雅保公司 (ALB) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to second quarter 2013 Albemarle Corporation earnings conference call. My name is Sandra and I will be your operator today. At this time all participants are in a listen-only mode. We will conduct a Q&A session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Mr. Lorin Crenshaw, Director of Investor Relations and Communications. Please proceed, sir.

Thank you, Sandra, and welcome, everyone, Albemarle's second quarter 2013 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 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.

Please note that our comments today regarding our financial results exclude all non-operating or special items and reconciliations related to any non-GAAP financial measures discussed. And those reconciliations may be found in our press release or earnings presentation, which are posted on our website. With that, I will turn the call over to Luke.

Thanks, Lorin, and good morning, everyone. Scott and I appreciate the opportunity to share Albemarle's second quarter results and our current views on the rest of 2013 with you today. As usual, at the end of our prepared remarks, we will open it up for your questions.

On our last call we expressed the view that 2013 profitability would be back end loaded and that the second quarter results would be very similar to the first. That is exactly what we saw in the second quarter. We ended the quarter with net income of $82 million or $0.97 per share, net sales of $634 million and EBITDA of $137 million, all consistent with first quarter results and in line with our expectations.

From a segment standpoint in the quarter, polymer closed stronger than we expected, Fine Chemistry performed roughly as expected, and Catalyst was a little weaker. Scott will go into more detail shortly about each segment, but at a high level refinery catalyst results continued to be impacted by lower metal pass-throughs, customer turnarounds, and less favorable mix.

In performance catalyst solutions, there were three major factors impacting performance. The full cost of our capital expansions hit the [PL] during this startup and customer qualification phase without the associated revenue. European polymer catalyst customers seem to be trading down to less performance-based catalysts due to the economy.

Finally, we sacrificed some share in price at some key accounts to ensure longer-term commitments. In Fine Chemistry, clear brine volumes in the second quarter, while strong, did not match the first quarter pace, but increased sales in custom services offset that slight drop-off.

In polymers, volumes were better than expected, but pricing continued to be under pressure in certain areas. Demand in electronics, enclosures, commercial construction, and infrastructure, particularly in Europe, remained weak. Overall, the performance of our businesses during the quarter was generally consistent with the direction of global economic environment.

60% of our sales are outside the US and the sluggishness in emerging economies, particularly China, impacted demand for products. Demand in Europe remained well below historic norms. Inventory levels in portions of the electronic segment caused customers to remain cautious.

Despite this challenging environment, on a year-to-date basis we have delivered solid EBITDA margins of 22%. Year-to-date cash from operations has totaled $179 million, in line with last year and on track for another year of excellent performance on that basis.

The second quarter also saw us being more aggressive on our share buyback program. During the quarter, we executed an accelerated share repurchase program with JPMorgan, under which we will purchase $450 million in stock, which should bring our aggregate 2013 repurchases to roughly 10% of our shares outstanding.

We funded this program with a combination of cash on hand and borrowing, and put in place a commercial paper program under which borrowing costs have recently been on the order of 30 to 40 basis points. Notably, as is normal with accelerated stock repurchase programs, aggregate short interest in our stock rose sharply during the quarter. In turn, short interest has drifted down steadily since our initial announcement and we would expect it to return to more normal levels by year end, at the end of the accelerated share repurchase contract.

These actions, combined with the previously announced 20% increase in our dividend, reinforce our commitment to returning capital to our shareholders. As we previously discussed, from a capital structure standpoint, we expect to maintain leverage of around 1.0 times net debt to EBITDA in the future and to continue looking for opportunities to increase our annual dividend and return capital to shareholders while still funding organic and strategic growth.

Now I would like to share a few highlights related to our major capital projects, which met several key milestones during the quarter.

With respect to bromine, after successfully commissioning the first phase of its expansion project in the first quarter, which doubled elemental bromine capacity, Jordan Bromine Company commissioned the expansion of its HBr and clear completion fluids capacity in the second quarter. We didn't see any commercial sales from that expanded capacity in the second quarter and wouldn't expect much in the third, as we work through some raw material startup issues which are typical for a project such as this.

This quarter we also announced the startup of our TEA facility in Saudi Arabia in conjunction with our joint venture partner SABIC, with full commercial productions scheduled to begin in the second half of 2013, once customer qualifications are completed. Construction at our Yeosu, South Korea site is complete for our single side catalyst production facility.

And our team recently celebrated the topping off ceremony for the unit under construction, which will produce our pure growth line of products for the LED and electronics industry. That unit is expected to be online by the end of the year for qualification runs, consistent with our previous reports. The pilot plan at Yeosu remains fully booked as it engages with customers in the region to help them solve their catalyst needs. And we expect the first commercial batch to ship out of our CMU at Yeosu in the third quarter.

At our 2011 investor day, we outlined our long-term growth expectations and Vision 2015. Three years into the strategy, the foundation of our business is stronger today than it was at the end of 2010. We have expanded our bromine and catalyst manufacturing footprints in areas of the world close to our customers to focus on markets which are forecasted for growth.

We have continued to manage cost to preserve relatively strong profitability despite tough economic environments, taken decisive actions to address underperforming assets, and leveraged our strong balance sheet to return substantial capital to shareholders. However, our world view and global demand expectations have certainly changed.

Given slower global growth and less progress than we originally anticipated in expanding into adjacent businesses, it has become clear that we will not attain the Vision 2015 financial targets in that timeframe. The impact of slower global growth on our ability to achieve our goals have been twofold. On the one hand, it has resulted in lower underlying demand than originally anticipated in our key markets.

In addition, the slower market demand is resulting in a longer payback period on our major capital investments. The absence of a post-2010 global recovery has been well documented. Growth expectations for advanced and developing economies have fallen considerably since we laid out Vision 2015.

This new economic reality and the resulting demand weakness in our key markets has led to increased competitive intensity and has caused us to selectively reduce prices and, in some instances, share in some segments in order to maintain longer-term relationships with key customers.

Our major capital projects -- once our major capital projects are fully operational and at 90% or so operating rates, we would still expect the associated incremental revenue to be in the range of $250 million to $400 million. However, due to market conditions, the timeframe from startup to 90% operating rates has extended by a couple of years.

In short, we invested 12 to 24 months too early. We knew there was a market risk when we made the decision to invest, but decided to go forward as we did, so that we would be prepared to meet the demands of the market and our customers rather than delay investment and risk missing that opportunity.

As we have stated previously, we are patient and are prepared to bring capacity on as needed in increments to meet market demand.

We still believe that we invested in the right markets. Within organometallics, we are now the only market participant with a dual global manufacturing footprint, positioning us to capture growth not only in Asia and the Middle East where petrochemical companies have invested disproportionately over the past 10 to 15 years (technical difficulty) demand is projected to remain strong.

But also in the US, where projects for significant new ethylene derivatives production capacity is projected to come online over the next 5 to 6 years.

Our bromine expansion further strengthens our position as the world low-cost bromine producer, balances our bromine production capabilities from a geographic perspective, and positions us as one of only two producers with current capacity to meet any growth in the demand for bromine and bromine derivative.

We have also increased our R&D focused on discovering new applications for bromine and bromine derivative products.

Our balance sheet remains strong and we continue to generate strong cash flows. As a result, we have the financial wherewithal, if we choose to exercise it, to still achieve the lower end of the Vision 2015 EPS targets through additional stock repurchases. However, growing operating earnings remains at the heart of our strategy and is our primary focus.

Overall, we remain determined to position Albemarle as an innovative, high-performing Company in all economic circumstances. We have invested early in the right markets, enjoy strong financial flexibility to grow organically or through acquisition, and remain confident in the long-term fundamentals driving growth in the markets we serve, and in the underlying earnings and cash generation power of our businesses.

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

Thanks, Luke. I am going to start with a review of our business segments and then turn to the details on our P&L and cash flow. Catalyst reported second-quarter net sales of $234 million, up 2% year-over-year, and segment income of $51 million, down 25% year-over-year on segment margins of 22%.

A number of unique headwinds continue to impact results that make it challenging to interpret the underlying health of the business without adjusting for them. Excluding the impact of lower metal surcharges in refinery catalyst, startup costs in performance catalyst solutions, and above-normal turnarounds in our heavy oil upgrading segment, sales would have been up approximately 12% year-over-year, and segment income would have been up 6% year-over-year.

Finally, joint venture income came in less than expected, due to lower metal surcharges, softness in demand, and unfavorable exchange rate impacts, particularly the yen.

Within refinery catalyst solutions, heavy oil upgrading volumes, which is mostly fluid cracking catalysts, were up double-digit year-over-year. And excluding the impact of metal surcharges, segment income was down slightly, due to negative customer mix from several large customer turnarounds and lower joint venture income, particularly in Brazil.

Barring another large change to metals pricing, this should be the last quarter where metal surcharges cloud the numbers.

Clean fuel technology's volumes, which are mostly hydroprocessing catalysts, also rose double-digits year-over-year, driving similarly [to] strong levels of sales and segment income growth. The mix of clean fuels shipments was similar to last year.

Performance Catalyst Solutions revenue declined 9% year-over-year and segment income was down approximately 17%, excluding the impact of higher startup costs. Lower revenue was driven by slower demand for polyolefins in Europe and customer destocking, resulting a lower production rates and therefore polymer catalyst demand.

We continue to experience the unfavorable impact of factory startup in the quarter and still expect such costs to amount to a full year drag of on the order of $20 million to $25 million.

Fine Chemistry reported second-quarter net sales of $176 million, down 16% year-over-year, and segment income of $34 million, down 25% on segment margins of 20%. The year-over-year profit decline was mainly driven by a low in custom deliveries and the expiration of several high-margin contracts that positively impacted the year-ago period.

Lower pricing within HBr, elemental bromine, and amines are -- also contributed to a lower year-over-year profitability, partially offset by year-over-year growth in clear brine fluid volumes, although clear brine volumes were not as strong as Q1. Also, sequentially, bromine and HBr pricing are holding firm.

Polymer Solutions reported second-quarter net sales of $224 million, down 9% year-over-year. Segment income of $44 million was down 34% year-over-year on segment margins of 20%.

Excluding the impact of exiting our phosphorus flame retardants business, revenue was down 4% year-over-year. Our flame retardants division was responsible for most of the year-over-year decline in segment revenue and profit, mainly attributable to lower pricing in the HBCD, 8010, and minerals product lines.

Specifically, within brominated flame retardants, a year ago we announced two consecutive price increases for HBCD, a unique global supply disruption due to an explosion at a facility that produced [CDDT], a key precursor. Since that time, HBCD pricing has come full circle, declining back to levels prior to our announced price increases. The impact of this decline in price on the quarter year-over-year was in the range of around $15 million.

The 8010-related price weakness is more modest, but reflects a continuation of competitive dynamics we expect to continue amid the current extended downturn in TV and PC enclosures related demand.

Within mineral flame retardants, we have not seen any improvement from Q1 as weak European construction and automotive market trends continue to restrain our performance.

Finally, stabilizers and curatives revenue in segment income were essentially flat year-over-year, as weak curatives results offset growth in antioxidants, which continues to benefit from better volumes related to new customer wins, growing sales outside of China, and an improved cost position in a key raw material.

Finally, second-quarter corporate results were negatively impacted by a reserve taken in the amount of $3.6 million pretax, or $0.03 per share, in recognition of a misappropriation of Albemarle funds by a freight bill processing and payment services vendor that recently filed bankruptcy amid allegations of fraud committed against their customers. The vendor was responsible for auditing Albemarle freight invoices to determine whether the invoices were accurate and in compliance with negotiated carrier agreements, then paying the freight invoices on behalf of Albemarle using funds provided by us for that purpose.

We have filed a lawsuit against the relevant principals and are also pursuing claims against the bankrupt entity.

Now, to highlight a few other P&L items for the year, US GAAP reported SG&A expenses were $63 million during the quarter, up 2% year-over-year as a percentage of sales, or slightly higher year-over-year at 10%. Primarily related to favorable nonoperating pension costs last year, excluding those non-operating items, SG&A is actually down 10% mainly due to lower incentive compensation and other personnel costs.

R&D expenses were $22 million for the quarter, up 3% year-over-year and up 35 basis points as a percentage of revenue to 3.4%. Second-quarter free cash flow, defined as cash flow from operations, adding back pension and postretirement contributions, and subtracting capital expenditures, was $35 million, up $43 million year over year despite lower earnings levels, driven by lower working capital and CapEx levels.

Our year to date free cash flow was up 27%, driven by lower CapEx spending.

CapEx was $48 million in the 2013 second quarter and year to date has been $103 million, down versus the first half of last year. For the full year, we still expect to spend approximately $175 million, a decline over 2012 spending. Net debt rose sequentially by over $500 million this quarter to $749 million, reflecting the impact of funding the accelerated share repurchase program.

As a result, net debt to adjusted EBITDA ended the period at 1.2 times, up from 0.4 times last quarter and just above the leverage target of one time adjusted EBITDA, and excludes restructuring charges and nonoperating-related pension adjustments.

Net working capital of $622 million ended the quarter 8% higher than year-end, and at 24% as a percentage of sales is currently about our 20% target for the full year, mainly due to an increase in receivables and inventory levels that we expect to come down in the second half.

Excluding nonoperating items, we expect our effective tax rate for the full year to be 22.6%. This is a 200 basis point reduction from our expected full-year rate at the end of the first quarter, driven primarily by the geographic diversity of our income and profitability. Our rate for this quarter was 20.6%, reflecting the need to catch up to the new full-year rate.

Finally, last quarter we provided guidance relating to the impact of the significant depreciation of the Japanese yen, which averaged approximately JPY98 to the dollar in Q2, down 22% year-over-year. This movement impacted the P&L during the second quarter from a translation standpoint by about -- by approximately $5 million, or $0.05 per share, and by $9 million or $0.08 per share year to date. Assuming yen exchange rates remain near current levels for the rest of the year, we can continue to project a full year negative pretax impact of around $22 million, or $0.20 per share relative to our expectation heading into the year, and estimate that a 1% change in the yen dollar exchange rate would impact earnings by approximately $0.01 per share.

With that, I will turn the call back over to Luke to elaborate further on our outlook.

Thanks, Scott. At this time, I want to take a minute to update you on the prospects for each business segment for the balance of the year. In Fine Chemistry, we are forecasting demand for clear brine fluids to remain strong for the balance of the year. We are encouraged that drilling in the Gulf of Mexico increased sequentially during the second quarter from 46 to 57 average rigs in use, and that the average international offshore rig count is up 6% year to date to 321 versus the full year average for 2012.

In addition, we expect Fine Chemistry Services to show an increase in profitability in the second half, driven by a combination of new product launches and an increase in the demand forecasted by a number of our key customers. However, the overall step up in the second-half profitability of Fine Chemistry Services is now lower than we expected at the time of our last call. So while we expect sequential improvement in segment income for Fine Chemistry in each of the next two quarters, the increase in demand is not as strong as we previously expected.

In Polymer Solutions, there have been no developments in terms of our order book or about leading indicators we monitor that would lead us to a more optimistic view that we shared on our last call. The most positive trend across our order book remains the continued improvement in our brominated polystyrene family of products, which corresponds with the Bishop's Report Connector Confidence Index. That Index reached a two-year high 69.3 in June and is up from its two-year low of 35.1 reached last October, which tracks our increases in volumes in this segment.

The most recent IPC book-to-bill ratio showed further improvement to 1.12 in May, the fifth straight month of sequential gains for that rigid printed wiring board indicator. However, absolute shipments remain at just 80% of 2010 volumes, and are down year-over-year. This shipment index trend is more in sync with the underlying demand for tetra brome that we are observing than the direction of the book-to-bill ratio itself.

The most recent forecast from [GFK] calls for lower full-year shipments of TV sets in both developed and developing markets, with all of the growth coming from developing markets where flame retardant usage is typically low.

On a positive note, the number of weeks of TV panel inventory declined sequentially during the quarter, but remains 3 to 4 weeks higher than historical averages, a level of access last seen in early 2008.

The ongoing decline in global demand for PCs continued in the quarter, declining 11% year over year, according to Gartner. This trend would appear to reflect some combination of an expansion in the duration of the PC replacement cycle and displacement of PCs by tablets.

Finally, we have not seen improvement in the European commercial construction or wire and cable market, as both public and private investment for new projects remains at low levels with ongoing debt problems in many countries continuing to constrain spending, limiting the near-term growth prospects for HBCD and mineral flame retardants.

Overall, our interpretation of the order book patterns and leading indicators suggest that Polymer Solutions segment income in the second half is likely to be similar to the first half levels, with the third quarter being somewhat higher than the fourth.

Within Catalyst, the second half outlook for refinery catalyst solutions calls for fewer turnarounds at our SSC customers, driving better heavy oil upgrading results. We have gotten word of new unit project startup delay that will push back certain large SSC orders from the fourth quarter to 2014.

The second half also calls for a large number of clean fuels technology customer wins. However, some CFT shipments scheduled for the second quarter slid to third quarter, and even more third-quarter orders are slipping to the fourth.

It isn't a question of whether we get these orders. We have got them. But there is a question of when the customer will instruct us to ship the order.

We are forecasting that CFT will be considerably more profitable in the fourth than the third quarter due to current expectations on the timing of these shipments. In short, in Refinery Catalyst solution, it all comes down to the timing of shipments. It's the nature of this business. And I must caution you that in both product groups there is potential for further slippage.

The timing of the shipments, while meaningful in the context of quarterly earnings, certainly doesn't impact the overall strength of our Refinery Catalyst franchise.

Our second half expectations for performance Catalyst Solutions have also declined, driven by weaker European polymer catalyst demand and competitive actions. We have responded accordingly to maintain our market leadership, but have yielded some on price and share at some key accounts in exchange for long-term commitments. Those actions are appropriate long-term, but could have a negative short-term impact.

Catalyst results for the rest of 2013 really depend on the timing of the CFT shipments for the rest of the year. Based on current information, Catalyst segment's income should be down year-over-year, with the fourth quarter expected to be substantially more profitable than the third.

We currently expect total Company result of the third quarter to be slightly higher than the second quarter, with the fourth quarter expected to be sequentially stronger. For the full year, we are now projecting EPS to decline in the range of 10% to 15% from 2012, including the impact of our share repurchase program. The critical factor comes down to the timing of catalyst shipments currently scheduled for December.

In closing, we certainly have a number of headwinds to continue to manage in the near-term, but we remain confident in the long-term fundamental trends driving our businesses and the underlying earnings and cash generation power of our Company going forward.

With that, I'll turn the call back over to Lorin for questions and answers.

Operator, we are ready to open the lines for Q&A. But before you do so, I would remind everyone to please limit your questions to two per person so that everyone has a chance. And then get back in the queue if time allows. Please proceed.

(Operator Instructions) Robert Koort, Goldman Sachs.

Thank you. Good morning. Luke, could you explain a little bit more and talk maybe if there is any precedent on this downgrading of your chemical catalyst customers? I would suspect if times are lean, they would need to get the best deal and efficiency possible. So can you just give us a historical basis for these guys going to cheaper materials or cheaper catalyst?

Yes, and that was specifically in Europe. So I think what the issue has been is, as it seems to us, is that there hasn't been the demand for our customers' products in the market which they are selling. So they are seeing a slowdown, so they don't need that efficiency, Bob, to get higher throughput and efficiencies in their production process.

So they seem to be going to a -- at least in the second quarter, seem to be going to a lower performance catalyst, but we have always be seen already seen in July some of those orders picking up. So I think it will return to norm in due course.

Okay. And then, appreciate the update you gave us and the specificity around the guidance as well as your Vision 2015. I think if I did the back of the envelope, though, it would suggest, to get to that low end that you said was still possible with share repurchase that you would see 50% growth between 2013 and 2015, so I just want to make sure I did the math right. That seems awfully sensational.

Bob, I hope that is the case, but I don't think you did the math right. If you look at what I'm trying -- the point I'm trying to make is we have previously stated that we are going to try to maintain a level of roughly one time net debt to EBITDA. Now, if we were -- that would assume you can buy back shares $350 million, $400 million a year. My CFO is kind of shaking his head. But sometime in that range.

That doesn't prohibit us from the possibility of leveraging up further if we decide that is the right point. So I think that's what you have got to look to. It is more the amount of leverage we would be willing to put on the business in order to acquire those shares. We will still have fundamental underlying growth, but it's not going to be anywhere near the kind of number that you just threw out.

And just to clarify, Luke, but you said if you were to lever up, maybe you could get to that [675] low end.

Yes. That's right.

Got it. Okay. Thank you.

P.J. Juvekar, Citi.

Good morning. When you lowered expectations related to your Vision 2015, which segment do you see the biggest shortfall? And you mentioned that your capacity was maybe 12 to 24 months earlier. Are you referring to the catalyst plants or the bromine expansion or both?

Yes, I think if I look from where we estimated, if you go back and look -- remember, we talked about polymer margins being in the 30% range by that time. And where we are today, given the dynamics and what is going on with PCs and televisions, I have a hard time seeing us get to that kind of margins, given where we are today, by 2015.

So I think the one where we have got the biggest gap is on polymers, particularly in that one area.

When I talk about the being 12 to 24 months early, the bromine expansion, if you look at capacities today, we clearly didn't need that capacity for another 24 to 30 months. I mean, we could have got along with the capacity we had. So bromine was clearly early.

And on catalyst, it's a lull today. I don't know whether it is actually 12 months early or -- it's hard to tell because you know don't what the economy is going to do. But, clearly, we don't need it today. So on both of those we don't need them today.

But in both of those instances, because of our market leadership position, we took the position that it was better to be early and be able to meet the demands of the market, as opposed to being late and running the danger that someone else steps in and fills our shoes as the market leader. So that's the decision that we took.

Thank you. And, secondly, you talked about catalyst orders slipping. Is that mainly because of customer destocking? And I think you mentioned it's in polyolefins, but are you seeing that similarly in refinery customers as well?

Yes, no, when I was talking about the orders slipping, I was really referring to refinery catalyst. So it's not a destocking at all. It is just a matter of when they are going to turn around the unit and when do they want to make the purchase -- they want to make it in this calendar year or they want to make it in the next calendar year, based upon when they are going to do that turn around, how they do their annual budgets, and that. But it has nothing to do with destocking in that space.

Please proceed to the next question.

David Begleiter, Deutsche Bank.

Just a quick question, Luke. Your guidance for the back half on earnings [basis for accounts] was very helpful. Could you just give a little bit more color as to the margin cadence Q3 to Q4 and then for the full year?

Yes. What I am going to do is I'll give that to Scott and he can look at that on the specific margins. What I would say is I think we are going to -- that the margins this year, you've got to remember those additional costs that we've got coming through for the year.

We have lost the rare earth pass through, the impact of the metals pass-through as well as the startup costs that we've got that will be impacting margins year-over-year when you look at that. So I would be mindful of those two specific incidents that we've got that will impact those margins.

At the end of the day, those margins remain strong and I think that those are ultimately mid-20%, 30% -- high 20%, 30% margins in that catalyst base going forward, as we discussed in our Vision 2015. So, Scott?

Yes, if you look at the second half, Catalyst, we'd expect margins in the third quarter that are similar to what we had in the second. And we expect to have improving margins going into the fourth, so really tied into that volume that Luke talked about in terms of the sequencing in the second half.

That's very helpful. And then just follow up on Polymer Solutions. You brought up a good point in that we might be seeing the secular shift away from PCs towards tablets. Have you guys thought a little bit more about raising the content on other electronics platforms going forward? Do you see an opportunity there?

Absolutely. What we have done is we've got a bromine task force. And that bromine task force is the job -- their sole job is to find, first of all, new applications for bromine in general. And if you look at the GDU, they've got the polymers -- GDU has a corresponding task force looking for ways that we can spread our applications in flame retardants into other areas, not only in the electronics, but other areas where we don't participate today.

So, looking for that as bromine as well as our Gemini product and phosphorus and mineral products as well. So a lot of work going over there and we believe these markets are still strong. And we've got to find ways to get into other areas of markets where we don't play today to expand our footprint.

Understood. That is very helpful. Thank you.

Kevin McCarthy, Bank of America.

Yes. Good morning. In the catalyst business, I think you outlined a whole host of different issues, some of which appear to be transitory in the first half around metal surcharges, customer turnaround activity, some startup costs that you have, PCS in Europe, et cetera, creating is a lot of noise here. And so I'm wondering if you could just go back up to a high level and maybe opine on how you would view this structural growth prospects in your key catalyst businesses, let's say, over the next three years at the industry level or the Albemarle level.

How fast do you think these businesses are growing, which might be growing faster than others? If you can just kind of reset the bar, because I think it's difficult to disentangle a lot of these moving parts here.

Yes. Thanks, Kevin. I appreciate that question. I love the catalyst business, first of all. I think it's a good solid performance driven business that delivers high margins for us. If I look at the growth and I looked over the next 2 to 3 years, we have been public about the wins that we have seen in our high oil upgrading, our fluid cracking catalyst.

We believe that our technology is strong for what we are going to see in a lot of areas of the world, where they are going to have to maximize that propylene yield and that heavy resid. There is a shale gas. Everybody is talking about light sweet oil in the US and it is certainly there, but in the emerging regions of the world, they are not going to be able to crack naphtha. So they are going to be looking to maximizing that propylene yield to the maximum that they can in areas of the world and we believe our technology there.

So I feel real strongly about the growth of our SSC business 2014 and on into the future. We have got that business. We've got to keep it and we plan on keeping it, but our technology should be the winning technology in the bulk of these new units coming online.

If you look at our win rate on hydroprocessing catalyst, it is going quite well. We have not lost any share. I would not say we have gained any share, but we are winning the units that we would expect to use based on our technology and our relationship with [EOP] there for the new units, as you know, we have done quite well with those new unit wins. So that's been a strong partnership.

And I continue to see growth in those areas of the world, particularly as you see the sulfur specifications in the areas around the world getting tighter and tighter. And that doesn't even talk about bunker fuels and things like that with regard to ship carries and things. So I continue to see a tightness in those sulfur specifications driving the use of our clean fuels technologies.

And Brazil is going to bring those units online. It's just a matter of time. And when they do, we will be there with our partner, Petrobras, to have -- capture more than our fair share of that growing market. So that business should continue to grow.

On Performance Catalyst Solutions and organometallics, we are the market leader with the world's low-cost position and we make good margins above those products. We've got customers that are -- we've got other competitors trying to come in and become a market leader, but we are there and we are going to maintain our market leadership. And we are going to capture more than our fair share of growth in these markets.

We have worked too hard to let it go away and we are not. So I continue to see strong growth in our organometallics and are excited about the possibilities in LED.

If you will listen to companies such as Philips, who has the bulk of the fluorescent market today, they are talking about the amount of volume they are going to see in LEDs and moving to LED lights. So I feel like that LED market for lights and backlighting, it keeps moving a little bit, seems to be delaying a little bit. But it is going to come.

There are too many people in the industry, too many companies in that lighting industry who are making it, but their commitment to move to that line of lighting. So we are going to be set there with the largest best cost position from the key intermediates that are going to allow us to go downstream in this LED market. So I feel good about the long-term perspectives for growth in LED and our organometallics.

So all in all, I love catalyst. It's got great growth; got great legs in the long term.

Thanks for that. Second question, if I may, just on clear brine, Luke, I would have thought those volumes might have increased in 2Q with the new bromine salt capacity in Jordan. Why was that not the case? And perhaps you could comment on pricing trends for clear brine.

Yes, if you look at pricing, what I would say is clear brines have held in there pretty fine. It hasn't seen a whole lot of degradation in price in the clear brines. It is what it is.

On clear brines it is not a matter of generally of price. It's a matter of do you have the product in the area of the world where it needs to be when they complete that well. So we haven't seen a whole lot of price degradation there at all. It's been pretty solid around the globe.

With regard to the volumes, they had a tough comp in the first quarter. It was the second highest volume we've ever had. And, remember, Kevin, while we have brought the JBC online and commissioned it in the second quarter, we didn't see any commercial production held from back in the second quarter at all.

So I would think, sort of the rest of the year, we are going to see similar volumes that we've seen to the first half, which would be a record year for clear brine fluids. So I feel like that business is in good hands.

Okay. Thank you very much.

James Sheehan, SunTrust.

Hey, Luke, just wondering if the macro situation doesn't pick up any in 2014, what actions you think you can do to generate greater top line growth? Or is there any specific company -- company-specific levers you can pull to increase the outlook for 2014?

Yes. I think if you are looking -- I would not -- you should not expect that you are going to see another plan C like we went through in 2009. We are going to be committed to bromine task force. We are going to be committed to innovation and an intimacy with our customers to grow new products. That is going to be our focus.

There are levers that we can certainly pull. There are opportunities for us from a cost standpoint, from a collaboration standpoint, from a partnering standpoint that would give us more leverage across our spend and across our revenue. I am not quite sure that we could increase the revenue because of that, but we certainly would work to maximize our bottom line.

Okay. And one other term question on your mercury sorbents business. Could you just update us on your expectations for the timing of EPA mercury removal rules and how much of a market share of that business do you expect pick up?

Yes. On the mercury removal, I haven't seen any change from the EPA. I know there are some lawsuits, but our current expectation is that it is still a 2015 type of area in the US for that registration. So I would expect that we would -- you would see some increased bromine use for that.

I would keep in mind that the mercury removal, if you go to the EPA regulations and you really need the 95%, that is really an activated carbon play. There is not as much bromine. I mean, the bromine put on that is insignificant compared to the activated carbon.

So to have a material share of that, we are going to have to have a more reliable domestic source of activated carbon and we've got -- we are working on that today. But absent being able to get a meaningful and remind reliable domestic source of activated carbon, our share in that market will be minimal.

Thank you very much.

Vincent Andrews, Morgan Stanley.

Thank you. Could you -- if we think about Catalyst and we think about last year, there was some order deferral into 2013, and now it seems like there is going to be some order deferral into 2014. But you speak with confidence about the orders and it's just a question of timing of shipments.

Is there a way you can sort of a frame that in terms of talking about your backlog of orders and help us understand how much of the deferral out of 2013 was realized -- I'm sorry, the deferral out of 2012 was realized in the first half of 2013? And is there sort of a run rate of sort of a deferral time period or -- and where is your total backlog today versus maybe the second quarter, at the end of the second quarter a year ago?

Yes. That is -- it mainly -- all that mainly is in clear fuels technologies, okay? So when you've got -- our specific situation in the SSC that I talked about is there is a new unit coming online and that construction is being delayed. I mean, their startup is being delayed.

So, sometimes you have those where you have construction being delayed. They tell you a date, you've got to be ready to have it there -- the SSC catalyst there so it can operate when it cranks up. If you really look at HPC catalyst; if you look at last year -- let's use last year as an example.

In 2012 we moved roughly 22,000 metric tons of HPC catalyst. First quarter was about 6500. Second quarter was, if my numbers are right, about 3700. Third quarter, about 4600 and the fourth quarter was about 7300. So it's a lumpy business.

And what we have seemed to see over the course of the last few years is you have seen a heavier first and heavier fourth quarter and then a weaker middle. And that's consistent when you are going to see the turn around. So you see turnarounds mostly in the first quarter because they want to be up and ready for the driving season that starts in the middle of the year.

What I can't tell you is I don't know how much of that high first quarter is being pushed from the fourth quarter and how much of the fourth quarter is in anticipation of that first quarter. I just don't have data to do that. And we are not -- it is not back ordered like you would think about as if I was an engineer or a construction company.

So what we have to do is, when they tell us that they need their order; when we first go to produce that product, we've got to have it ready at the earliest time when they say they may need it, because if we don't have it ready when they say they need it, they are going to go somewhere else and get it. And you can do that once, but you can't do it twice. So we can't risk that.

So we've got to have the catalyst ready. And then we are kind of up to their desires about when they actually want to take it, and that is based on their budgets and a lot of other items. So I didn't really -- I don't know -- that's about a good answer at I can give you, Vince, and I wish I could do better, but that's where we are.

That's very helpful. And, Scott, if I could just ask you to elaborate a little bit on the working capital. You said it was largely related to receivables and you said there were some actions you are going to take in the second half that were going to help bring that down. So is there any more detail there? And just is there anything on your operating rates going into the second half that we should know about?

No, I don't think so. On the inventory side of things, we have built some inventory in anticipation of these HPC orders that we've been talking about. And so as those get shipped, that inventory will come down. So that's a big driver.

The fourth quarter is where a lot of that comes out. The operating rates within Polymer Solutions; the inventory rates of Polymer Solutions are very healthy in terms of inventory. The operating rates are holding steady with what they have been in the last couple quarters. And so we feel pretty good about that.

And then I think on the receivables side it's really just a natural effect of collections coming through as we continue to drive to collect that cash that has built up in the first half.

And so it looks like working capital will be largely flat year-over-year by the end of the year or am I (multiple speakers)?

That is my expectation. That is what we are pushing for. We will see how well we do to get there.

Understood. Thanks very much, guys.

Laurence Alexander, Jefferies.

Good morning. So, a couple of questions. First, can you sort of give a little bit of extra clarity around what you see being pushed from this year into next year that you are reasonably certain will be an incremental tailwind for next year? I mean just in terms of gives and takes. And, also, can you address the longer-term expectations around fine chemicals and catalyst in terms of margins?

Sure. On the orders and what push it might be a tailwind for next year, I am not -- we are not trying to push anything into next year. That is not how we are going to run our business. When the customer wants it, that's when we are going to give it to them.

So I don't -- right now, we are expecting everything that they have told us they are going to want in the fourth quarter is going to go in the fourth quarter. And if it doesn't, if it slides in the first, then it will slide to first. But we are not going to try to push anything to give a tailwind.

So there isn't really anything -- I can't give you -- if one order moves, it might be $1 million. If another order moves, it might be $8 million. So without knowing exactly what is going to move and what might not, I can't give you a good answer on that. Okay?

With regard to margins, I still believe that Fine Chemistry is a low 20% to mid-20% margin product if we get the right custom services contracts in there. We have done that in the past and I think that is where the sweet spot is going to land for Fine Chemistry.

On Catalyst, there is not a reason in the world, once we get some of these one time, year-over-year matters behind us, there is not a reason in the world that can't be a mid-20% to 30% margin business. We have done it in the past and we certainly expect that kind of profitability going forward.

And, I guess just as a follow-up, in terms of -- what would you expect to see or what would you need to see in the external markets to bring the CapEx down closer to [D&A]?

What would I see? I would be able to see -- where I don't see where I have a demand for new products. We've got one or two projects out there right now that we have actually -- I have held up, on seeing what's going to happen with demand, what is going to happen. And if we continue to see the kind of market demand in our key segments that we are seeing today, I think next year you will see us closer to that level.

Okay. Thank you.

Mike Ritzenthaler, Piper Jaffray.

Hey, guys. Just a quick nuance on Catalyst in the back half as you see things now. And we appreciate the timing risk and things like that, but as it sits, we are finding asset utilization looks a bit better year-over-year. So in 3Q, what's the relative contribution of improved volumes based on those increasing asset utilizations versus that mix that you have highlighted.

You are talking about from our increased utilizations?

No, no, from refinery. Yes. The industry asset utilization improving.

Mike, I can't give you a good answer on that one. I'll have to get the data and get back with you. I only know what we are scheduling to ship from our customers and what we are seeing is stronger FCC sales building during the [quarter]. We will see a volume increase in FCC over the second half.

And the way it is set up now in HPC, if the orders go as expected, our second quarter will be strong and the fourth quarter could be a near record.

Yes. Okay. That makes sense, I guess. And then on the Vision 2015 and following up on a couple of previous questions, the bromine task force, is the thought that perhaps the adjacencies will be able to fill it in the TV and PC gap? Is that a fair way to look at it?

We were looking at the food safety, the bromobutyl rubbers and the different things that you have talked about before plus all the things that were kind of being worked on in the skunk works.

Yes. If you look at all that, it's going to be tough for it -- what we are trying to do is this. If you really look at where we are today, we are a catalyst and bromine Company. And we have got to have a focus on growing the pie -- not the share, but growing the pie in bromine.

And if you look at who's got capacity around the world, new uses of bromine benefit us more than anybody else in the industry. So we've got to have a dedicated focus to driving new applications for bromine and that's what -- we have initiated that.

And it's too early right now to give any indication of about what areas we may be looking at, that the opportunity costs are all about there. But we've got metrics, we've got milestones, and we've got a list of credible opportunities for us to go after in that regard.

Fair enough. Thanks, guys.

Mike Sison, KeyBanc.

Good morning, guys. Luke, when I think about your portfolio businesses, I agree that the economy is sluggish this year. But when you think about the earnings decline you are going to show this year, particularly if you exclude the stock buyback, it sort of mirrors the decline that you saw in 2009. Yet you would think that -- I don't think the economy is as bad as in 2009.

So are you a little surprised in terms of the -- your outlook for earnings this year? And maybe just walk us through how much of the decline is, let's say, economic related, some of the push-outs and maybe self-inflicted in the sense of that you've got these costs coming in, because I would've thought this portfolio of businesses could have performed a little bit better.

Yes. Well, you have got to look at the comparisons, first of all. So if you look at Catalyst, we have got two things. We've got about $40 million or $50 million hitting it year-over-year between the startup costs, the volume absorption loss, and the rare earth pass-through. So that's $50 million a pop right there.

Got it.

And how much of that is self inflicted? How much of that is market? I can't tell you. We have been operating in polymers -- if you look at electronics, we have really been in a trough since 2011.

So in 2009, what happened is the world ended, nobody took any volume. It didn't matter what price you offered because nobody would have taken it. We have been now in a trough for probably 18 months -- 18 to 24 months, if you really look at it, because there was some false demand in 2011 in the first half.

And 2012.

Yes, and the beginning of 2012. So if you look at that, we have really been in a trough. So people get antsy in a trough and try to start biting off a little bit here. And we are having to protect it. So we lost some price, Mike, on that one.

So is that economic or is that competitive? I don't know. So I think that, even in this downturn, you got to remember, we have got 22% EBITDA margins. Okay? Now, we want to do better, but in the economy that we are working in with those kind of headwinds -- and you are right; some of them were self-inflicted because we invested early, intentionally did it. 22% EBITDA margins under those conditions still shows you a strong business that is going to throw off great cash flow.

Okay. And then given the balance sheet, what are your thoughts on maybe growing via acquisition? It is tough to grow organically, clearly, in this environment. Are there opportunities either to continue to build upon your businesses or would you even consider something new, maybe a fourth leg or something to that degree?

Yes. I don't feel the need to do an acquisition for the sake of doing an acquisition. I think that our strategy is sound and I think that we've got the opportunities in all these businesses to continue to grow. But we are certainly in the market looking at acquisitions.

I mean, there is one, particularly in the catalyst area. Dow has got a [unit pole] business that's up for sale. Certainly, I will be looking at that business because it is right in our sweet spot from a catalysis standpoint, as I'm sure will a lot of other catalyst companies. So we are looking.

We've got a strong balance sheet. We've demonstrated in the past the ability to lever up, both for acquisitions as well as to return capital to shareholders. And we will continue to balance that act and do both.

Great. Thank you.

Thank you. I would now like to turn the call over to Lorin for closing remarks.

Well, we appreciate everyone's time and interest in the Company and would encourage you to call with any further questions. Thank you and have a great day.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.