雅保公司 (ALB) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2016 Albemarle Corporation earnings conference call. My name is Joyce and I will be the operator for today. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Matt Juneau, Senior Vice President of Investor Relations and Corporate Strategy. Please, proceed.

Thank you. Welcome to Albemarle second-quarter 2016 earnings conference call. Our earnings were released after the close of 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; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Bromine Specialties; Silvio Ghyoot, President Refining Solutions; and John Mitchell, President Lithium and Advanced Materials.

As a reminder, some of the statements made during the 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 forward-looking statements contained in our press release. That same language applies to this call.

Please also note that our comments today [regarding] our financial results exclude all non-operating, nonrecurring and other unusual items. Reconciliations related to any non-GAAP financial measures discussed may be found in our press release or earnings presentation.

In addition, with the execution of a definitive agreement to sell the Chemetall Surface Treatment business to BASF, US GAAP requires that we report the business as a discontinued operation. As such, all of our comments today, unless specifically noted, refer to our continuing operations and exclude the impact of Chemetall Surface Treatment.

However, given the timing of reporting Surface Treatment as a discontinued operation we have provided bridges in our earnings deck to better explain the impact of this change. These can be found on pages 4, 7 and 16 of the deck which is posted on the website.

In addition, page 8 and the appendix of the earnings deck provide details of our reported earnings along with non-GAAP reconciliations related to discontinued operations and other special items in the quarter. With that I will turn the call over to Luke.

Thanks, Matt. And good morning, everyone. In the second quarter of 2016 we again delivered outstanding results in our core businesses and made significant progress against our strategic objectives. Adjusted EBITDA grew by 20% in lithium and by 28% in refining solutions compared to the second quarter of 2015.

For all of our continuing operations, excluding the year-over-year net impact of the divestitures of the minerals and metals sulfites businesses, adjusted EBITDA grew by $19 million, or 11%, compared to the second quarter 2015 and adjusted earnings per share by $0.25, or 37%.

Overall Company adjusted EBITDA margins remained strong at 28% with our three reported segments delivering combined adjusted EBITDA margins of 34%, up from 33% in the second quarter of 2015.

The second quarter was also highlighted by the signing of a definitive agreement to divest the Chemetall Surface Treatment business to BASF for $3.2 billion, over 15 times trailing 12-month EBITDA. Combining the expected proceeds from this sale with those already received for the divestiture of metal sulfides implies that we purchased the lithium business at a pretax multiple of about 10 times 2014 EBITDA.

The closing of the sale, which we expect before the end of 2016, will mark another major step in our transformation into a Company focused on our high-growth lithium and catalyst franchises.

Also in the quarter we became a component of the S&P 500 and received the 2016 presidential Green Chemistry Challenge Award from the EPA in recognition of the development of the AlkyClean process technology and the AlkyStar catalyst used in conjunction with that technology.

This is the world's first solid acid alkylation technology and was successfully commercialized in 2015. AlkyClean is a potential game changing technology and another demonstration of the innovation we bring to our customers.

Our businesses and our employees continue to deliver strong results despite a weak and uncertain macro environment, a testimony to the quality of both our businesses and our people. Now I will turn the call over to Scott.

Thanks, Luke, and good morning, everyone. For the second quarter we reported adjusted earnings per share of $1.09, including Chemetall Surface Treatment but excluding special items.

On a continuing operations basis, we reported adjusted earnings per share of $0.93, an increase of 36% compared to second quarter 2015 excluding the year-over-year net impact of the divested minerals and metals sulfides businesses. The increase was driven by strong core business growth, a lower effective tax rate and lower corporate and interest costs.

Before I turn to other financial metrics, let me remind you again that all of these will be discussed on a continuing operations basis unless noted.

In the second quarter business mix by country and continued strength in our Jordan Bromine Company joint venture again drove a favorable effective tax rate. As such we now expect our 2016 effective tax rate, excluding special items, non-operating pension and OPEB items to be about 19%.

D&A for 2016 is now forecasted at $185 million to $200 million with 2016 capital expenditures, excluding Chemetall, expected to be in roughly the same range. Operating working capital crept up to about 29% of sales at the end of the second quarter. Very strong sales in bromine and lithium in the second half of the quarter drove an increase in accounts receivables and a corresponding increase in working capital. However, we expect to reduce operating working capital to between 27% and 28% by the end of the year.

In the first half of the year our adjusted free cash flow, including contributions from discontinued operations, was $237 million. This number represents cash flow from operations, adding back pension and post-retirement contributions and subtracting capital expenditures, but excludes one-time synergy acquisition and tax-related costs. Free cash flow including those one-time costs was $163 million through June, up significantly from 2015.

The impact of foreign exchange on our businesses continued to decline in the second quarter to the point that the overall year-over-year impact was essentially negligible with a negative impact on adjusted EBITDA of less than 1% in the quarter.

Before I turn to our core business unit performance, note that our fine chemistry services business remains a challenge. Second-quarter adjusted EBITDA in that business was several million dollars below expectations at the beginning of the quarter.

In addition, fine chemistry services is facing challenges due to the difficult environment for customers in the ag industry and the need to rebuild relationships and business with a customer base after the extended sales process. As a result our forecast for full-year adjusted EBITDA in 2016 has now been reduced by about $15 million since April.

Moving on to our core businesses, let's start with Lithium and Advanced Materials. Second-quarter net sales were $233 million with adjusted EBITDA of $83 million resulting in adjusted EBITDA margins of 35%. Compared to the second quarter of 2015, net sales were up 10% and adjusted EBITDA was up over 3%.

The lithium portfolio again delivered outstanding results. Second-quarter net sales were up 24% and adjusted EBITDA up 20% compared to the second quarter of 2015. Adjusted EBITDA margins were 41%, the sixth quarter in a row with margins greater than 40%.

Overall volume grew in the quarter by 19% and pricing improved by approximately 3%. All of the growth and most of the pricing improvement were in battery grade applications where we achieved double-digit price increases compared to second quarter 2015.

Margins were in line with our expectations as we continue to ramp up lower margin towing of [spagamine] into battery grade lithium carbonate and lithium hydroxide to meet demand growth. Lower year-over-year potash pricing continues to be a headwind for this business of about $7 million of full-year adjusted EBITDA.

From an operations standpoint, the startup and customer qualifications of our new La Negra lithium carbonate plant in Chile are progressing as planned and we continue to see good reception from our customers on the shift to long-term contracts.

We are also pleased to announce the initiation of a collaborative effort between Albemarle and SQM to safeguard the ecosystem of the Salar de Atacama and to ensure the sustainable extraction of brine over the long term.

PCS experienced headwinds during the second quarter from both polyolefins catalysts and curatives. Net sales were down just over $10 million and adjusted EBITDA was down almost $8 million compared to the second quarter 2015.

Lower curatives volumes and pricing due to increased product availability from competitors and the impact from the Sun Edison bankruptcy were the primary drivers. PCS adjusted EBITDA could be negatively impacted by as much as $15 million in 2016 compared to 2015, a worsening of $5 million from our expectations at the time of the first-quarter call.

Second-quarter adjusted EBITDA for our bromine based business was $67 million, down 3% year on year with net sales down almost 8% to $207 million. Adjusted EBITDA margins were 32%.

Better-than-expected clear completion fluids demand in the Middle East, timing of certain large volume flame retardant orders, favorable costs and a better-than-expected pricing environment for some of our bromine derivatives helped the business overcome most of a $15 million year-over-year adjusted EBITDA headwind due to the loss of a large methyl bromide customer in 2015.

While we do not expect to see a repeat of the strong first-half performance in the second half of 2016, we now expect the business to deliver full-year adjusted EBITDA that is only a few percentage points below 2015 performance of $223 million.

Refining solutions reported second-quarter net sales of $178 million and adjusted EBITDA of $62 million with adjusted EBITDA margins of 35%. Compared to the second quarter of 2015 sales were up 8% and adjusted EBITDA was up 28%.

Heavy oil upgrading, or FCC catalysts, continue to perform at a high level with volume, revenue and adjusted EBITDA all up as expected compared to second quarter 2015. Heavy oil upgrading also benefited from a more favorable product mix and lower variable cost compared to second quarter 2015.

Clean fuels technologies, or HPC catalysts, results also continued to improve as expected with improved adjusted EBITDA driven by volume, a favorable product mix and lower variable cost. Overall refining solutions' expectations for 2016 remain fully in line with our view at the start of the year.

Now I will turn the call back to Luke to update our view of the year.

Thanks, Scott. Just as in the first quarter, lithium, refining solutions and bromine specialties exceeded our high expectations in the second quarter and helped us to overcome weakness in fine chemistry services and PCS.

For the first half of the year we've exceeded our initial 2016 expectations in all three of these core businesses. In the third quarter we expect lithium and refining solutions to again show solid growth compared to the third quarter of 2015.

While our full-year outlook for bromine has improved due to the strong first-half performance, we do expect to see both sequential and year-over-year weakness in both the third and fourth quarters of 2016. Strong first-half clear brine fluid demand outside the US is not expected to continue and certain large volume flame retardant sales in the first half are unlikely to be repeated in the second half of the year.

Finally, the issues that Scott noted in fine chemistry services and PCS lead to an adjusted EBITDA headwind of about $15 million compared to our guidance in the first-quarter earnings call. Even with those headwinds the overall balance for the year continues to improve and we are increasing our guidance for the year.

On a continuing operations basis our updated full-year 2016 net sales expectations are now $2.5 billion to $2.8 billion. Adjusted EBITDA is expected to range between $705 million and $750 million and adjusted EPS to between $3.35 and $3.60 per share driven by the increase in our adjusted EBITDA forecast and the impact of a lower effective tax rate.

As a reminder, given the changes to guidance resulting from the move of Chemetall Surface Treatment to discontinued operations, we've provided a bridge to prior guidance on page 16 of the earnings deck posted to our website.

Albemarle's power to generate free cash flow will remain strong even with the sale of Chemetall Surface Treatment. We estimate that Albemarle's free cash flow in 2016, excluding one-time items, and the expected free cash generated by Chemetall will range from $400 million to $500 million.

We expect to close the Chemetall Surface Treatment sale before the end of 2016. Our priorities for the use of the proceeds from that sale are the same as those we have consistently communicated since we acquired Rockwood in early 2015.

First, we expect to deleverage to a gross debt to EBITDA range of around 2.5 times.

Second, we will leave some cash on the balance sheet to accelerate growth in our core businesses. In the near-term investments will likely be focused on high-growth battery applications in our lithium business.

Third, we will work to return cash to shareholders through some combination of dividend increases and stock repurchases.

While you should not expect us to completely finalize plans until sometime after the sale closes, rest assured that we intend to put this cash to work in ways that will generate the highest shareholder returns over time.

In closing, I am very pleased with our overall execution in the first half of this year. Our core businesses exceeded expectations and we entered into a contract to sell our Chemetall Surface Treatment business at an attractive valuation. Once the sale closes we will have a very strong balance sheet and are set up nicely to continue strong performance in the rest of 2016 and to accelerate the execution of our longer-term strategy.

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 at one time so that everyone has a chance to ask questions, then feel free to get back in the Q4 follow-ons if time allows. Please proceed.

(Operator Instructions). Bob Koort, Goldman Sachs.

Good morning, this is Ryan Berney on for Bob. Digging into the lithium margins, can you help me understand the puts and takes on the margin change in lithium from the first quarter to the second quarter? And could the cadence of the potash sales have any impact there?

Hi, Ryan, John Mitchell here. Yes, so in the first quarter, as we said, we benefited, number one, from mainly brine to lithium salt sales which was driving a much higher onetime benefit in margins. As we see in quarter two, and we expect going forward in three and four, we have some margin dilution as a result of the tolling, as tolling volumes ramp up.

We also have some impact on the potash pricing headwind. And also as we ramp up our capabilities from a manufacturing perspective on the new plant in Chile, we have some added cost there. So, those are the main items that are impacting. But as we mentioned in the quarter one call, I mean our margins are where we expect them to be, around that 40%.

Great, thanks. And then maybe as a follow up, could you update us on kind of your spending priorities for the cash proceeds from the Chemetall sale?

Yes, I will take that one. As I said in my prepared comments, we are going to do exactly what we said since we acquired Rockwood in 2015. First, we are going to deleverage. You can look to us to go to somewhere approximately 2.5 times gross debt to EBITDA.

We will then have cash on the balance sheet that will allow us to accelerate growth opportunities in our core business. And you can expect to see that focused on lithium with some opportunities we have out there to accelerate our strategy. And third, we will return some cash to shareholders through increased dividends and some stock repurchases.

Thank you very much.

David Begleiter, Deutsche Bank.

Luke and John, on lithium pricing in the back half of the year, Orocobre has been talking about $14,000 to $15,000 a ton for lithium carbonate. Are those prices anything that you could realize in the back half or even for 2017?

Hi, David. It is John here. As we have said, our approach to pricing in the market, I mean number one, we want to make sure that we are supporting our customer base in terms of reliable supply of lithium salts. And we are focused on the long-term development of the market and long-term supply agreements.

We are making great headway on the long-term supply agreements where more than 60% of our customer base is under that. We do have pricing flexibility there. But we are not going to comment on other people's prices at this point in time. But the environment is favorable, the market is in balance at this point in time.

Understood. And, John, any update on the MOU with the Chilean government?

Yes. So we are very close, we continue to have great conversations with the Chilean government. We expect the definitive agreement to be signed shortly. And we continue -- we have already initiated engineering work on kind of the phase 3 build out in La Negra. So, everything is moving along nicely there. And hopefully we will have some good things to announce shortly.

David, this is Luke. That thing I would add to that, remember this was really the first agreement after the lithium commission. And so, we are working through, making sure all the i's are dotted and t's crossed down there in Chile. And I fully expect that agreement to be signed. And we are proceeding with the development of that plan for the expansion confidently and are moving forward assuming it is going to get signed in short order. And I believe it will.

Very good, thank you.

Vincent Andrews, Morgan Stanley.

Could you talk a bit about what you are seeing in terms of electronics demand, I guess for lithium and for bromine, and how you see that progressing over the next couple of years? So how is it doing now and what is happening going forward?

Okay, I'm going to let John take it first around lithium and then we will have Raphael talk a little bit about bromine second if that is okay, Vincent.

Sure.

Hi, Vincent; it's John. With regard to lithium, when we look at energy storage we look at the market in three categories: consumer devices, transportation and grid storage. So on the consumer device side, that includes not just the computers, tablets, cell phones but it includes power tools and other wearable devices. And we are still holding to our model about 8% to 10% annual growth in that segment.

And that is what you are seeing this year?

Yes, that's -- I mean we continue to see that kind of growth in that segment.

And bromine?.

Yes, so, Vincent, this is Raphael. For the bromine business our FR business, our flame retardant business goes into various electronic applications -- overall confidence in that market from a market perspective is increasing. So, the various indices which track confidence in the connector industry as well as overall electronics are going up.

So, the industry is feeling more confident in the outlook year over year as well as sequential, it looks better. That is also reflected to some extent in our business. We've had a strong first half in flame retardants into those markets and we expect over the next year and in the outlook that to be stable to slightly increasing.

Okay. And, Luke, if I could just ask you, with bromine -- appears to be stabilizing, you have got the Chemetall sale so you are going to delever. What would the pros and cons be of keeping bromine at this point or finding another home for it one way or the other?

Yes, I think if you look at bromine, I do believe that business this year has a fighting chance to be down just a few percentages point from last year, so improve much over the first half. It's going to generate -- excuse me, when I said over the first half I meant improved over 2015 our early expectations. Also is going to generate significant cash that we'll be able to harvest to apply to the lithium growth opportunity.

So, to me it is still a question of how do we best drive shareholder value. And at least as we look at it today, harvesting that cash to allow us to accelerate the growth opportunities that we see in our lithium organic growth and potential opportunities in catalysts today.

But that always changes. We will continue to look at it just as we looked at the Chemetall business. And we are going to do what is the -- creates the highest value for our shareholders over the long-term. But right now I think that is keep bromine, continue to watch the great performance that we've seen this year and harvest that cash.

Okay, thanks very much.

Jim Sheehan, SunTrust Robinson Humphrey.

Could you comment on the lithium supply/demand environment in 2017, the impact of new capacity that you see possibly having on lithium carbonate prices next year?

Hi, Jim, this is John. With regard to supply/demand, again (technical difficulty) said on multiple calls, when we look at the midterm we see that market imbalance. There certainly will be periods of time where new capacity kind of comes on in slugs. For 2017 we see a few resources in Australia coming online to support the growth as well as continued ramp up of Orocobre in Argentina as well as our own capacity ramping up. So we see 2017 again being in balance.

And I think fair to say, John, not a significant impact. We don't see demand -- supply coming on that is going to have a significant impact at all on our ability to price for the value in lithium carbonate.

No, that is right.

Great. And on FCC pricing, could you just comment on the trends you are seeing there and what you expect in the second half?

Yes, this is Silvio. Like we told early in the year, we initiated a process for increasing our prices. We have been clear from the get-go that it is a long haul exercise. But we are positive about what we're seeing after first couple of months; we have a couple of first successes. And we will pursue the efforts and will stay on track as we announced before.

Thank you.

Aleksey Yefremov, Nomura Securities.

A follow-up question on the use of proceeds. Will you rule out any sizable acquisitions and does your comment about investments and sort of battery -- battery grade lithium also could potentially involve acquisitions or mostly organic investments?

There is always a possibility for an acquisition. And if we see opportunities for acquisition it would be in the lithium space immediately. But there would be -- it would be a fulfillment of or an acceleration of the strategy that we have already stated, Aleksey.

And as a follow up -- on repurchases, any thoughts on the timing or how quickly you can get to that? And then is that decision dependent on your sort of potential acquisitions as well?

Yes. I think that we have got to close it. So it is one thing, we have got to get the deal closed first; we expect that to happen by the end of the year. We also have to be able to get the cash back to the US in an efficient manner so that we pay down debt and then have that cash on hand to do it.

So, I wouldn't expect any repurchases, any at all, in 2016. I would expect that would roll over into 2017. And we are going to look at what the environment is and what the opportunities are to use that cash at that time. And that will determine how much goes into what bucket, Aleksey, is the best way for me to describe it. But we are making the analysis to ensure that we are driving shareholder value to the greatest extent that we can.

Great, and final question if I may on lithium EBITDA, what is the outlook for the second half? Is it a first-half run rate or about a good [one] for second half as well?

John?

Yes, I think as we have stated, our expectations on EBITDA for the lithium business in that 40% range. And so, that is what we expect going forward for the second half.

Thank you very much.

P.J. Juvekar, Citigroup.

As you get the cash in you look into making acquisitions in lithium, would you look at acquiring more reserves either in brine or rock? And then on your Kings Mountain, North Carolina asset, you haven't run that asset in a while. What kind of investment would you need to get that in operation?

That is a couple questions. What I said is I will consider acquisitions, P.J., so let's be clear what we are saying, okay. We would look from a standpoint of anything that would accelerate our already stated goals. Those goals are to capture 50% of the growth in the lithium market over the next 5 to 10 years.

So, you can look at -- that will require additional resources that we will need to bring online to be exploiting in the 2022 kind of timeframe. We will have to find those assets, acquire them. We've got teams around the world looking at them and talking with people about options.

Because not only we do need to satisfy the demand today, but we have got to decide -- meet it into the next decade and that will require additional resources, as we have stated. So we will look at that. As a part of that you can expect us to look for high quality rock reserves as well as high-quality brine reserves.

We have today the low-cost position in brine, the low-cost position in rock, we have geographic diversity, we have got a diversity of a portfolio of our end products, and we believe that gives us a tremendous competitive advantage. And you will see us take steps to enhance that advantage that we believe we already have.

With regard to Kings Mountain, that is the original, I believe, rock mine in North America. Still best of everything that I have seen today. The data would show it is probably the second or third most concentrated rock reserve in the world. And we are in the process of analyzing the cost to bring that back online if it was necessitated.

But what it would be would be a simple mathematical equation for us. What is the cost of bringing it online versus what our other options are around the world and does it give us a competitive advantage or not. And we will pick the one that is the highest.

So, I don't have an answer to your second question and it would just -- it would be premature for me to throw a number out there, P.J. I am sorry, I just don't have that number but we are working on it.

That is fair, and thank you for that. And just secondly on your refining, you saw nice improvement in EBITDA. How much of that was coming from sort of benefit from spring turnaround versus how much of that is from a cyclical recovery with strong gasoline market, etc.? Thank you.

P.J., I'm not sure I understood the question. I think you asked of the EBITDA growth year over year, how much of that was refinery turnarounds for hydro treating and how much of it was the gasoline demand in FCC catalysts, was that right?

Yes, that is right, Luke. Thank you.

Hi, P.J., this is Silvio. Both businesses contributed well to that growth because on the FCC you may recall that year over year last year we went through a period with a lot of trials. So the volumes were somewhat better this year together with the strong gasoline demand for the first half.

And on the [CFT] side, as reported earlier, we're expecting 2016 to be better than 2015 as we do not see that same hesitance with the refiners as we did notice over last year. And that has been confirmed. We see more change out, we see a better product mix and so also the CFT contributed to that EBITDA growth.

If you look year over year I think it is safe to say we had better performance in CFT year over year. FCC was solid but -- it had nice movement, but the real growth was in CFT year over year.

Thank you.

Josh Spector, UBS.

Just to follow up on the refining side. So, specifically on HPC, you had sales stronger in the quarter, I know you just talked about it. Just curious, was it getting to the point where customers needed to change out and that drove demand? Or are you seeing some additional demand as crude was higher in the quarter? What would be the main driver in your opinion sequentially?

Okay, let me put it correct. Last year was the exception where we saw all kinds of measures taken because of the economic climate at that time and the oil pricing. Over this year things came back to what we call normal; we saw regular change out, we saw the use of fresh catalysts versus regenerated catalysts.

So, I dare to say that we are getting back to normal operations and see the regular change out. Comes to see now what the recent trends and the oil will do, but I make -- confirm that the first half of the year was back to normal business.

Okay, and just on margins as a whole I mean, I think if I look historically margins have been more in the higher 20% range; now you are on a couple of quarters of above 30%. Is that just mix and as HPC comes back in that might go down? Or is this kind of a new fundamental basis to look as we go forward?

No, I would dare to say that it has to do on one hand with the quality of the mix, both the fills and the products that go in there, as well as the use of fresh catalysts versus reused catalysts. That is one element. On the other hand, as we reported, we have some variable cost and also favorable variable cost in the beginning of this year, first half year.

I think the thing that you have got to remember in HPC catalyst, particularly, and you focused on HPC, is what is that mix going to be. So, if you look, we make fine margins on our FCC catalysts as well. But we get -- if we get a use of a really tough complex crude that's hard to get the sulfur out and the amount of hydrogen can have an impact on it. And if we need our specialty hydrotreating catalyst we can make better margins on that on the mix.

So, the HPC mix that we have more than anything else can impact those margins. So, I think it is going to from quarter to quarter fluctuate. I think over time, over a long period of time you are going to see high 20%, 30% kind of percent margins is what I would -- somewhere between 25% and 32% kind of margins is where it is going to fluctuate, that is what it has and I think that is what you will continue to see.

Okay, thanks, guys.

Dmitry Silversteyn, Longbow Research.

Yes, a couple of questions if I may. On the first question on the bromine side of the business, pricing I understand is holding both year-over-year increases in sequential in elemental bromine and some of the derivatives outside of drilling fluids, is that still correct?

Dmitry, this is Raphael. That is still correct. So we have -- we were fortunate to have a tailwind with China pricing. That helped as well as some of the mix of our business in the first half of the year. So we are seeing flat to slightly improving pricing in our business.

And then if you exclude the share gains that you have gotten in the Middle East, what is your feel for the overall drilling fluid demand in the global market, both in the second quarter and then looking forward to the balance of the year?

Dmitry, we see overall demand being down. As you have noted correctly, and I am very proud of our bromine team. In the first half of the year we did secure some share in the Middle East as well as secured business with existing customers. So that was very favorable.

And while those customers continue to order into the second half of the year, it is not at the rate that we saw in the first half of the year. So we would say that overall demand is down, it is down most significantly for us as well as for the industry in the Gulf of Mexico, but down overall. So, it has a bit of a tail going into the second half of the year and perhaps the start of 2017.

Hey, Dmitry, this is Luke. Remember when we talking about drilling fluids, we are really focused on deep water drilling. So, it is really -- that is our main focus is deep water. We are not much onshore, or not much in fracking. So it is really you have got to focus it on deep water.

And I think what -- there is such a long tail on that. And so, I think we are going to see the second half is going to be down. That is included within our guidance and I think you will see a weak start to 2017 with respect to completion fluids.

Got you. And then on lithium pricing, I think you said they were up 2% year-over-year, is that correct, with the 19% volume growth?

It's up 3% overall and that is on the portfolio overall for lithium. Battery grade material which drove most of that pricing was up much higher than that.

Okay, so your price increase in lithium carbonate, was it specific to the battery grade or was it lithium carbonate broadly speaking? Can you remind us?

This is John. So again, on the technical grade applications there tends to be in some cases a ceiling on price because the value and use, once you go beyond a certain price sometimes you can substitute out products, so you have to be careful on the technical grade side. But certainly on the battery grade side we have gotten our fair share of price within battery grade.

Also, in terms of the way we define our pricing mix, I mean as the tolling -- you have to also remember as the tolling volumes coming on, we are not necessarily counting that in terms of our pricing in terms of the way we have reported out on the pricing percentages.

Okay, I am just trying to understand, I think you went out with like a 15% or 20% price increase that you expect to get over a couple of years. I am just trying to understand if that is -- if the 3% is the first step of that or is that 3% being masked by things like tolling and some of the other things that you mentioned and you actually [aren't] realizing a much higher price increase?

The reason I am asking is -- your competitor in lithium reported yesterday and I think they talked about getting a 10% price increase on the hydroxide side of the business.

Right. I mean I think you might be confusing us with someone else in terms of what we announced. But what we have said on the call is that for the overall lithium portfolio, not the Lithium and Advanced Materials, but we expect mid-single-digits overall. And that in the battery side we have good double-digit price increases on the battery side. So, we are getting -- we are in line with where we think the market needs to be.

Dmitry, we are not in any way getting left [blind] on the pricing in battery grade applications. If you do the math on our battery grade applications, you can see they are up double-digits, and it is not 10%, it is well into the double-digits. So, it is right in line what you are hearing from the rest of the industry on pricing and I would expect to be able to see strength in that going forward.

Thank you, Luke. Thanks for the color.

Laurence Alexander, Jefferies.

So, first on the lithium, the contract extensions. To what extent -- if and when prices roll over how fast should we think of the flow through to your business or how sticky should pricing be because of the contracts you have in place?

As we've said that -- I mean, each of the contracts are going to be negotiated on an individual basis. In terms of when we decide to adjust prices, I mean I would say those prices could take effect within the quarter. So, I mean they can be -- I mean it can react pretty quick, but it really depends on when we decide to take action. And again, each agreement is negotiated individually.

And then on the bromine side, is there anything that can be done, as you look at the end market mix, to reduce the lumpiness in that business going forward? I mean, any further actions you can take?

Laurence, this is Raphael Crawford. I mean we continue in the bromine business not only to make sure we are delivering cash out of the core business, but we do continue to invest in R&D as well as business development efforts into new markets, whether that be specialty applications or other core uses. We certainly look at that and that is our best avenue to reducing some of the lumpiness.

But this business -- it does see headwinds and it sees tailwinds based on various end markets and various geographic considerations. And over the cycle we continue to focus on cash delivery and making sure that our cash flow delivery is consistent year-over-year to fund the growth in the catalyst and lithium businesses.

Thank you.

Mike Sison, KeyBanc.

Hey, guys, nice quarter. Luke, congrats on getting really good value for Chemetall there and I guess I get to say new Albemarle again this year. But when you think about the portfolio as you look over the next several years, can you maybe just frame up what this portfolio can do in terms of growth, free cash flow and just maybe give us an update on the long-term potential now?

Yes. I think it is -- as I look across it what I would say is that I think lithium has got -- is kind of a double-digit growth for the next -- if you look now through the rest of this decade and as long as we get the additional resources continue. So, I see continued strength in lithium, at least double-digit growth year over year for the next four or five years. And that is about as far as anybody can see, right. And that could be accelerated based on energy storage, based on EVs and other items. But I don't see any change coming on that.

On refining solutions, demand for transportation fuels is going to drive that and that is usually going to grow somewhere around 2% to 3% to 4%. And I think we will grow a little bit better than that because of our capabilities in the complex tough to crack crude slate. So, I feel great about our ability to have year-over-year growth there. It will I think moderate from what we have seen this year.

Remember this year was a bounce back year, [wouldn't] expect to see that type of growth well into the future. But I think that the strength of our innovation in catalysts will allow us to continue to grow that low- to mid-single-digits. And dependent upon how our incumbencies are in clean fuels we could pop above that from quarter to quarter. But I think there is still continued growth in that catalyst business.

Bromine, as I said before, this year that bromine is outperforming my expectations. We said they were going to be down, I still think they are going to be down this year year-over-year. But they have got a fighting chance to get close here to what they did in 2015.

That business -- we are not counting on it for growth, but if we get a little bit of growth from bromine over the years, certainly the free cash flow generation from that is going to accelerate our ability to drive more of our profits into lithium. So I think you will see that.

I think the free cash flow will continue very strong. We will have some capital that we need to invest in lithium obviously. But even with that I expect our maintenance capital, if you will, to probably be around 4% across our base and you are going to have growth capital in lithium that will take us up higher than that.

So, a continuation of the free cash flow story here and I think good solid growth and growth opportunities between lithium leading the way followed by refining solutions and then counting on bromine to remain flat. It may go up one year a little bit, down one year a little bit, but overall I feel great about the ability of these portfolios to drive shareholder value.

Great, and a quick follow up on heavy oil upgrading. What are your operating rates now and where do you think you will end the year as you head into 2017?

This is Silvio. The operation rate is in the [90s], as we said -- as we announced before, so it's not changed. We have had a strong quarter. The demand for fuel has been very strong maybe a little pressure on it for the coming months because the industry is dealing with the [inventory]. But overall longer-term picture we believe that the demand for -- and the gasoline production will come back and will remain strong into the [17s].

Great, thank you.

Mike Harrison, Seaport Global Securities.

I was wondering if you could give a little bit of color on the Takreer volumes that are going to roll off at some point. Maybe any insight on the pace and magnitude of how that is going to affect your FCC business?

Yes, I will let Silvio talk about that. We are not going to give what the specific volumes are, Mike, for obvious reasons. But, Silvio, you want to talk a bit about that and what is built into our guidance?

Okay, well, we have been supplying a different [rhythms] over the beginning of the year and did supply well into July. For remainder of the year we do not foresee any additional volumes and that has been solidly built into our guidance for this year.

All right. And then was also hoping we could get an update on the operations in La Negra and the expansion there. Could we start to see some additional volumes contributing commercially in the second half or is that more of a 2017 story? And do you continue to view it as coming on maybe 20% of capacity per year for the next few years?

This is John. I mean we are progressing really well in La Negra in terms of qualifying the product with really a great portfolio of customers. You should expect to see contribution really in 2017. And we -- as we said, we are focused on the long-term agreements and we have already started to pre-sell that volume with customers. So we will bring on capacity in line with our customers' demand.

All right, thanks very much.

Ben Kallo, W. Baird.

Congratulations, Luke, on all the progress over the past year.

Thank you.

I have two questions. First on the HPC side, could you just talk about that? Your (inaudible) was out the other day talking about the [art] JV and seeing some progress there.

And then I wanted to change subjects for my second question that is about lithium -- that was a joke. But maybe just tell us, Luke, what you think some of the parts of the value chain -- I know you talked about resource and what you guys have there in terms of the acquisition (technical difficulty), maybe even going deeper into the battery side of it that are interesting to you. And as you get capital from the sale of surface treatment that you would be interested in looking in what -- either organically or through acquisition? Thanks.

Okay. Silvio, you want to talk about HPC volumes?

Yes, I can shed some light on that one. Year-over-year the volumes are getting better. Longer haul there is the structural fundamentals that more fuels are going to be consumed and that more fuels need to be cleaned up so there is a structural growth pattern in there.

Looking at a different segment, however, we see that there is a shift, that one segment is growing faster than the other. We see stronger demand in the (inaudible) area where more complex oils are being processed.

But to answer your question, we have gone through a dip last year with a lot of uncertainty on the refiner side. We are still cautious, but we see that coming back this year, that's -- like I said before, we are getting back to the normal patterns. And for the longer haul we expect the HPC volume to grow because you just need to process more oil going forward.

Thanks, Silvio. And if I look at -- your question really was about what parts of the value chain would we look at in the batteries. And we really like where we are today. What we are good at is resources, taking those resources, converting them into quality lithium carbonate, lithium hydroxide and other byproducts from lithium that drives higher value.

So, as I look at that, we are going to stay true to who we are, Ben. I don't think you can expect to see us buying a cathode company or anything like that. What we want to focus on is driving value which is an acceleration of our strategy to be able to gain faster growth in lithium carbonate, lithium hydroxide and in the catalyst space. So, that is what you will see us doing. We will be consistent with who we are.

Thank you, Luke.

David Wang, Morningstar.

I guess my first one is on bromine. (Technical difficulty) managing this business mostly for cash flow generation. I guess going forward do you see mostly as volumes and pricing driving the cash flows of the segment? Or is there much room left -- wiggle room on the cost side so that you can still improve EBITDA for the segment even if pricing doesn't necessarily go your way or we don't see much of a rebound in volumes?

Yes, David, this is Raphael Crawford. I think we see both sides of this. We certainly see a great leverage effect on volume and the drop through to the bottom line. So we do take efforts on securing additional business when we can. For example, the China opportunity this year with the favorable pricing in China was something that we jumped on in order to pick up some additional volume. And pricing as we go forward, that is always a lever.

There is still room on the cost side, that is something that we continually look at. We saw some cost improvement particularly in raw materials, for example, from favorable buying in the first half of the year, so we look at that continually. And as I said before, we look at all the levers we can pull to continue to deliver consistent for growing year-over-year cash flow into Albemarle. And that includes cost, capital as well as on the sales side.

Thanks, Raphael. And then I guess my second question is on lithium. You mentioned that going forward you would be considering acquisition. And I was wondering how this would be prioritized relative to your other opportunities.

For instance, is there -- would you look to expand the Chilean operation even more so than you have already laid out before you would look at an acquisition? Or would you look at spagamine [and] hydroxide (technical difficulty) acquisition? I was wondering the priorities of these options or other ones that you are considering.

Yes, our priorities are going to be ranked -- you shouldn't look at them as we look at brine versus rock versus conversion; you ought to look at it on ways that we believe it will accelerate our strategy and deliver higher shareholder value. And that is what we would look at as opposed to focusing any one geographic area or any one particular asset. It is going to be -- if we find one, if it makes sense, if we can get the right type of accretion it would all be related to driving an already articulated strategy.

And just to clarify on that. So would you prefer to -- I guess I am just wondering why you would be looking at an acquisition when it seems to me like you could continue to expand the Chilean operation.

Well, I mean what we will do is -- what I said we would do is we would have cash on the balance sheet to allow us to accelerate our strategy. So, accelerating the strategy could be we develop more assets in Chile as well. So, you are reading too much into it that I am going to do one or the other.

What we are going to do is we laid out a strategy, we are going to maximize the resources that we have today as rapidly as we can to meet the market demand. And then if an acquisition allows us to accelerate that we will do it. But it is going to be -- if you look at our Chile operations today with the MOU, we have already got a plan to build out the revenue capacity to use up 100% of that resource over time. We will accelerate that and we are in the process of accelerating that today.

And if there are opportunities in Chile we are certainly -- we are down there, we know those resources and we will certainly continue to look to pursue those. There are other -- in other areas of the world there could also be some opportunities that we would proceed from a resource standpoint as well as from an asset that may accelerate our strength and our position in that area of the world. And that is what we are going to do.

So, we are looking at ways to accelerate our strategy and strengthen our overall global leadership position. So, it is not going to be anything that comes out of left field; it is going to be -- if we do anything it is going to be very consistent with the strategy that we have articulated since we bought Rockwood in 2015.

All right, thank you for the color, Luke.

There are no further questions in queue at this time. I would now like to turn the call back over to Luke Kissam. Please proceed.

Thank you very much. We would like to thank everybody for taking time to be on our call today. And we look forward to continuing our performance in 2016 and the acceleration of our strategy into 2017. Thanks a lot. Bye-bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.