special item relates to a $4.5 million, or $0.05 per share, in one-time tax net benefits, principally related to the release of various liabilities for uncertain tax positions. The two special items largely offset one another, resulting in no net income per share impact.

Now to highlight a few other P&L items. R&D expense is up 3% year-over-year -- year-to-date 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 are running at about 3% versus 2.7% last year. Year-to-date, SG&A expense is down 8% on a year-over-year basis, principally driven by a combination of lower personnel-related costs and performance-based incentives. Specifically, in the third quarter, we adjusted our accruals for performance-based incentives to reflect our lower outlook, benefiting the P&L by about $8 million. We also saw the benefit of our cost reduction efforts in the range of $2 million to $3 million in SG&A. These costs are down slightly to 10.4% year-over-year -- excuse me, year-to-date.

Pension expense has risen approximately $15 million year-to-date, including the special charge of $6.5 million pre-tax that we took this quarter for the SERP curtailment. The rest of the rise is 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 reported effective tax rate for the quarter was 21.6%, including the benefit from the special item. Excluding special items and one-time tax discretes, the tax rate was 25.9%, up 80 basis points compared with a year ago rate of 25.1%, driven primarily by the balance of profitability and higher tax countries versus lower tax. At this time, we continue to expect our full-year rate, excluding specials, to be around 25.8%, no change from last quarter.

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 $32 million lower sales and $10 million lower operating profits. Of this, the impact in the third quarter alone was lower sales of $16 million and lower profit of $5 million, or about $0.04 per share. If it persists near the current levels through the end of 2012, we estimate that the full-year impact would be on the order of approximately $45 million and $15 million, respectively, on sales and profits. Although EBITDA, excluding special items, declined during the quarter, cash generation doubled sequentially to $122 million [from] $61 million due to a substantially lower working capital drag on cash.

Specifically, working capital shifted from a use of $89 million last quarter to a drag of only $3 million this quarter and $86 million Delta. Through year end, we will remain focused on reducing working capital which rose 160 basis points as a percentage of sales to 22.9% sequentially. Polymer Solution, which reduced inventory days by 10 days sequentially, was the only business to see a decline in inventory days. Besides further declines of polymers, we also expect declines in Catalyst in particular where we've built sufficient inventory to meet what's expected to be a robust fourth-quarter demand in HPC and ahead of scheduled maintenance shutdown in our HPC plans.

Free cash flow, defined as cash flow from operations, adding back pension and post-retirement contributions and subtracting capital expenditures was $107 million through the first nine months, excluding special items, down $109 million year-over-year due mostly to higher CapEx. Specifically, cash from operations to date of $306 million is up $21 million year-over-year, or 7%, while CapEx to date of $218 million is up $92 million year-over-year, reflecting continued investment in the major strategic projects we've commenced in South Korea, Saudi Arabia, Jordan, and here in the US. With the delayed third phase of the Jordanian expansion, which we announced last quarter, we still expect CapEx to be approximately $275 million to $300 million for 2012, with roughly $75 million attributable to the JBC expansion.

Overall, our balance sheet remains in excellent shape with net debt of $293 million, excluding $18 million in non-guaranteed debt from our JBC joint venture. This is up $20 million quarter-to-quarter, mainly due to higher CapEx and share repurchases. Net debt to EBITDA ended the period at 0.4 times and net debt-to-cap was 14%. We reduced long term debt by $41 million this quarter, primarily due to our restructuring of high-cost debt in Asia. We made $18 million in dividend payments during the quarter, up 21% year-over-year, and year-to-date we completed $40 million in share repurchases. Our strong cash flow and low leverage continue to give us options and tremendous flexibility as we work toward Vision 2015.

And as an update, at this time, we maintain the Board authority to repurchase up to an additional 4.3 million shares left of a $5 million authorized under our existing share repurchase program. While we would prefer to use our capital to support organic growth or acquisitions, we will continue to consider opportunities to repurchase our shares at times when valuations are attractive.

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

Operator, at this time, we're ready to open the floor for questions.

(Operator Instructions)

PJ Juvekar of Citigroup.

Yes, good morning. This is John [Hirt] on for PJ this morning.

Hi John.

Regarding your comments that overall 4Q should be a little bit worse than 3Q, which it sounds like it's primarily a function of Polymer Solutions. Is it reasonable to think that Polymer Solutions profit could be down on a year-over-year basis in 4Q?

I think if you look at it on a year-over-year basis, that's the range that you're looking at.

Okay. And as an extension of that, do you think maybe a sequential pick-up in Catalyst could offset that quarter-over-quarter decline in polymers?

I think you'll see nice pick-up year -- sequentially in Catalyst, but I also think we're going to have is, we've tried to reiterate on the call, you're going to see some weakness in Fine Chemistry relative to some significant contracts that we won't be running in the fourth quarter, we won't have the benefit of and some cost absorption. So if you look at it, I don't think that the increase in Catalyst will be enough to overcome the weakness in Polymers and Fine in the fourth quarter.

Okay and can you talk about where exactly your bromine operating rates are today and what your expectations are for the rest of the year and as an extension of that, do you need to lower operating rates even more to keep inventories under control?

Yes, if you look at our bromine operating rates -- it's difficult to do but if you look at our overall bromine operating rates, they were in the third quarter in the mid-70% for bromine itself and that would be, I would expect that to drop probably to the mid-60%, or mid- to high-60% in the fourth quarter. And then if you look at our BFRs, BFRs are probably running in the range of all -- this is all Brominated Flame Retardants, probably at about 50% in the third quarter. I would expect to see that drop to the low 40% in the fourth quarter which would mean, obviously when you look at that, that some of our clear brines which that in those to run pretty hard in the -- and some our, specialty bromides to run pretty hard in the fourth quarter.

David Begleiter, Deutsche Bank.

Luke, could you comment on bromine for pricing sequentially year-over-year; any pressure you are seeing there?

I think if you look at specifically Brominated Flame Retardant pricing, if you look sequentially in construction where we sell brominated flame retardants in the construction, we saw a pretty significant decline in pricing. But it was really, if you'll remember in the last call, we talked about a key raw material that goes into HBCD called CDDT. There was an explosion at one of the key raw material suppliers in the third quarter that allowed -- there was a tremendous demand that allowed some pricing there for people who really worried about whether or not they were going to supply. So we've seen it drop back down to a more, what I would call a more normal rate, nothing for us to get alarmed about long term from HBCD standpoint.

And as you typically see, tetrabrom, you see a little nibbling around the edges. I would say maybe, sequentially, probably 3% to 4%, something like that but we are also seeing evidence now of its [price back up] and that's mainly in Asia. So overall, brominated flame retardants seem to be holding well with those two caveats, David.

And just bromine [tecnical difficulties] volumes, is it -- any market share losses given the consumer environmental issues or is it just purely end market weakness driving lower volumes here?

We do not believe that there's been any share loss from Albemarle from a brominated flame retardant standpoint. But let me give you -- I'm trying to figure out a way to give you guys a view on the level of the production and level of sales. So I want to go back and this is for all brominated flame retardants. So if you let's index off the first half of 2011. Brominated flame retardants were at 186% of what they were in the first half of 2009, so almost doubled. During the first half of the third quarter of 2012, we were roughly 120%, 130% of those volumes in the first half of 2009. In the fourth quarter, we will be down a little bit more than that.

Now if you look at that on the edges, electronics would've probably been a little bit better than that; construction probably a little worse than that in the quarter. So, I don't think there's been any market shift from a market share standpoint. It looks like to us it's all macroeconomics, but we're consistently watching it and making sure that we're bringing new products to the market that allow us to maintain that competitive edge.

Kevin McCarthy, Merrill Lynch.

Scott, I think you had commented that Polymer Solutions inventory days declined by about 10 days in the quarter and I was wondering if you could tell us what the before and after numbers were for that business? And then also at the end of the quarter, how would you characterize Polymer Solutions inventory levels relative to what you would consider a normal level for that business? Is it 20% above or 50% above; how should we think about that?

Yes, I mean I think Kevin overall for the Company, you're going to see as you do the calculations that our inventory days are holding flat right now at around 65 based on revenue, so days' sales in inventory, which is higher than what we'd like it to be. It's normally -- we'd like it to be for the total Company in the mid-50 range and continue to become more efficient there.

As we said on the call also, we've built some Catalyst inventory on purpose in HPC in particular, as we have a heavy fourth quarter of shipments and we have some shutdowns for some turnarounds in HPC in the fourth quarter. For Polymer Solutions, we've also seen, as I mentioned, we have declines. We typically like to see them in the mid-70 range, maybe a little bit lower than that as they become more efficient. And so we've come down -- hopefully, we will be at that level by year end.

Kevin, this is Luke. If I could find what steady state for that business was going to be based upon the demand that we see it. It just jerks around so quickly based on where we are on that supply chain, but what I would tell you is if you listen to the call here, we've got cost -- loss absorption of roughly $16 million to hit that business in the third quarter and we will have about $20 million to hit it in the fourth quarter, to give you an idea where we are looking to go with inventory in that business.

It's really helpful. I appreciate it. As a second question is on Performance Catalyst Solutions, I think you had indicated that you see that as a one-quarter issue. I was wondering if you would just elaborate on what's giving you confidence that the pressure there is transitory in nature?

Yes, sure. We had a number of big customers in the Middle East who had shutdowns in the quarter related to turnarounds so multi-week turnarounds that impacted our volume there. They're back up and running and we are seeing the shipments resume. And for one of them, it was actually a tie-in where they're building another unit, so in the longer term, that will mean more volume for us as we keep that customer. So, as we look to that, we are seeing everything in our order book and with our customers that would indicate that we are back on track and it just happened that those, a number of those customers all had that turnaround in the same quarter.

Laurence Alexander, Jefferies.

First question just on Catalyst. Can you parse out the pricing trends for each of the categories -- polymorphin, FCC and HPC, excluding metal pass-throughs and then tie that pricing trend commentary to the 40% drop in profits?

Yes, what I would generally say on that is, as we've said in the past, you've got to be really careful about the mix issue on that and it's complicated even further by the fact that we've got the rare material -- raw material for rare earth. So if you look at where we are, Catalyst-based pricing from a FCC standpoint is holding very strong. Sequentially, we haven't seen any degradation of that and it begins, it continues to hold well.

From HPC, we are seeing good pricing. We've got a little bit of metal pass-throughs from moly and nickel and cobalt impacting the revenue line, but that's a straight pass-through so it doesn't have a whole lot of profitability impact. And on PCS, pricing remains strong there. We've seen a little bit around the edges but nothing substantial and it continues to be very strong and very profitable from an earnings standpoint but Scott can go into a little bit more detail, Laurence.

I'd just add HPC is a difficult one because it's very customer-specific customized solutions. Pricing is a difficult measure to have there, and so Luke's right, the base pricing is holding well. PCS is also affected by mix. We've got a lot of different products as that business grows, but again, the pricing seems to be holding well.

Then your press release had some initial cautious comments on Polymer Solutions out through the Chinese New Year. As you're taking an early glimpse at 2013, what tailwinds or -- do you have that you can actually point to as solid, already served effectively in the bag that we should offset against a fairly soft demand environment?

You're talking about the overall corporation or --? (multiple speakers)

Overall corporation.

I think you'll see, I think Fine Chemistry services is going to continue to see very nice growth over that. I think clear brines, we've seen a pick-up in the Gulf in September. So we are beginning to see some of those clear completion fluids orders and clear completion fluids should have a very strong fourth quarter billing to a very strong 2013, continue to see good growth in that business. So I think Fine Chemistry services has some tailwinds behind it that we feel really strong about it. And on those custom services contracts, the contracts are done. We know we are going to get that volume, so we feel really good that we can put that in the bank and go with it.

We also feel good about the continued growth in our Catalyst business. So, I think you're going to see that return once we get all this rare earth behind us and you'll see that in, probably, there will be a little bit of rollover in the first quarter of 2013, but as a general rule, it should be behind us. And I think we'll continue to see strong volumes in FCC and HPC and growth in our PCS business. We will have Korea coming online in the second half of the year which will give us a nice little boost there. So I think there's some Catalyst tailwinds that we are counting on both Catalyst and Fine Chemistry to grow high single double-digit type of growth in 2013. But again, we are working on the AOP and we'll get more details to that to you in January, Laurence.

If I can just clarify in Polymer Solutions, is there any room for shrinking the business or cost-cutting further?

Yes, I think there's always room for cost-cutting. If you look at what we've done across our portfolio, but it won't be focused just on Polymer Solutions. If you remember in 2009, a lot of that [plans to see] that we implemented was focused on Polymer Solutions. There's still good growth opportunities there when that business -- the macroeconomic trends turn right with the pricing and the cost position that we have in that business, every incremental pound contributes is very profitable for us.

So it's a strong business. We are looking forward to seeing it grow next year when we get some help from the economy and I feel good about it overall. There's not another $160 million for me to go out there and cut, Laurence. There's some cost savings that everybody would do from a common sense standpoint, from travel, from incentives, from pay, from all of that, from hiring and replacing people. But I don't have another $160 million that we can go out there and cut. It wouldn't be the right thing for the Business and to grow the Business.

Mike Ritzenthaler, Piper Jaffray.

Can you talk a little bit more about the growth for NBPT? Is it the international distribution that's driving the growth there? And given the domestic measures and volumes we're hearing from some of the fertilizer companies for this fall, I guess is there any risk of shortage, or maybe I guess I would've expected maybe 4Q to be a little bit stronger because of the nitrogen volumes?

No, I think that long term debt business is in great shape. We don't see that there's an issue with shortness in the fourth quarter or shortness anywhere else. And I think it begins that they've always had a plan from an international standpoint to expand that business and pushing us to get assets outside of the US. So we are working with that and hope to grow that business and feel really good about it both in short and long term.

Okay. And then is there anything outside of connector and circuit board end market release that could solve these anemic bromine volume problems? I mean could you give us a sense maybe for your share in the early stages of Mercury Abatement or any of the other end markets, the brominated -- [bromobutyl tires]?

Yes, I think that if you look again at from a flame retardant standpoint, we have some good opportunities in some additional markets with some new products that we're pushing out that we talked about in the past, probably the Gemini, GreenArmor and some other products there that could be a nice growth over the next 2 years to 3 years for us. If you look outside the uses of brominated flame retardants, we're putting together a Bromine Task Force and we've got together a Bromine Task Force and that job of that group is to come up with new uses for bromine, not just the new flame retardant. We've got a group working on that but it's, what's another use for bromine and how can we drive more uses of bromine. And we're excited about some of the possibilities of that still very, very early stage but a lot of good work and good thought process is going on in there.

We don't have a big market share of the Mercury Control market today. We're not in the Section 45 in the US for Mercury Control with those clear completion fluids and until we get need for regulations in the US and abroad, that market is going to be slow. So, I think we're doing things in our specialty bromides business that we've seen nice growth there. We talked about driving new uses for bromine, and it's just going to be a continuation of finding new ways, getting it to a market in a cost-effective manner that allows to grow the uses of that molecule.

Luke, I would just add that in the shorter term, clear [brine] fluid, clearly one that we're excited about. Literally in the last week of September, we had some significant shipments that helped us deliver the results that we did and we are expecting that to continue through to 2013. The growth that we've seen in Food Safety, as well as some of our Industrial Bromides, like in water treatment, are all showing really good signs of traction. And so all supportive of that bromine molecule. So once the economy starts to turnaround, we'll see that Flame Retardant business pick back up as well.

Jeff Zekauskas, JPMorgan.

You talked about your relatively low utilization rates in brominated flame retardants. I think you talked about them being in the 60% and being a little tougher in the fourth quarter. So does it make sense to postpone the Jordanian capacity coming on, because it doesn't seem that you need it. And I would imagine that all of the bromine companies expanded capacity in expectation of the Mercury removal markets coming along much faster than they did or than they will. And so how is the industry going to manage the situation that there seems to be much too much capacity for slow-growing volume business?

Hi, Jeff, that's a great question. If you look at the utilization rates for our brominated flame retardants, you'll remember we have delayed not just the start-up but the commencement of the expansion of our tetrabrom expansion in Jordan. So we are not bringing that online. We haven't even started construction of that yet, so we have postponed that tetrabrom expansion.

If you look at bromine and you look at clear completion fluids as it's growing, those capacity rates for clear completion fluids are getting tighter. And so we needed some additional clear completion fluids capacity. We got that. It's coming online and it will be able to service the customers. With respect to bromine, it didn't make any sense to expand clear completions without expanding the bromine at the same time in Jordan.

I'm not aware of other announcements by ICL. I know Chemtura just acquired, or announced an acquisition with Solaris, so that would be some additional capacity that they would have but that's not new capacity; it's already out there. But I think that what we're going to do, and I can't speak for the others is, I have no intention of flooding the market with bromine. We are going to bring that online as needed to meet the demand. It is not going to be a situation where I feel compelled by any stretch to run that at a 100% capacity on day one and we will not operate it that way.

And then for my second question, can you review what the rate of demand growth has been for the nine months for Fluid Cracking Catalysts versus HPC catalysts? My impression is that FCC has grown much faster and I was wondering if that were the case, why is it? Why is the demand profile so much stronger in FCC than it is in HPC?

If you're looking at it from a volumetric standpoint, okay, Jeff? Is that your question?

Yes, that's exactly right.

From a volumetric standpoint, that's the case. And one of the things that we saw in the third quarter in particularly were FCC volumes were up. We had some customers buying ahead of a potential West Coast strike that what they were worried about in the third quarter. That strike has since been settled but they were buying ahead of that. I think our HPC volumes this year will be relatively what they were in 2011, so pretty flat, and we made good headwinds -- good headway into FCC markets.

I think a lot of it is deals with the heavier resid and the cracking up there with the propylene yields that we were able to provide that higher output on FCC catalysts than in part some of our competitors have been. So I think that crude slate is helping us there. It's in our sweet spot in FCC and HPC has been strong; it just hasn't grown like FCC has from a volumetric basis.

I would just add, too, Jeff, that we're seeing good growth internationally as those refineries are operating in India and the Middle East. We are seeing the benefit of that in FCC.

In the interest of time, our final question will come from Mike Sison, KeyBanc.

Given the rough start in Polymer Solutions is likely to see in the first quarter of '13 or the first half you talked about, the weak demand, is it possible to grow earnings next year?

It's possible to grow earnings next year.

Okay. And then when you take a look at Fine Chemicals and Catalyst you outlined at your Analyst Day that '13 could be a year where we see that trajectory to '15 come to fruition. So if you think about all the things you can control, your management team can control for those two businesses, is it possible that '13 will shape up where the trajectory to your '15 goals seem still pretty feasible for those two segments?

Yes, I do. I think what you're going to see is, remember there was a range and some of it was organic growth and some of it was with a M&A deal, so I'm just talking about organic growth right now. I think you're going to see that the Fine Chemistry and Catalysts are going to be on a trajectory to put us right in that gap where we talked about where we'd be. And I think polymers is going to -- the economy's going to come back and we are going to see the growth of that business and when it returns, you are going to see really, really strong earnings coming out of that business just like we had before. So, I still remain confident that we are going to be in the sweet spot long-term for Vision 2015 strategy on what we said we were going to deliver from each of our businesses.

Great. Last question since I am the last. Your balance sheet is still pretty good and you've seen other companies -- Eastman, even Ecolab obviously take some pretty big risks and go after some nice businesses. Any thoughts there? Are there any opportunities for you to generate some pretty good growth in a slowing economy via acquisitions?

Yes, I think we're still looking at acquisitions in the market today but we are going to take the same kind of measured approach that we have that it fits within an overall strategy. It grows our technological base and it's one that is not going to dilute our earnings and it's going to be one that we think we can manage. I'm not going to do an acquisition just because interest rates are low and we want to do one. We are going to do an acquisition that makes sense for the strategy for this b=Business to grow it for Vision 2015 and beyond.

At this time, I'd like to turn the call back over to Mr. Lorin Crenshaw for closing remarks.

Sure. Now we would just like to thank everyone for their time and attention and encourage you to call with further questions.

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