雅保公司 (ALB) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 Albemarle Corporation earnings conference call. My name is Katina and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Lorin Crenshaw, Vice President, Treasurer, and Investor Relations. Please proceed.

Thank you, and welcome, everyone, to Albemarle's third-quarter 2014 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; Scott Tozier, Chief Financial Officer; Matt Juneau, President, Performance Chemicals; and Michael Wilson, President, Catalyst Solutions.

As an initial matter, I would like to note that our discussion today will include statements regarding the proposed merger between Albemarle Corporation and Rockwood Holdings. Certain statements regarding this transaction, as well as certain statements related to Albemarle's plans, strategy, and expectations regarding 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 filings with the SEC, including those related to the transaction. That same language applies to the statements made today. Please also note that our comments today regarding our financial results exclude discontinued operations, special, and nonoperating items.

Reconciliations related to any non-GAAP financial measures discussed may be found in our press release or earnings presentation, which are posted on our website.

You should also know that this discussion does not constitute an offer to sell or solicitation of an offer to buy any securities, or a solicitation of any vote or approval. Our filings with the SEC related to the transaction contain important information about the proposed transaction. Stockholders and investors should review those filings carefully. They can be obtained free of charge from the SEC's website, from our Investor Relations website, or by calling our Investor Relations department at 225-388-7322.

With that, I will turn the call over to Luke.

Thanks, Lorin, and good morning, everybody. I'll start with some comments on the quarter. Scott will review the performance of our business segments and financial results before providing perspective on our outlook for the rest of the year. I'll end by providing an update on the Rockwood transaction. At the end of our prepared remarks, Matt and Michael will join us to address your questions.

Third-quarter results exceeded our expectations heading into the quarter, with earnings per share of $1.14, up 5% year-over-year and up 4% sequentially. Net sales of $642 million also showed solid growth, up 9% year-over-year and up 6% sequentially. EBITDA was $145 million, and EBITDA margins were 23%. All in all, this was very good quarter.

Scott will go into the details, but our performance was primarily driven by catalyst solutions, which has had a great year so far with 27% segment income growth through the first nine months versus the comparable period of 2013. Third-quarter catalyst results reflected solid refinery and polyolefin catalyst volume growth year-over-year, and a positive refinery catalyst pricing. Our catalyst team delivered these results while safely and successfully bringing online additional capacity at our Bayport FCC plant, which is a credit to the focus of each of the employees involved as they executed the planned turnaround without missing a beat.

Today, this expansion, which was necessary to meet the projected demand of our existing customers, is producing on-spec TOPAZ catalysts at expected operational rates. Catalyst performance offset weaker-than-expected results within performance chemicals.

Performance chemicals profits declined year-over-year on lower fire safety solutions pricing, and operational issues at some of our bromine units, which led to higher manufacturing cost. These headwinds were partially offset by better pricing in specialty chemicals and higher volumes across the GBU. Heading into November, these operational issues appear to be behind us.

As we announced during the quarter, Albemarle and Israeli Chemicals agreed to establish a manufacturing joint venture for a bromine-based polymeric flame retardant to replace HBCD in the construction end markets. HBCD is being phased out in the European Union, Japan, and other countries. The joint venture will own two plants: one in the Netherlands, which is already in operation and producing commercial volumes; and one in Israel, which is scheduled to come online within the next few months. The transaction is subject to certain closing conditions, including regulatory approval, but is expected to close in 2015. This venture represents the most cost-effective and timely means for us to bring our GreenCrest product to the market.

We were also pleased to close the previously announced sale of our antioxidants, ibuprofen, and propofol businesses to SI Group in the third quarter, and received the associated cash proceeds from the sale. This divestiture improves our overall company margins, tightens our focus, and places these assets into the hands of a company with a more strategic focus in those end markets.

With that, I will turn the call over to Scott to discuss our business results and outlook.

Thanks, Luke. I'm pleased to report that the third quarter came in better than we expected. Those results increase our confidence that we will deliver annual earnings growth well within the 2% to 7% range that we shared in January. Overall, third-quarter net sales rose 9% year-over-year to $642 million, and we delivered segment income of $140 million, up 3%, and segment margins of 22%.

Three special items impacted our results this quarter. First, we had acquisition and financing costs related to the Rockwood transaction of approximately $11 million after-tax, or $0.14 per share. We also had a $0.01 per share expense related to nonoperating pension and OPEB items, offset by $0.02 per share tax-related gain. In addition, we reported $6.7 million after-tax, or $0.08 per share, in losses related to discontinued operations. These items net to a loss of approximately $0.21 per share, which added back to our reported EPS of $0.93, gets you to our adjusted EPS of $1.14 for the period.

Now let me turn to the business details. Catalyst delivered an outstanding quarter, with net sales of $278 million, up 23% year-over-year; segment income of $60 million, up 18%; and segment margins of 22%. As we discussed in July, margins were negatively impacted year-over-year and sequentially by lower production rates in Bayport during our previously announced turnaround, and our initial sale of AlkyClean, a solid acid alkylation catalyst designed to increase a refinery's octane yield. If I adjust for these two items, segment margin would have been around 25%.

Within refinery catalyst solutions, higher FCC and CFT pricing and higher CFT volumes year-over-year had a favorable impact on the quarter. CFT volumes were up double digits, even without the benefit of the AlkyClean order. As a result, refinery catalyst solutions achieved another quarter of double-digit sales and profit growth year-over-year.

Performance catalyst solutions delivered a second consecutive quarter of solid growth. Volumes and profits were up double-digits year-over-year on growth and demand for polyolefin catalyst components, and good traction within finished catalysts from both a volume and new product standpoint.

Performance Chemicals reported third-quarter net sales of $365 million, flat year-over-year, and segment income of $80 million, down 7% on segment margins of 22%. These results reflected fine chemistry services and specialty chemical profit growth, offset by lower fire safety solutions profits. Fine chemistry services reported its highest profit quarter of the year, largely driven by exceptional volumes within the pharmaceutical end market in particular, where we were able to move quickly to accommodate a particularly large order and several other small orders this quarter.

We were able to respond to these opportunities due to the flexibility and quality of our manufacturing assets, and our ability to quickly move products to market. It is noteworthy that this division delivered excellent quarterly profit margins despite the headwind of not being able to recognize approximately $3 million of profit on a shipment to SIGA Technologies, a custom pharmaceuticals customer that filed for bankruptcy during the quarter. These orders helped to fill in the gap we had from the contract loss that we discussed in the second quarter.

Specialty chemicals reported strong volume and profit growth year-over-year. Results were driven by strong methyl bromide volumes and continued strong curatives results. Clear completion fluids demand improved, where the customer-specific inventory management issues we flagged last quarter subsided, resulting in a sharp improvement in sequential volume and profit levels.

Within fire safety solutions, revenue was lower and profits were down double-digits year-over-year, reflecting weaker pricing across the bulk of our brominated flame retardant portfolio; less favorable mix; and operational issues at some of our units, which led to higher manufacturing costs. As Luke noted earlier, the operational issues are now behind us. Brominated flame retardant volumes in the quarter were up year-over-year, and we expect full-year volumes to rise in the low- to mid-single-digit range.

In addition, as we have said all year, our order book trends continue to indicate a gradual mix shift in our electronics portfolio towards servers, automotive electronics, and other growing digital applications, with a corresponding decline in exposure to the slower-growing PC and TV enclosure end markets.

If we look at our total bromine portfolio across the fire safety solutions and specialty chemicals divisions, we actually saw volume growth of 8% year-over-year, revenue growth of 3%, and margins north of 30%. We would also expect to see a continuation of a trend towards less bromine being used in flame retardant applications, as other applications continue to grow faster.

Moving on to a few P&L items, SG&A expenses were $66 million during the quarter, and R&D expense ended the quarter at $22 million, both in line with expectations. Year-to-date free cash flow -- defined as cash flow from operations, adding back pension contributions, and subtracting capital expenditures -- was $112 million for the quarter, and has risen over 80% versus the year-ago period, driven by the continued improvement in working capital and lower CapEx spend.

As previously announced, our goal is to permanently reduce working capital by at least $100 million by the end of 2015, as part of a broader supply chain transformation initiative. We continue to make excellent progress, and we actually hit our goal this quarter. Net working capital was down to 23.7% of revenue, which represents $105 million of cash savings from year-end 2013. With our major bromine and catalyst-related growth projects behind us, we continue to benefit from lower CapEx this year, and are tracking toward $110 million to $120 million, in line with our prior full-year guidance.

For the third quarter of 2014, CapEx was $30 million and totaled $77 million year-to-date. This represents over a 40% decline versus the comparable period of 2013. We saw a 27% sequential increase in our cash balances to $653 million, reflecting a combination of the receipt of the proceeds from the sale of our antioxidants, ibuprofen, and propofol businesses, and lower working capital. As a result, net debt, excluding non-guaranteed JV debt, ended the period at $393 million, or just 0.7 times EBITDA, as we continue to position ourselves to fund the upcoming Rockwood acquisition.

Our effective tax rate -- excluding special items, non-operating pension, and OPEB items for the quarter -- was 18.9%, down 360 basis points year-over-year. At this time, with the same exclusions, we expect our full-year rate to be 21.7%, driven by the favorable mix of income in lower tax jurisdictions.

I'd like to close my remarks with our outlook for the balance of the year. Catalyst solutions is tracking nicely toward our target of year-over-year double-digit segment income growth, with a good balance of both volume and pricing gains contributing to that growth.

Performance catalyst solutions is performing in line with expectations, with topline volume growth offset by higher costs and tough market dynamics. The refinery catalyst solutions division has been the largest contributor to growth. Heavy oil upgrading is benefiting from a continued strong demand globally for our FCC catalyst designed to handle heavy resid base feedstocks and maximize propylene yield.

We are also benefiting from our previously announced price increase. Similarly, clean fuel technologies is on track to deliver strong double-digit profit growth for the year, despite relatively flat annual volumes, driven by favorable mix. Overall, and our outlook for catalyst solutions still calls for fourth-quarter segment income near second-quarter levels, which would result in double-digit earnings growth for the full year.

Turning to performance chemicals, in terms of brominated flame retardants, our assessment of the market and our order book trends continue to lead us to assume, as we have all year, that while volume trends continue to stabilize in most applications, pricing remains a relatively soft and we don't expect absolute growth in earnings or volumes year-over-year.

The fine chemistry services division is working hard to replace the major contract that was lost during the second quarter in time to impact 2015, and made progress toward that goal during the third quarter. Overall, we continue to expect segment income for performance chemicals to come in below 2013 levels, as we indicated on our July earnings call.

Given the moving parts and normally weaker fourth-quarter in flame retardants, we expect Q4 income to be flat for this business versus 2013. As we roll all of the various factors up by business and account for the excellent third-quarter results, we are confident in our ability to deliver earnings growth for the full year that is well within the range that we shared in January.

And with that, I will turn the call back over to Luke.

Thanks, Scott. Let me take a few minutes to update you on the Rockwood transaction. First of all, with each interaction with the leadership teams of the two Rockwood businesses, I grow increasingly excited about the growth opportunities ahead for our combined company. As you know, Albemarle has been pursuing an entry into the lithium market for some time. It is clear from the S-4 disclosures that both the Rockwood and Albemarle boards have recognized the strategic fit of our two companies and the value of a possible combination for over two years.

Let me give you a little more color as to why. From an operational standpoint, Albemarle starts with brine, produces bromine, and derivatizes that bromine into higher-value bromine salts and organic bromine derivatives like flame retardants. Similarly, Rockwood starts with either ore or brine to produce lithium salts, including lithium carbonate and lithium hydroxide. We expect cost savings and efficiencies by sharing technology and know-how related to these processes.

In addition, both companies have expertise in handling metal alkyls, which are highly flammable, pyrophoric materials. Albemarle is a leader in aluminum alkyls used in polyolefin production; and Rockwood is a leader in lithium alkyls used in, among other markets, synthetic rubber production. There is a tremendous amount of know-how and expertise in the production, packaging, shipping, and container fleet management of alkyls, and we are confident that sharing that know-how will present opportunities for significant supply chain and manufacturing efficiencies.

From a customer standpoint, lithium and bromine derivatives overlap in serving a number of global end markets, including consumer electronics, automotive, polymers, ag, and pharmaceuticals, and the combination will provide increased customer reach and access. Likewise, Albemarle's aluminum alkyls and Rockwood's lithium alkyls serve both the polyolefin and synthetic rubber markets. Having one company that can provide both lithium and aluminum alkyls for production of different polymer types should result in increased selling opportunities for the combined entity.

Ultimately, by bringing these businesses together, we will be able to provide customers with a broader set of value-added solutions in a more efficient manner that should drive revenue and profit growth as well as margin expansion. None of these types of synergies are included within our previously announced synergy target.

Obviously, these benefits cannot be achieved without first successfully integrating our two organizations. Since we announced the acquisition, our integration team has been hard at work preparing to combine our two companies and developing detailed plans to capture the $100 million in cost synergies we identified.

Overall, I am more confident today in our ability to deliver these synergies within that two-year time horizon. I am also more confident that we can obtain these synergies without negatively impacting how Rockwood goes to market and serves its customers.

Our integration team, which includes members from both companies, has been meeting regularly, with a focus on being ready for day-one opportunities and planning for realization of synergies. They have identified concrete plans that give us a clear path to achievement of the $100 million in synergies within the first two years.

We expect about half of the synergies to result from the elimination of duplicate overhead and back-office costs. The remainder will come from leveraging our increased scale to lower sourcing costs, asset and site consolidations, implementing the best practices of both companies across the whole, and a more streamlined organizational structure with fewer layers of management.

We expect to realize at least $30 million of synergies on day one, and at least $50 million in the first year. Let me give you a bit more detail on the sources of synergy opportunities above and beyond duplicative costs. The first opportunity will come from improving the manufacturing operations, primarily by applying best practices and our increased purchasing power to reduce spending in areas such as maintenance, storage, and other services.

A second opportunity includes several major initiatives to realize significant savings through better supply chain management, leveraging the new scale of the business to our advantage.

We believe the largest savings will come from redesigning our distribution network, leveraging the same supplier contracts for different materials, warehouses, transportation and services, and expanding centralized purchasing of raw materials and services.

A third opportunity comes from site consolidations around the world, where we have duplicative sales offices and facilities. While we are still working through the diligence process of all facilities, Rockwood and Albemarle have a number of sites within a very close proximity of each other, and we have a team reviewing possible opportunities within the plant manufacturing units as well.

The fourth major opportunity includes IT rationalization of a wide and local area networks, applications, and infrastructure, which will provide for further savings. An additional medium-term opportunity is using shared services to consolidate back-office activities into Albemarle's existing low-cost shared service centers and common platforms.

As you can see, we are focused on lower-value, high-cost activities that will not affect Rockwood's customer service or market strategies.

From a regulatory perspective, things are moving forward as expected. In the United States, the Hart-Scott-Rodino waiting period expired on September 8. We also recently received clearance from Turkey, Taiwan, and Russia, and clearance is currently expected from Korea before the shareholder meeting. We expect unconditional clearance from the European Commission at the end of the phase 1 period on November 13.

Finally, we are currently in pre-acceptance review with the Ministry of Commerce of the People's Republic of China. We have had good engagement with the China regulatory authorities and do not anticipate any substantive antitrust problems to arise during the review. We expect to receive China clearance during the first quarter of 2015.

In August, we successfully syndicated each component of the financing required to fund this transaction across our bank group. In addition, although we were prepared with committed financing to close the deal without cash proceeds from the sale of Rockwood's pigment business to Huntsman, we were pleased to see the October 1 close of that deal, and received by Rockwood of the associated $950 million in cash proceeds. With these milestones behind us and continued strong cash generation, we are well positioned financially to close this transaction as soon as shareholder and regulatory approvals are in hand.

In summation, the Albemarle businesses delivered strong third-quarter results despite certain obstacles. And we are right on track to achieve the full-year 2014 earnings growth, well within the 2% to 7% range that we forecasted in January. Integration planning is on track, and I am seeing promising early results. I am confident in our ability to achieve the $100 million of synergies within the first two years. I'm excited about the long-term growth potential for the combined company, and our potential to deliver more consistent and predictable earnings growth for our shareholders.

This combination creates a platform of businesses which will generate tremendous cash flow. We will use that cash to rapidly deleverage while continuing to invest in the businesses and return capital to shareholders to drive future returns.

The bottom line is that the combination of Albemarle and Rockwood is a tremendously compelling, both from a strategic and financial perspective. We have great confidence in our ability to deliver significant value to shareholders over the long term by bringing these two companies together, and I'm looking forward to closing the deal as soon as possible.

With that, at this time I will turn the call back over to Lorin for questions and answers.

Operator, we're ready to open the lines for Q&A. And I would just remind everyone to please 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-ons if time allows.

Please proceed, operator.

(Operator Instructions). Bob Koort, Goldman Sachs.

Luke, I was wondering if you could talk a little bit about what you seen on oil price impact on both your catalyst business and your clean -- clear brine fluids business.

Yes. I appreciate that question. From an oil standpoint, oil price standpoint, we really don't see an impact on the catalyst business. That catalyst demand is really driven more by transportation fuel demand and demand for plastics. In the oil price, we haven't seen it, and don't expect it to have any significant impact on our catalyst business.

From a clear completion fluids business, I think you have to break it down: whether you are just drilling a well in an existing field; whether you are using -- extending an existing field; or whether it's a new brownfield project. There's been a lot of conversations both -- if you look at Halliburton, Baker Hughes, Schlumberger and the oil companies on the impact.

I don't think we're expecting to see any short-term impact. But if oil stays down at the $80 or less barrel, I think you're going to see some of those projects longer-term start pulling back. So we could see an impact, not in the short term, but in the longer term. You'd need to see oil stay down this way for an extended period of time to have that impact, Bob.

And then my follow-up, in the bromine flame retardant business, you talked about some volume improvement. And I guess our expectation is in a relatively narrow market, in terms of competitive dynamic, that maybe that should lead to some better pricing, but you continue to see weak pricing. Can you explain why that's happening, and if there's any opportunity maybe to see some stabilization there?

Yes. I think, year-over-year, we are talking about price degradation. So we've seen price degradation year-over-year as we thought we would. Sequentially, I think we've seen some more price stabilization. One of the big things that you've seen is in the transition from HBCD to the polymeric flame retardant. That is underway. And we've seen some real pricing pressure there, both in the new product as well as in HBCD, which makes up a lot of the year-over-year decline. So, that's what I'd say about that on a year-over-year basis.

But, sequentially, it's not as down as much.

And Matt, do you want to add any further color to that?

No, I think Luke's got it right. That's the right message, Bob. If you look at the HBCD situation, just expanding on that a little bit, remember that is a construction-oriented product. It's very dependent on Europe. And as we're in this transition, there's been increasing pressure on HBCD as companies move to the polymeric. Plus, the weakening economy that we saw in the latter part of the quarters, in Europe especially, had some additional impact.

On the other spaces in FR, honestly, we continue to see signs of stabilization and less sequential issues. We're really comparing a year-over-year problem.

But, Bob, we're always looking for ways to drive value. So we'll certainly look for opportunities on a product-by-product basis, where we can move those prices.

Got it. Thank you very much.

David Begleiter, Deutsche Bank.

Luke, very strong results in catalysts. First on the pricing, and really on the FCC pricing, what types of realizations have you seen here? And what's the potential for further FCC price increases going forward?

Yes, well, I'll turn it over to Michael to address those. But you remember we announced over a year ago that we were looking at a 10% price increase in FCC catalyst, and that would take about 2 to 3 years to implement, given the way that the contracts rolled. And I think we're right on track with where we thought we'd be with regard to pricing, overall. There's some pockets here and pockets there, but overall we are right on track with where we ought to be.

Michael?

Yes, I think not to get too granular, as I look across the entire GBU and look at the price impact on revenue, prices have contributed low-single-digit percentages to overall revenue growth for the year. (multiple speakers) in refinery catalysts, I mean. We have said all along that there's been price pressure on the performance catalyst solutions side, particularly in polyolefins, or the products going into polyolefins. So, most of the benefit has been in refinery catalysts.

Understood. And on the volume growth in the quarter, which is a high water mark, how should that trend in Q4? And how much of that was initial -- can you break down the 20% a little bit more granularly in terms of sustainability and one-off items?

Yes, when you look at that, it's really across both of our refinery catalyst businesses, so both the heavy oil upgrading or FCC business and clean fuels. The biggest volume gain that we saw in the third quarter, in terms of year-over-year comparisons, was in the clean fuels technologies. And we did have a significant sale of a new product that we've talked about, both on prior calls and in our opening comments here, that benefited us.

But I think the better way to look at it is if I take the whole year, and I think about the forecast for the whole year, on a volume basis, we're going to see across refinery catalyst high-single-digits volume growth. And that will be a little bit higher on the FCC side than the CFT side.

Thank you very much.

Vincent Andrews, Morgan Stanley.

Could you just give us a sense on margins as we trend through 4Q and into 1Q, and I guess into the full your next year, what should the year-over-year progression in margins be? Have we seen the bottoming out, and we should start to see improvement, or what's the cadence going to look like?

Well, we're just rolling up our annual operating plan. We're in the middle of that right now. And you know it always rolls up, and then you always cut it back a little bit and get some cost out from the wish list and all that. So I don't really have a feel for it next year. I don't see anything dropping off the face of the earth. I think you would see similar types of margins on a full-year run rate basis that we would see in the second half at a very, very high level for the Albemarle businesses.

But with regard to the quarter, there's always some lumpiness in the quarter. But I wouldn't see a whole lot of change from third to fourth. It's about where I would see it.

Okay. And just on foreign exchange, if we hold the existing rates constant, can you just give us a sense of the -- with the pretty big move coming out of the third quarter, how should we be thinking about transactional and translational, heading into 4Q and into next year?

Yes, I'll turn that over to Scott.

Yes, so the two big foreign exchange exposures that we have are in the euro and the Japanese yen, as we've previously talk about. And both have had relatively high moves in the last month. So if I look at the fourth quarter, there's about -- if I look at the euro, there's probably about a $1.5 million of pressure on our op profit from the euro, and about $10 million in revenue. And from the yen, it's probably about the same amount, $1.5 million of op profit and the same in revenue.

Normally, on a full-year basis, the euro is a bit more balanced. It just depends on the mix of what we're shipping. So the euro will generally run about $1 million a year for a 1% move; and the yen is about the same, so a 1% move in the yen rate will generate about $1 million. So, depending on what's going -- on an annual basis.

Okay. Thanks so much. I'll pass it along.

Kevin McCarthy, Bank of America.

Luke, if we rewind to your last call in late July, I think you had sent some somewhat more cautious signals referencing the customer order that you lost in Asia in performance chemicals and so forth. And now the results are coming in quite a bit better than expected. So at a very high level, can you just walk us through maybe the two or three most important variances, and which particular businesses trended better than you might have expected a few months ago?

Yes. So, if we look back, as we said on the call, catalyst outperformed a little bit better than we expected, particularly in performance catalyst solutions, where we saw higher profitability than we expected.

The other two big changes, as I would say, was in July we did not have a feel for that big order that we lost in the custom services business. And remember, we said it was about $15 million over the second half of the year, so we were looking at that as a gap.

Right.

I think it's in Scott's comments. We were able -- had some -- through a lot of hard work, there were some sales that we were able to fill our assets with. And that's a real tribute to those employees and the flexibility of those assets. But they were opportunistic, and they were one-time, so they've got to do it again. And so we filled that up. That was a big mover.

And then we had some methyl bromide that we talked about of that was higher than we expected that we didn't expect in July that came through. So, those are the big buckets right there. Big methyl bromide sale; some good working custom services; and then [tax] helped us as well.

That's helpful. And then as a second question, your tax rate is coming down appreciably this year. You referenced 21.7%. What are your thoughts on how that might trend in 2015 for legacy Albemarle? And if you were to layer in the Rockwood business, how might that affect the 2015 rate as well?

Yes, I'm going to give that to Scott. One of the things that I -- we are going to really work really hard not to say legacy Albemarle and the new Rockwood businesses (laughter). Because when we close this sucker, we're going to all be one company.

He'll talk to you about what it would be as standalone and together, okay Kevin? Is that fair?

Yes, I'll buy that. Yes.

All right.

So on the former Albemarle company, the big driver, as we always talk about, is really where the income is being generated. And in the third quarter, really driven by the strong results out of our hydroprocessing catalyst business, we had great results coming out of Europe, which is a lower tax jurisdiction for us. And so that's what drives our tax rate down, as you look at the full-year basis. And so we generally are -- we're trying to watch and plan out where those incomes are.

And so as we go into 2015, his Luke said, the AOP is still coming together. We really don't have a good sense of how that mix will come in. I always guide people to that 24% to 25% range, because that's the balanced view of performance across our various regions.

As you look at the combination of the companies, we've been planning -- the Rockwood tax rate is a little bit higher, and so we've been guiding people to the 25% to 26% range from an effective tax rate.

Okay, that's helpful. And at the risk of overstaying my welcome here, I was wondering if I might ask a clarifying question related to your adjusted EPS. You've got quite a few different special items, as you enumerated. One of the line items was amortization of financing fees of $7 million pre-tax, or about $0.06 per share.

Yes, yes.

Are you backing that out, or leaving it in the number of $1.14 adjusted EPS?

That has been backed out of the $1.14, so that is not --.

Okay, thank you very much.

Dmitry Silversteyn, Longbow Research.

Congratulations on the stronger quarter. Couple of questions, if I may. First of all, revisiting the first question on the catalyst business and sustainability of that 20% growth in volumes, it sounded like most of that was -- or a large extent was driven by HBC catalysts. That tends to be a fairly lumpy business.

So as we look into the fourth quarter, was there any one-time shipments that we should not project into the fourth quarter? And is the overall volume, given the year-ago comps, likely to be higher or lower next year? Or, I'm sorry, not next year, in the fourth quarter.

Well, for the fourth quarter, I have to really talk about refinery catalysts in two pieces. If I look at the FCC or heavy oil upgrading, it will definitely be up in volume, quarter-over-quarter to the prior year. And CFT, just from a timing of orders standpoint, I expect that CFT volumes will be down. If you remember, we had a blockbuster quarter in CFT in the fourth quarter of last year, with some really large orders that went through.

Thanks. So, if I look at it net-net, that volume number for the fourth quarter should be closer to zero.

Across all of refinery catalysts?

Correct.

Yes, I'm not sure. I don't really look at it that way. Again, I'd go back to the comment I made earlier that if I look at the full year, year-over-year, we're going to have high-single-digit volume growth across refinery catalysts. The FCC or HOU piece is likely to be closer to double digits.

Got it, okay. And then second question, or as a follow-up on the catalyst question, you mentioned metals pricing and rare earth surcharges. If you look at the third-quarter results, on a year-over-year basis, were the surcharges for FCC rare earths higher or lower? Also, has there been move quarterly from the second quarter to the third quarter?

And as you look out to your raw material -- the molybdenum, the nickel, the cobalt, the rare earth pricing for 2015 -- would you expect there to be a little bit of an inflation or a little bit of a deflation going into 2015?

Yes, the metal surcharges that were in the third quarter were really very minor. In fact, I wouldn't characterize those as surcharges. I would characterize those as the pass-through of metal costs that are in our basic formulas in our CFT business. So it's predominantly related to moly.

But to your broader question, as I look at the prices of those metals across the year, they've been trading in a fairly tight range. They move up a quarter, and move down a quarter. We don't see anything that's going to have a long-term significant impact on metals prices now, or as we look into 2015. It has really been a fairly stable market.

So, Dmitry, this is Luke. We're not anticipating anything on rare earths like we saw a few years ago, that significant spike in the rare earth pricing. And we're also not expecting the decline in the moly pricing that we saw at the end of 2008 where we got stuck with all that inventory. We watch it consistently. We don't see any big, wild swings approaching us right now, but we remain ever-vigilant.

So, if I can finish up that question, that thought, if you look at the FCC pricing where you talked about pricing being up, that would be up exclusive of rare earth surcharges, or maybe even overcoming the rare earth surcharges if they're coming.

Yes, you ought to look at rare earth surcharges year-over-year as essentially flat.

Okay. Okay, so pricing was real pricing, then.

It was real pricing. That's exactly -- that's the point. That's right.

That's great. Thank you. That's all I have.

Mike Sison, KeyBanc Capital markets.

Nice quarter. Luke, you noted increased confidence in integration synergy for the transaction, which is great. Can you talk a little bit about your confidence about -- regarding the long-term growth prospects of lithium and surface treatment? Have you spent any more time on that front over the last couple of months?

Yes, we have. We have looked at it and had some more time with that leadership team, and I'm just as confident and not wavering at all on the growth aspects long-term for lithium, as well as for that surface treatment business. They've got great plans in place, a good team in place, to be able to drive that growth. And we're excited about closing that deal and getting all together and pushing it forward.

Great. And then just a follow-up question on bromine pricing: is the weakness global, or is it isolated still in China and India? And when you think about what you need to happen to see price increases improve in 2015, and maybe comment on those tax increases from the Israelis here, that that could probably help as well. Just maybe your thoughts on what could help pricing as we head over the next 12 to 24 months.

Yes, there's been a lot of press about this tax in Israel, so let me start with that. It is so new -- I know there has been some analyst reports out on it. We are obviously looking at that. It's very difficult right now to tell exactly the impact that will have. But I'd caution everybody that that tax goes into play in 2017, not 2015. So there may be a longer-term impact; but for the short term, there will be no tax impact there. So, something we're keeping our eye on, but a lot can change between now and 2017.

So, with that, I will turn it over to Matt.

So, Mike, as we've talked before, the pricing issues have been much more around India and China than the rest of the world, and that probably still continues. So I'd say you're right in your analysis that that's the places to watch out for. And then if it goes global, it gets back more to like we talked about HBCD, where it's a specific product issue because of specific circumstances, like we've seen going on with the HBCD transition to the polymeric flame retardant.

Great, thank you.

Laurence Alexander, Jefferies.

So, two simple ones. The working capital improvement, was there an associated earnings headwind from that? And what are your new working capital targets?

And, secondly, just to clarify on the ramp up at Takreer, what's your current thinking about potential tailwinds into next year? Any way to quantify the range?

Go ahead.

Yes, so on the working capital, let me take the working capital, and then Michael can handle the Takreer question. So working capital, like we said, was below our target, so below 24%, really five quarters earlier than we expected. So our challenge right now is to make sure that those reductions are permanent. There's a lot of work to go into making sure that the processes are going to deliver that kind of result on an ongoing basis. So, that's really the focus, at least for right now, our focus on making those process changes permanent, and not just a one-time result.

From an earnings perspective, certainly as we planned for at the beginning of the year with those working capital targets, as you look at the first nine months, there's probably about a $15 million to $20 million cost headwind from our manufacturing variances as a result of that. So if we were to -- let me say that differently. If we were to maintain the inventory levels that we had at the end of last year through this nine-month period, there would have been another roughly, call it, $20 million of manufacturing absorption in our numbers.

And so we think this is the right answer for the Company, and the right balance between both the earnings as well as the cash generation that we have to perform -- deliver to you on an ongoing basis.

Michael, do you want to talk about the Takreer situation?

Yes, in terms of the Takreer refinery, the latest information we have is that the refinery is slated for startup at the end of the fourth quarter, so December timeframe. However, as you know, this is a massive project, so commissioning on the unit has already begun, as we indicated at the end of our second-quarter call. We've begun supplying initial shipments of catalyst to the refinery in anticipation of the startup.

It's very hard to predict, on a refinery this size and complexity, how quickly it will get up to steady-state run rates. That could take one quarter, it could take two quarters, et cetera. So, there's no question that Takreer will benefit us in terms of our heavy oil upgrading FCC catalyst volumes in 2015. But we'll probably be cautious about how quickly that will ramp up in terms of impact as we go through each quarter of the year.

Thank you.

James Sheehan, SunTrust.

Just follow up on the Israeli tax increase, if that goes through in 2017, how would that affect your JV plant in Israel? How do you see the economics playing out there? And what is your view on the influence that this tax could have on industry dynamics?

Yes. Well, I want to be clear -- first of all, let's be absolutely positive to everybody out there what joint venture we're talking about. Jordan Bromine Company, which is located in Jordan, where we can produce derivatives as well as our largest bromine production unit, has no impact at all -- is not affected at all by this Israeli tax increase.

We have entered into a joint venture -- an agreement to form a joint venture with the Israeli Chemical Company related to the GreenCrest product. And we knew there was a possibility of this tax when we were going in, and it will have some impact on costs. But it will be minimal for our overall brominated portfolio, is how I would say it.

If you look at industry overall, it's too early to tell. I don't know how it's going to be viewed. Are they going to increase costs? I always get nervous any time there is a tiered taxing structure, because somebody is going to do the math to understand what the pricing ought to be to maximize their profitability and lower their taxes.

So, until we have a chance to study it more, I don't know how it's going to impact us. But if it increased costs, that means if ICL is going to need to do something to maintain their level of profitability, and that could be a good thing long-term. But, again, this doesn't happen until 2017, and there's a lot of time between now and 2017 to see what happens.

Maybe I'd add one thing. Remember, this does have to go through the Israeli Knesset, too. So at this point, it's still a committee recommendation.

Thank you. And also on the lithium business with Rockwood, just wondering your views on the drop in oil prices, and the possible impact that could have on the electric vehicle market. Has the decline in oil changed your long-term assumptions at all?

Well, first of all, it hasn't changed my assumptions at all, because I think what's driving the electronic vehicle adoption, one, is not so much what the gas price is. It's more from an environmental standpoint, are we using less of the oil? And can we develop a cost-effective electronic vehicle? And they are in the process of doing that.

You also have excellent growth in lithium, with or without that environment, with or without the electronic vehicles. And this is -- oil has got to be down for a long, long time in order for it to have an impact.

So, overall, I don't really see the link as much. I think electronic vehicles, there's going to be a niche in the market that's going to have a demand for that and it will continue to grow. And I haven't backed off in any way what I think our growth opportunities are for that lithium business.

And just on the operational issues you had in performance chemicals, about how much business did you lose from that? And do you expect to regain any in the fourth quarter?

Yes, I think whenever you talk about operational issues, we know for a fact it added costs. Whether or not it actually cost us business and we missed some sales, it's hard to say. Probably missed some, but those were third-quarter sales. Those people buy from us and buy from other people at the same time. So I don't see how it's going to impact us going forward from a loss of business standpoint. I don't see a catch-up in the fourth quarter either. So I think it's business we could have had, we lost, and it cost us some extra money. It's behind us, and now we focus on going forward and delivering quality product to our customers, on-time and on-spec.

Thanks a lot, Luke.

Chris Kapsch, Topeka Capital Markets.

Luke, it sounds like you have increased confidence in the synergy target. And appreciate the details surrounding the roadmap in order to derive and achieve those synergies. Just wondering, in the context of your comments about the combined company generating tremendous cash flow, wondering if -- couple things. One, you maybe quantify that. Also, what sort of costs are you going to incur in order to get after these synergies, to accomplish the $100 million in run rate synergies, and over what time? And are you contemplating any throttling back in CapEx for either company, over the near-term, in order to help drive tremendous cash flow? Thanks.

Yes, if you'd look at -- let me be sure I can get all of those. I think the cash flow that we outlined in the S-4 is still our most up-to-date view on what that cash flow would be. So nothing has changed on that. From a cost perspective, it's going to cost us somewhere -- to get $100 million, it's going to cost us somewhere between $150 million to $175 million to get that kind of cost, as best as we can look at it today. So, pretty good return, a good return on that investment.

And from a CapEx standpoint, I think what we said consistently is we're in the 4% to 6% range of revenue for the combined company. And we would expect that that would be consistent, still, from what we see going forward.

I don't see a need to leverage back into the investments of these businesses in order to deleverage. That was all within our forecast within the S-4, and that is still where we believe we are today. We generate sufficient cash to deleverage rapidly and invest in the businesses that we need to do to maintain those assets and grow the business.

Okay, thanks. And then a follow-up, just parsing the commentary, more near-term about the pricing dynamic in brominated flame retardants, just wanted to understand if -- obviously with HBCD being phased out, I understand -- I would expect the pricing pressure to intensify as that product line sunsets.

I'm just wondering if you could -- if you excluded the impact in overall pricing from that product line sequentially, are brominated flame retardant pricing -- is it flat? Is it up? Or is it still down a little bit sequentially, excluding the HBCD mix effect?

It's hard to say a broad statement about brominated flame retardants overall, because they are in such different applications. But what I would say broadly is they are flat sequentially.

Okay, thank you.

Tyler Frank, Robert Baird.

Great third quarter. Just a quick question on the Q4 guidance. Obviously on the second-quarter call, it was a little bit more cautious. And now you've maintained the same Q4 guidance that you did then; albeit you had a very, very strong third quarter, and said that the operational issues that occurred during the quarter would now be over. So I'm just trying to get a sense for what you're seeing so far in the fourth quarter, and what makes you still have that cautious outlook?

Yes. Here's what I'd say, is I'm confident in the fourth quarter. If you look at 2% to 7%, I'm very confident in being at or above midpoint of that. And if we get some things that break the right way, we got a chance to be at the upper end of that 2% to 7%. We got currency that's flowing through that; we've got HPC with some sales that are towards the very back end that could slide one way or another. So I'm confident at midpoint.

I think as you look across the businesses, though, we got to get some breaks to get to the upper end of that. So we feel really good about it. That's why we said well within the range, and we feel very confident about being able to deliver that.

Great. And then just as a follow-up, for the Rockwood transaction, it seems like everything is going as planned. What should we look for as the next upcoming milestones, and what are the biggest risks to the transaction that you see at this point?

Well, the biggest milestone is the shareholder vote on November 14. And that's the next milestone. And I don't see any impediments. I'm confident on our ability that the shareholders are going to get the vote that we need. We remain confident in talking to shareholders. We're excited about the possibility of getting this behind us, closing this deal, and all coming together to integrate these businesses into what I think is going to be the premier specialty chemical company in the space.

Great, thank you.

Ladies and gentlemen, this concludes the time we have for questions.

I would now like to turn the call back to Mr. Lorin Crenshaw for closing remarks.

I'd just say thank you to everyone for your time and your attention. If you have further questions, give us a call. Have a good day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.