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Albemarle Corporation (NYSE:ALB)

Q3 2008 Earnings Call

October 28, 2008 10:00 am

Executives

Sandra Rodriguez - Director of IR

Mark Rohr - President and CEO

John Steitz - EVP and COO

Richard Diemer - Sr. VP and CFO

Analysts

Steve Sherman - Lafayette Research

Jeff Zekauskas - JP Morgan

Bob Koort - Goldman Sachs

David Begleiter - Deutsche Bank

Kevin McCarthy - Banc of America Securities

Chris Shaw - UBS

Mike Sison - KeyBanc

Laurence Alexander - Jefferies

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 Albemarle Corporation earnings conference call. My name is Amity and I will be your coordinator for today. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Miss Sandra Rodriguez, Director of Investor Relations. Please proceed, ma’am.

Sandra Rodriguez

Thanks, Amity. Good morning everyone and thank you for joining us today for a review of Albemarle’s third quarter results, which was released after the market closed yesterday. A press release contains preliminary results for the quarter and this information is subject to further review by the company and our auditors as part of our quarter-end review process.

Please note that we have posted supplemental sales information, as well as reconciliations for net debt and EBITDA on our website under the investor information section at www.albemarle.com.

I’d like to also caution that the remarks today contain forward-looking statements. Factors that could cause results to differ from expectations are listed in our annual report on form 10K.

Participating on the call with me this morning are Mark Rohr, Chairman and CEO; John Steitz, Executive Vice President and Chief Operating Officer; and Rich Diemer, Senior Vice President and Chief Financial Officer.

Now I’d like to turn the call over to Mark.

Mark Rohr

Thanks Sandra and good morning everyone. It’s a pleasure to be with you this morning and have the opportunity to share our third quarter results. I’ll give you the details in just a moment, but before I do, I’d like to make a few comments about the business impact of the September hurricanes and then update you on some of the strategic initiatives recently reported.

Most of you are aware that we have manufacturing research and administrative sites in Louisiana and Texas. Like most companies in the region, Albemarle was materially impacted by Hurricanes Gustov and Ike.

Our facility suffered little fiscal damage and, thanks to our employees, we were ready to restart after a few days. However, others we depend upon were not so fortunate. A number of customers went down and many declared forced mature (ph) as outages lingered. Of particular note, there were 17 refineries down at one time and their return to full capacity has been impacted by storm damage, as well as low demand in some fuel markets.

Issues resulting from the storm spanned our supply chain from lack of raw material availability to customers’ inability to receive orders. While most have recovered after a few weeks, distribution challenges, especially rail care availability became the prevalent issue in the region as we closed September.

We estimate the negative impact to our third quarter results from the two hurricanes to be approximately $11 million before taxes, or $0.07 to $0.08 per share with a majority of the impact hitting the catalyst and Fine Chemical segments. We also expect approximately $2 million of the impact in the fourth quarter as raw material delays are still causing shutdowns in a few areas.

Despite these natural disasters, our performance was solid with a year-over-year and sequential top line growth.

Moving on, I’d like to update you on some of the strategic initiatives under way. Earlier in the year we talked about possible asset optimization steps. As part of this process, we recently announced the initiation of the consultation process with the works council at our Port-de-Bouc facility in France, for the purpose of the potential sale of this facility to International Chemical and Investor’s Group, ICIG. This proposed divestment would improve biochemical segment performance next year and polymer additives business segment performance in 2010.

We would expect to incur a pre-tax charge in a range of $25 million to $30 million at closing, which could occur before year-end. I will provide more information on this potential sale when available.

You also heard us talk about the great opportunities we developed through our alliance with UOP. Another example of the success of this alliance is a recently signed technology agreement between Albemarle, UOP, and Petrobras to accelerate the commercialization of UOP’s catalytic crude upgrading technology. Under the agreement, UOP will provide the process technology and Albemarle and Petrobras will provide an improved FCC catalyst solution to be used in this process.

We are very pleased to have a role in the commercialization of CCU technology and believe it provides an outstanding opportunity for our FCC business.

At the end of July, we closed on the Sorbent Technologies acquisition at a cash price of $22 million. This acquisition has more than met our expectations to-date, contributing $2.6 million in revenues in the third quarter and adding to our profitability.

Bromine-based mercury removal technology fit seamlessly within our franchise and complements our focus on products that help provide clean energy solution.

Sorbent’s integration is going well and the business is positioned to grow materially in 2009 and 2010. In support of our commitment to a sustainable business model, we are pleased to have appointed Dave Cleary as our Chief Sustainable Officer.

This newly created role combines technology and consumer advocacy to reinforce our commitment to innovation and to help transform our portfolio to better fit the needs of society. Dave is a Ph.D chemical engineer and has 20 years of experience in process technology, research, and business management that will serve us well in this important strategic role.

And finally, I’d like to note two other announcements, the introduction of a new single site polyolefin catalyst activator that will deliver cost performance and upkeep potential for our customers, and the six Albemarle scientists recently honored by the American Chemical Society as heroes as chemistry for their work with Exxon Mobile and the coal development of a unique and more environmentally sustainable catalyst for diesel.

These two announcements demonstrate the nature of our business model which combines our technology with a customer-defined opportunity to create solutions for the challenges society faces. This model is stronger than ever and in tough times like these, I believe will be the differentiating factor for Albemarle.

Now let’s get into the specifics. Raw material and energy costs increased approximately $11 million sequentially at $52 million year-over-year. Total year forecasted inflation now stands at $192 million, down about $30 million from the last time we talked.

We’re starting to see lower prices in some raw materials and in natural gas, which is a good thing. However, we do not expect feed stock costs to pull back in proportion to the decline in commodity prices. Since many companies have not been successful in their attempts to pass through inflation and will fight to retain what gains they have made.

So while I’m sensitive to market disruptions impacting volume, we will continue to seek opportunities to take purposeful pricing actions to mitigate headwinds and improve margins.

As noted in our earning’s release, we delivered solid top-line results in the third quarter with net sales of $660 million, the second highest sales quarter in our company’s history. Driven by increased volume and pricing, net sales are up 13% compared to third quarter 2007, and for the first nine months sales were up 12% compared to the first nine months of 2007.

Net income for the third quarter totaled $56 million and resulted in earnings-per-share of $0.61, which is in line with third quarter earning’s of last year. I’ve already alerted you to the $11 million hit from the September hurricane events; this is included in these numbers. As of the negative hurricane impacts saving and income for the quarter will be approximately 10% higher than the third quarter 2007.

Polymer additives began seeing the impact of the economic slowdown in the third quarter and yet still delivered a third consecutive quarter of record sales. Segment margins improved slightly to 10.5%, bromine FR sales remained strong, while phosphorous and metal contributions were below our expectations.

Catalyst delivered double-digit, top-line growth compared to the second quarter 2008 and 7% growth over third quarter 2007. Refineries are clearly moving heaven and earth to delay catalyst purchases and this has impacted our business in the third quarter and we expect an impact to continue into the fourth. Nonetheless, we did see some volume improvements sequentially.

Our biochemical segment also generated record quarterly revenue with double-digit, year-over-year on sequential growth. Strong sales in bromine products and our Fine Chemistry portfolio held margins essentially flat versus a second quarter.

As I wrap up our remarks, let me spend a few minutes on the outlook for our business. The unprecedented volatility we’re seeing in the financial markets today and threats of global recession clearly make this a difficult operating environment for our company and the industry as a whole.

And while it’s impossible to predict the impact of these trends, I expect they will have an adverse effect on parts of our business through 2009. In particular, as we have seen in the past, our polymer active segment will be impacted by a prolonged slowdown and super spending, and we are seeing further evidence of softening in the electronics and overall polymer demand as we head into the fourth quarter.

If history provides any insights, slow sales through October usually extend to the first quarter, as buyers regroup over the holidays and plan for the coming year. But even with this uncertainty, we are seeing keen interest in our diverse portfolio products that help customers differentiate themselves and we have a host of new product offerings in the wings that will improve efficiency for customers needing support in these times.

While the chemical segment has been temporarily impacted by the refinery slowdowns, we expect our catalyst business to see strong growth in 2009 and ’10 as delay units are recharged, projects underway are commissioned, and new technology is introduced. We also see very attractive long-term growth prospects in both refining and part of our catalyst areas as these markets continue to grow in emerging economies.

Our Fine Chemical segment continues to execute on its business model and is seeing an economic resilience in markets that are historically less impacted during periods of weak economic growth.

In closing, with our strong balance sheet, stable cash generated businesses, ample cash reserves, assets of environmental or other legacy liabilities, and no significant debt maturities before 2013, Albemarle is positioned to excel in these troubled times.

We expect the catalyst and Fine Chemical segments to grow, even during period of depressed economic growth. And while Polymer Additives will be challenges, our portfolio of new products and our low cost space should help us perform better in the segment than would be expected.

While I am uneasy forecasting the next six months, I am confident that we will perform better than most and be one the companies that lead the industry performance as market stability returns.

With that, I’ll ask John to provide some details on each segment.

John Steitz

Thanks, Mark and good morning everyone. Our third quarter of 2008 got off to a very strong start. In fact, July was an all-time high revenue month for Polymer Additives, catapulting the segment to record quarterly revenues of $262 million, compared to $233 million a year ago. This 12.5% revenue improvement was driven primarily by volume growth of approximately 5% and pricing improvements in the range of 4%.

Brominated flame retardants delivered its fourth consecutive quarter of volume revenue and operating profits sequential gains. Very impressive year-to-date performance in our Brominated flame retardants portfolio, which has been somewhat overshadowed by weakened performance in our mineral flame retardants where increased raw material and energy costs continue to outpace our pricing gains and pressure segment income margins.

We believe some relief may be forthcoming from raw materials and an improving competitive environment. During the quarter, we dialed back our minerals flame retardant production to manage this high cost inventory.

While most of our polymer additives manufacturing is positioned outside the direct hurricane impacted areas, we still encountered delays in raw materials sourcing to some of these facilities resulting in approximately $2 million negative profit impact.

The interruptions mainly impacted production volumes in our curatives business which saw strong top-line growth in the quarter. This issue, combined with raw material inflation and reduced production rates in minerals, diluted polymer additive margins, yet this resilient segment still delivered 4% sequential profit growth.

Our team is intently focused on preserving polymer additives profitability through innovative profit development, cost management, and as I said, optimization. The proposed divestiture of our Port-de-Bouc facilities will enhance margins in our polymer additives business.

In the face of volatile and uncertain markets, we stand firmly committed to weather these economic hard times by doing what we do best, operate efficiently and effectively and differentiate ourselves through innovation.

Moving on to catalyst, we reported net sales of $232 million, a 7% gain over the third quarter 2007, driven primarily by pricing improvement. Catalyst segment income for the quarter was $36.5 million.

This segment suffered the greatest impact from the hurricanes. We estimate lost revenue, lower production volumes, factory spending, and additional raw material expense, and caused approximately $5 million in negative profit impact, diluting catalyst margins by approximately 200 basis points.

Our polyolefin segment again delivered strong results with net sales up 10% compared to the third quarter of ’07. Pricing initiatives are currently sticking here, supported by innovative advancements, like our new breakthrough ActivCat technology just introduced this week. This exciting proprietary technology will significantly improve our customers cost and use of single-site catalyst systems.

On the refinery catalyst side, volumes and net sales improved sequentially despite the September headwinds we mentioned earlier. Our FCC business showed strong performance in the quarter with double-digit profit gains over the third quarter of 2007 driven primarily by successful pricing initiatives.

A macro-trend our refining industry is facing is the need for higher olefins in diesel. This global shift favors our FCC catalyst and creates opportunities for us to continue investing in new FCC products to secure our leading market position. We’ve come a long way in this business raising FCC profitability and delivering advanced products that create value.

In line with expectations, our HPC business showed sequential improvement with double-digit volume and revenue gains building momentum for a strong fourth quarter. Our margins in HPC were squeezed this quarter due to a number of factors, including the aforementioned hurricane impacts.

Those of you who follow the CMAI reports saw that the Gulf Coast refining and petrol chemical production was interrupted nearly all of September. We also took steps to reduce inventory in catalysts this quarter, in an effort to control high-priced inventory and working capital.

Joint ventures delivered weaker than expected profits in the third quarter, following a robust second quarter particularly Nippon Ketjen, our HPC joint venture, in Japan. Our catalyst segment consists of three very solid divisions and all three are off to a good start in October, and our view of 2009 continues to show strong growth and we continue to build confidence in our outlook for 2009.

Turning now to Fine Chemicals, record net sales for the quarter were $167 million, 24% higher than the third quarter of last year, increased volumes of 10%, and prices of 9% drove this robust improvement. Fine Chemical segment income was a healthy $25 million. We estimate the hurricanes negatively impacted Fine Chemical’s profits by approximately $4 million.

In performance chemicals, our industrial bromides portfolio results were very strong in the quarter, driven by strong pricing and regional mix. In fact, this is the third consecutive quarter of record profits for industrial bromides and this includes clear brine fluids that had a great quarter despite interruptions in servicing rigs in the Gulf of Mexico.

The timing was ideal to roll in our newly acquired sorbent mercury control business, which is already contributing to the bottom line and is accretive to Fine Chemicals’ margins. Our expansive global network served to benefit the integration of the mercury control business and to our global strategic platform.

One final comment on another slice of our diversified performance chemicals portfolio, I’d like to highlight the continued solid operations of our JBC joint venture in Jordan. They had another strong volume and revenue quarter, contributing to the overall bottom line results that you see.

Our Fine Chemistry services business delivered good results in the quarter with strong sales in our ag intermediates business and ibuprofen. However, profits were down because of key raw material sourcing issues during the storms.

Our new products portfolio focused on developments in life sciences, agriculture, and specialty materials has never been more robust. We’re confident about the future of this sector.

All-in-all, Fine Chemicals delivered an outstanding quarter, and the segment weathered the storm in many steps of our supply chain and set records along the way. With that, I’ll turn it over to Rich.

Richard Diemer, Jr

Thanks, John and good morning everybody. The items I will address on the call today are corporate expenses, other income expense, income taxes, cash flow, and our balance sheet financial position in liquidity as of September 30th.

Unallocated corporate expense was $10 million, down $2.6 million from last year principally due to reduced spending and benefit accruals.

SG&A expense was down $1.1 million or 1.8% to 9.1% of revenues in the quarter as compared to 10.4% of revenues last year. And year-to-date, are at 9.8% of revenues versus 10.5% in 2007.

Other income expense this quarter was a net expense of $2.7 million, a swing of $3.5 million compared to last year due to foreign exchange losses. R&D expenses this quarter was up 12.8% from prior year levels.

Our effective tax rate for the quarter was 15.3% as we adjusted our estimates of our full year effective tax rate to 18.6% just below the full year effective tax rate in 2007.

As has been the case in prior quarters, both the level and geographical mix of income in 2008 combined with benefits from tax planning activities have resulted in a decrease in the tax rate as the year has progressed. A significant contributor to this result has been the increased profitability of our Jordan-based bromine JBC operations where we enjoy a statutory exemption from that.

Our EBITDA this quarter is $103 million down $2 million from last year. We ended the quarter with cash and equivalents of $207 million. CapEx for the quarter was $23 million and our full year CapEx estimate is in the $95 million to $100 million range.

Appreciation and amortization was $27.5 million. During the quarter we repurchased 350,000 shares for approximately $12 million.

At quarter end, we have consolidated debt of $969 million, including $57 million of debt from JBC, our Jordanian venture. $576 million is floating rate and $393 million of our date is fixed rate, an approximately a 60/40 split.

Our floating debt interest rate was 3.08% at quarter-end. The weighted average interest rate for Q3 was 4.03%, a net of $207 million of cash on hand and excluding $32 million of non-guaranteed JBC debt. Our net debt is $730 million, up $180 million from year-end.

Our debt cap ratio is 42.8% and our net debt cap is 36.8%. With no significant debt maturities for the next four years and no significant projected minimum required pension contributions in the near term, we feel comfortable with our current leverage and liquidity profile, and that we will be able to fund future growth and other corporate activities. Now back to Sandra.

Sandra Rodriguez

Thanks, Rich. I’d like to thank everyone for participating on the call today. If there are any further questions, you can contact me at the number indicated on our press release. Have a great day, everyone. We are going to open it up for questions and answers now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Steve Sherman of Lafayette Research. Please proceed.

Steve Sherman - Lafayette Research

Good morning, everyone. I’ve noticed a number of additional hydrogen products announced. Are you expecting another uptake in catalyst demand maybe later in ’09, maybe early 2010?

John Steitz

Well, the new catalyst, yes, that’s an important question, Steve, and you know a lot of it, I think, depends on the economic outlook. The current view is that a lot of these major refineries in the Middle East, India will be operational at the end of 2010, sometime early 2011. I really don’t have any clear line of site on that at this point. We’re hopeful that those projects will remain on track, but I think, in part, it depends on how things develop in 2009 and early 2010.

Steve Sherman - Lafayette Research

I guess the other piece would be that in 2010, there are some additional requirements for off-road diesel. I know it’s a smaller market than gasoline and diesel, regular on-road diesel, but are you expecting a little bit of a rate increase just due to that?

John Steitz

Oh, well, absolutely. I mean, the need for additional diesel globally is an important driver for our FCC business, and a lot of that, of course, plays into ultra low-sulfured diesel requirements and increasingly stringent sulfur requirements. So, it also impacts HPC. But overall, that trend is a very positive one for us in the industry, absolutely.

Stephen Shuman - Lafayette Research

I guess the last piece is on currency. It was a help, it looked like, in the last quarter, but currencies have since moved. What are you expecting here going forward for the fourth?

Richard Diemer

Well, let me tell you about currency from two different viewpoints. Steve, this is Rich. Certainly to the extent we have foreign profits that get translated back into U.S. dollars, the way we report, there will be a headwind. There’s been extreme volatility in currencies and certainly the tailwind we had in terms of our diverse operations in getting that translated back into dollars has turned into a headwind.

So, that’s one way I’d talk about it. The other way is in terms of the foreign currency losses that I cited as part of my part of the call. That’s accounting, so let me tell you it actually really involves no cash outflows outside of Albemarle, and what it is is in a couple cases we have, say, dollar items in a euro company or we have dollar items in a real company in terms of Brazil, and it’s been cited and people have noted that our other income has benefited from that over the course of the last couple years. Okay?

And really in any one quarter it’s never been all that significant, but this quarter because of extreme volatility, especially in terms of those two items that I mentioned, U.S. dollar to Euros, U.S. dollar to Reals, we had a headwind there of significant amount that impacted our earnings this quarter.

I suspect we’ll see a little more of that in the fourth quarter, but we have taken some actions to make sure that doesn’t have the same amount of headwind that had us this quarter. So, that hurt us by $0.03 in terms of our reported earnings this quarter. It may be a little bit of a headwind in fourth quarter, but I anticipate after that it’ll be less.

Stephen Shuman - Lafayette Research

Great. Thanks, guys.

John Steitz

Thanks, Steve.

Operator

Your next question comes from the line of Jeff Zekauskas with J.P. Morgan. Please proceed.

Jeff Zekauskas - JP Morgan

Hi. Good morning.

John Steitz

Morning, Jeff.

Jeff Zekauskas - JP Morgan

Your catalyst volumes were down I guess about 11%, and at least as I understood your remarks, you talked about strength and fluid cracking catalysts. So, does that mean hydroprocessing was down, I don’t know, 20 or 25%?

John Steitz

Let me differentiate, Jeff. This is John. FCC volumes were down year-over-year, and we anticipated that, and we have seen good sequential growth, and we anticipate continuing sequential growth in FCC. We mentioned on the last call, because of tightness and supply in the markets, we have seen a couple refiners come back to us over the last couple months, and that was good to see. So, but it was mostly a year-over-year impact of FCC.

Jeff Zekauskas - JP Morgan

So, how about that target that you’ve got of the 5,000 incremental tons of hydroprocessing catalysts? You know, on a run rate basis where are you going to be at the end of the year, as far as you can tell?

John Steitz

Things have changed dramatically, I think, in HPC due to the market situation we’re in. As we turn the calendar towards ’09, we’re still very bullish, very confident on our growth projections for ’09, but as you can tell by the math, ’08 has turned into a very challenging year.

Some of the issues there relate to if refinery, due to its margin situation today, can extend the life of an HPC catalyst that is basically a free catalyst that has already been fully depreciated, if you will. So, we have found that out through the course of this year and it’s gotten significant, but we were glad to see some continuing good double-digit sequential growth in HPC as well in the third quarter, and we’re working hard to deliver a solid fourth quarter as well.

Jeff Zekauskas - JP Morgan

A question for Rich, in earnings per share terms, should the fourth quarter look like the third quarter, more or less?

Richard Diemer

Not more or less, but I would think we (inaudible) can have a hurricane and I think it’ll be better, so.

Jeff Zekauskas - JP Morgan

Right, but in terms of, I guess, what you’re looking at is some downward pressure in polymers and maybe catalysts is sort of the same and maybe fine chemicals is sort of the same. I know that you have a bullish outlook toward next year, but it just seems like so much refinery expansion has been pushed off, and as you’ve said, customers are using catalysts longer.

So, I mean, basically are you looking sort of at, I mean, if your run rate of earnings now is about 250 a share, I mean, is the right number for next year something like 250 as well, in the sense—?

Richard Diemer

Absolutely not for next year, and I’d say we’d be disappointed if we had $0.61 in the fourth quarter. That’s not the way we run our business. We try to drive upsides. We try to execute on our plans whatever is out there trying to push up against us. So, maybe John or Mark?

Mark Rohr

Jeff, let me make a comment. I mean, you asked a lot of questions in that long sentence, but in a fundamental sense, so refineries, the second half of the year, as margins plummeted, have taken extraordinary steps, and steps that would normally not be taken, even in times of modest margins, to relay do everything they could to try to hold margins. And one of those things is that they extended the life in catalysts.

And I would also comment here some of the new catalysts John’s introduced has better life, which is a good thing, and that’s part of the value equation. Now, when you roll all that up though, that is a temporary situation, and so, yes, maybe you can extend it six months, but you’re not going to extend it to years. It’s not a two, three, or four year scenario. It’s a near-term scenario.

So, as we look at it, and John said, we had that headwinds the second half of this year, our real objective was to fill up HPC by the end of 2009; and as we reported, we still feel pretty good about that. But we haven’t done half of it and won’t do half of it. It won’t be a linear process; I guess is what I’m saying.

It’s going to be more back-hand loaded. Now, when you roll out beyond that and look at what we see around the world, we still see the kind of growth continuing out there because there are now new emerging needs as we shift the refinery mix to more diesel, less gasoline, and that’s an extremely attractive area for us.

We still see most of the emerging economy is moving ahead with the projects, although we’ve cautioned that project schedule for 2012, or maybe in our portfolio going to be 2013 now or something, I mean, that could easily happen. But I don’t think materially it’s going to make much difference for us.

Jeff Zekauskas - JP Morgan

Okay, thanks very much.

Mark Rohr

Thanks, Jeff.

Operator

Your next question comes from the line of Bob Koort with Goldman Sachs. Please proceed.

Bob Koort - Goldman Sachs

Thanks. Good morning.

Mark Rohr

Hey, Bob.

Bob Koort - Goldman Sachs

I was wondering if you guys could talk a little bit about the customization portion of your catalysts and how far in advance do your customers have to give you order visibility in order for you to meet that order?

John Steitz

Well, I tell you, that’s a very broad question, Bob, because it impacts three to four different businesses, including our AFT business, our alternative fuels technology business. And let me start with AFT because those orders are placed generally 12 to 18 months in advance.

They’re in anticipation of some significant capital outlays by our customer base, and that kind of the window of opportunity there. In our polyolefin catalyst business, about half of our polyolefin catalysts are organometallic compounds, and those orders are placed routinely with not a lot of advanced notice. We’re talking 15 to 30 days notice on those orders. It's fairly routine.

We produce them routinely and our customers use them normally routinely outside the scope of the hurricane impacts. And then you get into FCC. There is some customization in FCC, but we’ve got to be very quick, very fast, very resilient in that business, and we’ve worked hard to do that.

So, those orders generally we’re talking 30 to 60, maybe in the outskirt 90, day notice on those. The HPC, normally we will have some pretty significant advanced notice there, four to six months, but in this environment we’re finding more what I call emergency orders.

We had one customer come in yesterday, for example, who had been using regenerated catalyst that failed on them. So, they needed a shipment in the next couple weeks, for example. So, you do have those kind of emergency situations, and we’re seeing more and more of that lately, I think, reflective of the environment we’re in. Hopefully that kind of gave you some color commentary around that question.

Bob Koort - Goldman Sachs

Yes, thanks. And John, I guess I get worried we might be on the precipice of repeating 2001 or 2000 in the flame retardant industry. Can you just give me some reason why it might not get as bad as it did back in the fire tech bubble?

John Steitz

Well, Bob, I tell you, with what we’ve had to live with the last couple of months, I’m not sure, but it’s difficult for me to sit here and predict these macro environments we’re in. But I will tell you that if it does occur, that we are going to be prepared for it, that we’re going to work to be lean and mean, we’re going to look at high-cost operations, like Port-de-Bouc and address those.

We’re going to come out of this stronger, as a result and we’re going to do a lot of contingency planning around that issue. Hence, the third quarter, for example, we reduced inventories, I think, forcefully in polymer additives, and that is a good thing.

So, we’re going to be lean and mean in preparation for this, and we’re going to come out stronger as a result. We’ve looked through these kind of situations before, and we’ve certainly come out stronger as a result.

Mark Rohr

Bob, I’d add to that, we just got back from the senior leadership team and the board. We spent about a week in China, and through that process, one of the things we had in 2000 was very high inventory levels, not only companies like Albemarle, but in customers.

You had companies like Anaya (ph) that when the crash occurred, it really started 2001, found themselves with as I recall three years of inventory, so, you have these absurd levels of inventory throughout the supply chain. To my knowledge, that doesn’t exist today.

We don’t see that with our customers. They are, as we are being, very prudent with our inventory level. So, I think the system will respond much quicker to moves and demand, both up and down, now than it has perhaps in the past. So, I would not expect the kind of deep tail we had in 2001.

You may recall it took several years, actually, for volume to come back, about three. But much of that was a product of the inventory and things like that, and I have a hard time seeing that replicating itself.

John Steitz

And Bob, I would just add one last comment. Our fine chemicals business during that downturn in 2001 and 2002 carried a lot of water, and now we’re even more diversified with our catalyst franchise. So, I think that diversification for our company will be a real strong benefit going forward.

Bob Koort - Goldman Sachs

Got it. Thank you very much.

Richard Diemer

Thank you.

Operator

Your next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

David Begleiter - Deutsche Bank

Thank you. Good morning.

Mark Rohr

Hey, David.

David Begleiter - Deutsche Bank

Hey, guys. John, can you discuss how pricing’s holding up in bromine flame retardants? You haven’t seen any weakness yet, but what’s your expectation if volumes do soften over the next couple of quarters?

John Steitz

Yes, David. Yes, if you take brominated flame retardants, we did see a sequential improvement in pricing, up 4%. Due to some mix impacts, it was pretty flat year over year, but again, one of the real strengths of our portfolio is its broad diversification from a really fantastic line of brominated polystyrene polymeric materials to our proprietary Decabromo alternative product, S8010.

So, we feel from a portfolio perspective we’re really prepared for this, and we’re seeing the discipline out there on the pricing front. So, with that said, the biggest issue on the pricing horizon we have related to neuroflame retardants, and we’re continuing and in the last few weeks have seen very good discipline in terms of trying to get the rampant raw material inflation covered, and we think this bodes well for the turn of the year January 1. So, that, we hope, will help us going forward.

David Begleiter - Deutsche Bank

And to be cleared, are you expecting flame retardant volumes to be up year over year in Q4 and/or sequentially in Q4?

John Steitz

Well, it’s hard for me to see an increase sequentially, due to the economy. Our current projection is we’ll be flat to slightly down. If we can hold on to that kind of view, I think that would be an outstanding accomplishment. A lot of this comes down to the holiday season, as you well know, and the order book, over the next month or so, in anticipation of holiday spending, and anybody’s guess there.

David Begleiter - Deutsche Bank

And John, just on FCC pricing, there were some pricing actions over the summer, how were they taken up by customers?

John Steitz

Yes, FCC pricing continues to help us offset the raw material inflation we’ve seen. And David, the pricing in FCC was just under average price for our FCC portfolio, was just a hair under $3,400 a ton for us. We are seeing good competitive support for that.

The increase year over year is double-digit, significant double-digit number. But we continue to see, despite the oil pricing, we continue to see very high rarer and related product inflation. So, that has not ameliorated, if you will, over the last couple months. It’s actually gotten worse.

David Begleiter - Deutsche Bank

And we do expect FCC pricing to be up double digits as well in 2009?

John Steitz

We feel pretty good about that. We’ve had some recent tenders. There’s been some very good price support. So, we remain hopeful for 2009. We think 2009 will be a strong year for our business in FCC, and with the lowering of gasoline prices out there, we think a lot of people are going to start firing their hummers back up in the U.S. So, we’re a little bit hopeful.

David Begleiter - Deutsche Bank

Thank you very much.

Operator

Your next question comes from the line of Kevin McCarthy with Banc of America Securities. Please proceed.

Kevin McCarthy - Banc of America Securities

Yes, good morning. On the subject of raw material costs, obviously energy is moving lower but you have a fairly broad basket of things that you buy along with lag effects, I imagine. So, could you comment on your expectation for raw materials in the fourth quarter versus the third quarter please?

Mark Rohr

Yes, as we look at it, Kevin, you know, John mentioned rarers or a non-movement with where this is moving against us. We’re seeing metal prices come down a bit, but for the most part that is pass-through. It does afford some cautious view that we should get a break or could get a break as we start next year.

I don’t think we’ll see any of that in the fourth quarter. My comment on people not pulling down prices as rapidly as commodities have come down really relates to a bunch of products out there that we buy, not the big ones like chlorine and caustic and those things, but the huge number of products we buy that are specially in nature, and frankly we’re not seeing any real movement south in the prices of those products yet.

So, long and short of it, direct fuel derivatives like ethylene will come off and things like that. Benzine will probably come off a bit. But we’re not seeing much anywhere else today.

Kevin McCarthy - Banc of America Securities

Okay. And then, when you closed the sale of the French plant, could you quantify the expected benefits or profitability in fine chemicals in 2009 and polymer additives in 2010?

Mark Rohr

Kevin, we’d like to take a pass on that for a month or two. We’re in consultation processes with the union and the works council there, and so, we’ve got a lot of work to do to see if this is possible. So, if you’ll indulge with us just a little bit, we’ll give you an update on that whenever we see our way clear to.

Kevin McCarthy - Banc of America Securities

Okay, fair enough. A couple of quick ones for Rich, if I may. Rich, it sounds like you’ve reduced inventory in mineral-based FR’s and maybe certain catalyst lines, do you have a preliminary inventory number for the quarter, is the first question, and the second one, what is the magnitude of other expense that you would expect for the fourth quarter given your foreign exchange hedges?

Richard Diemer

Inventory is around $520 million, thereabouts at the end of the quarter. So, it’s up a little less than 50 for the year. Now, at one time I think we were up over 100 for the year, so we have improved there.

In terms of the other income, if I had to give you a number right now, Kevin, volatility is the key word in and around these types of calculations, but I’d say we’re probably down $2 million in the fourth quarter. So, not as much as a headwind as it was this quarter.

Kevin McCarthy - Banc of America Securities

Great, thank you very much.

John Steitz

Thanks, Kevin.

Operator

Your next question comes from the line of Chris Shaw with UBS. Please proceed.

Chris Shaw - UBS

Hi, good morning everyone, how are you doing. I was trying to figure out, are you still behind in your pricing, trying to catch up for the raw materials for the year?

John Steitz

Well, yes, to answer your question, specifically in polymers, yes, we’re still behind primarily in the stabilizers, curatives area, and I’d add, Chris, the mineral flame retardant has been probably the single biggest inflationary impact two impact polymers, and we’re still working on getting that through, but we’re starting to see some line of sight that will be successful on that initiative around the turn of the year.

Chris Shaw - UBS

Do you know what kind of gap your running between the two, between your cost inflation and the price gains this year?

John Steitz

Well, for example, the mineral flame retardant gap in the third quarter was about $5 million, year-over-year, and that’s the biggest single issue that polymer additives is dealing with today. So, it’s pretty significant, when you look at that in terms of margin and the margin impact it’s obvious, we’re talking 200 basis points.

Chris Shaw - UBS

You’ll still be going after the pricing there, so there could be benefit going into 2009?

John Steitz

Yes, and I think I had a question earlier, I kind of reiterated that, but that’s what we’re working to achieve.

Chris Shaw - UBS

Okay. On the active CAD announcement, is that going to be meaningful? Are there orders on the books are ready, or?

John Steitz

Well, I mean, it’s just a good example, we just try to give you examples in a situation like this where we are really bringing value. Is it a significant material issue? I mean it’s probably a hopeful penny or two next year, that kind of thing.

Our organometallics business continues to do quite well in terms of providing value to our customers, and we’re actually continuing to see good volume growth in that line of products and some new applications, including uses in intermediate and solar cell technology.

So, we feel pretty good about that, but that’s just a good example of being innovative and driving value with our current product line, current customer base.

Chris Shaw - UBS

And, then on SG&A, I know Rich touched on in briefly, but it was a lot less then I thought. I mean, I know some of that, I think he said was just cost controls, but was there a big impact from lower option expense, is that what the other part was?

Richard Diemer

It wasn’t really lower option expense, there was some variable pay impact on that.

Chris Shaw - UBS

Based on, sort of, the share performance?

Richard Diemer

No, just based on our overall performance.

Chris Shaw - UBS

Okay.

Richard Diemer

Versus our plan.

Chris Shaw - UBS

That makes sense, all right, thanks a lot.

John Steitz

Thank you, Chris.

Operator

The next question comes from the line of Mike Sison with KeyBanc, please proceed.

Mike Sison - KeyBanc

Hey guys, I saw you had a nice quota in a difficult environment here. In terms of HPC backlog or order, or whenever you want to call it, is the backlog full enough to fill up the expansion in ’09? Was that, sort of, what I was hearing earlier?

John Steitz

Yes, Mike, I tell you, the way I view it today is we’ll have sequential growth in the fourth quarter, and hopefully again double digit, and with the turn of the year, the first quarter looks to be a very strong quarter for us where all three of our plants will be sold out.

So, we feel good about that, and the remainder of the year, we believe, will provide additional growth, possibly more like bookends as we’ve said. With a strong first quarter, then second and third quarter is more flattening out, with a strong fourth.

So, but our view currently is, as Mark said, and I will reiterate, we’re looking for a strong year in HPC, and a lot of these units are really in need of refills. So, with that we’ll be real close to having that plant sold out in ’09.

Mike Sison - KeyBanc

So, when you think about, you know, you’ve outlined the 2010 sales goal, 11%, it sounds like FCC pricing will be good, maybe you can make a small comment on polyolefin catalysts next year, HPC being good. Hitting that 11% top line growth target should certainly be in the cards next year, or a little bit better, or a little bit less, but within spitting distance, right?

John Steitz

Yes, you bet, Mike, and a polyolefin catalyst view for next year continues to look very strong, and as does, I would add, as does fine chemicals.

Mike Sison - KeyBanc

Right, yes, and my next question, the outlook for fine chemicals, certainly that business continues to do very, very well. Can you sort of walk us through, in ’09, some of the things that maybe aren’t as economically sensitive? Meaning, fine chemical services probably has a pretty good backlog, sorbent expectations, and anything else, sort of pricing there, that helps you achieve that, again, that annual goal of 12 to 13%.

John Steitz

You bet. Let me start with a real hot button for us is sorbent on mercury control. Our order book there for ’09 continues to build, the margins overall are accretive to our fine chemical margins as they are today. The new product portfolio, we’re doing some new ad products for a couple of new, significant customers.

So, that continues to look very good in the life sciences area. Our ibuprofen business and fine chemicals, volume-wise, continues to do very well. We will be sold out next year, and we’re getting good support for pricing improvement.

The overall, we call it specialty materials, the specialty materials area is one where we have to be fairly confidential in our description of those products because they are one customer opportunities, but that looks really strong for ’09.

We’ve got the orders, we’re putting in an expansion in our Pasadena plant to provide that, and that is looking really solid. It’s for a new material that will facilitate the growth in windmills as an energy source. We’ve mentioned earlier the SIGA opportunity, and that one continues to blossom for us, so we’re very bullish about that for ’09, as well, and that’s just two, to name a few.

Mike Sison - KeyBanc

So, given a difficult economic recession in the U.S. and Europe, it sounds like fine chemicals should still show fairly good growth. It should be close to where your annual sales goals would be.

John Steitz

You bet, we feel very, very confident about that.

Mike Sison - KeyBanc

Then, last question, and polymer additives, when you think about the last downturn, wasn’t pricing, or, sort of the major three, still sort of finding out pricing and this time around, maybe the major difference would be the pricing amongst to the majors are more rational.

Any comments there, what you think would happen, in terms of pricing, if economic environment slow significantly for bromine and flame retardants?

John Steitz

I just echo your view, that we have made such good pricing gains over the course of the last decade, that to jeopardize that is just putting one’s business in such great risk that it is not a viable option.

Mike Sison - KeyBanc

Okay.

John Steitz

The hopeful aspect to aluminum flame retardants is that we’ll see that kind of discipline going forward and we’ve seen some signals that would support that. We’re hopeful, phosphorus has had a lot of inflation, we’ve got some new management of one of the key competitors in that area and we’re hopeful that their leadership will be strong going forward. We haven’t seen that yet, but we’re hopeful.

Mike Sison - KeyBanc

Okay, and I apologize, Mark, any change of your confidence in the 2010 goals given the difficult time we’re seeing here in the environment?

Mark Rohr

Well, Mike, we’re in the process today of going through and updating that, and we’ll have that done, I think, probably, February, March timeframe next year, and we’ll share that with all you guys. Clearly, when we first rolled that out some folks cautioned us with a view that (inaudible) may be too strong and catalyst may be too weak.

That could turn out to be true. So, today we’re not backing off that goal, but I think in fairness you need to give us a few months to sort out what’s going on. We’ll be in a position to talk more clearly about it next February.

Mike Sison - KeyBanc

Thank you.

John Steitz

Thanks, Mike.

Operator

Your final question comes from the line of Laurence Alexander with Jefferies, please proceed.

Laurence Alexander - Jefferies

Good morning. First question, on the FR’s, how much of a earnings hit did you have for inventory reductions, and what’s your confidence level of not needing further inventory reductions in the first half of next year?

John Steitz

Laurence, this is John, I think the impact in the third quarter was in the high $0.02 to $0.03 range in polymers. The question is, if we would have had that inventory around, would we have sold it?

I’m not sure, so that draws into your question of the first half of next year, and I think we’re getting our pot right in terms of inventories, but we’re going to continue to watch it, especially in light of some of this raw materials and what’s going on there. We do not want to be saddled with higher cost inventory, as some raw materials decline.

So, we’re going to watch it very closely. Your whole view towards polymers in ’09, we’re going to try to, going into 2009, be very lean in terms of inventories, in terms of asset base, and Port-de-Bouc move, and we’re just going to try to make our business, use this as an opportunity to make us much stronger and better positioned as the growth returns to this segment.

Laurence Alexander - Jefferies

Then, on the catalyst business, given what’s happening in the end markets, are you seeing any shift in order patterns in favor of lower price and lower margin, less sophisticated catalyst, particularly in HPC?

John Steitz

We’ve seen some customers attempt to use some portion of their catalyst fills in terms of regeneration. We have some proprietary technology where we make a very good royalty fee on that technology, but it is not fresh catalyst.

And we find that if a customer is using a very difficult (inaudible) slate, that that could fail on them, hence I identified earlier the customer who had been using a high amount of regenerated catalyst and has come back to us for an emergency fill. So, we are seeing more of those kinds of things. That’s the only example I can think of.

Laurence Alexander - Jefferies

And then, lastly, on working capital, are you seeing much of a tail wind from the labdanum, in Q4, possibly in terms of reducing working capital?

John Steitz

Yes, absolutely. Labdanum is going down, we’re managing our inventory very closely there, to what we need, but a lot of these metals are going down, so we’re going to keep a close eye on that.

Laurence Alexander - Jefferies

Okay, thank you.

John Steitz

Thanks, Laurence.

Sandra Rodriguez

Okay, thanks again, everyone, for participating on the call. Have a great day.

Operator

Thank you for your participation in today’s conference, this concludes the presentation, you may now disconnect. Good day.

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