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Albermarle Corporation (NYSE:ALB)

Q4 2012 Earnings Call

January 23, 2013 09:00 AM ET

Executives

Lorin Crenshaw - Director, IR

Luke Kissam - CEO

Scott Tozier - SVP, CRO and CFO

Analysts

PJ Juvekar - Citigroup

Robert Koort - Goldman Sachs

Vincent Andrews - Morgan Stanley

Mike Ritzenthaler – Piper Jaffray

Robert Walker – Florence

Mike Sison - Keybanc Capital

David Begleiter - Deutsche Bank

Steven Schwartz - First Analysis

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2012 Albermarle Corporation Earnings Conference Call. My name is Carissa and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instruction). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host, Mr. Lorin Crenshaw, Director of Investor Relations and Communication. Please proceed.

Lorin Crenshaw

Thank you, Carissa, and welcome everyone to Albemarle's fourth quarter 2012 earnings conference call. Our earnings were released after the close of the market yesterday and you'll find our press release, earnings presentation and non-GAAP reconciliations posted on our website under the Investors section, at albemarle.com. Joining me on the call today are Luke Kissam, Chief Executive Officer; and Scott Tozier, Chief Financial Officer.

As a reminder, some of the statements made during this conference call about the future performance of the company may constitute forward-looking statements within the meaning of Federal Securities Laws. Please note the cautionary language about our forward-looking statements contained in our Press Release. That same language applies to this call. Finally, reconciliations related to any non-GAAP financial measures discussed on this call may be found in our press release or earnings presentation, which are posted on our website.

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

Luke Kissam

Thanks Lorin and good morning everyone. We appreciate the opportunity to share our fourth quarter and full year results with you today. I'll begin by commenting on the Company's results and accomplishments for the quarter in the full year. Scott will review select highlights related to business segment performance and financial results and I will end by providing prospective on our outlook for the future. As usual, at the end of our prepared remarks, we'll open it up for your questions.

In 2012, we continue to deliver strong returns for our shareholders and build an even stronger foundation for sustainable long-term growth. And we did so in a manner aligned with our core values of safe operations and sustainability. We invested our cash wisely in capital expansions to advance our competitive position and retain our marker leadership in critical existing and emerging markets, while we enjoy advantages of low cost and close proximity to and intimacy with our customers.

During 2012, our business demonstrated strong earnings power in the face of a weak global economy, negative impact on our catalyst results due to raw material pricing related to certain metals and lower demand than originally anticipated in some of the markets served by our products, resulting in lower operating rates at some of our production units.

We closed out 2012 by delivering fourth quarter net income excluding special items of $105 million, or $1.17 per share, versus $1.13 per share in the fourth quarter of 2011. That resulted in full year earnings of $436 million or $4.85 per share, excluding special items, versus $4.88 per share in 2011.

Net sales for the quarter totaled $688 million and were $2.7 billion for the full year, while EBITDA excluding special item was $160 million and $703 million for the quarter and year respectively. Profitability as measured by EBITDA margin, excluding special items was 23% for the fourth quarter and 26% for the full year. So in a year, in which we saw global economic slowdown, in which our revenue in profit were negatively impacted year-over-year by metals pricing; our business was essentially flat from the earnings perspective and we actually improved our EBITDA margins.

Scott will discuss our financial results in detail in a moment, but from a 20, 000 foot view, strength in fine chemistry and specific cause initiatives undertaken during 2012 overcame weakness in polymer solutions caused by global macroeconomic trends and catalyst volume growth partially offset the impact of lower metals pricing.

In addition we generated $0.5 billion in cash for the second straight year. That allowed us to fund a higher than average level of capital expenditures in support of several strategic expansions, that position as well for future growth.

We also repurchased over 1.1 million shares of stock and increased dividends to shareholders for the 18th straight year. Even with those increased cash expenditures, we ended the year with the strongest balance sheet in our history and the financial flexibility to continue to fund growth opportunities and return cash to shareholders.

Overall the results we delivered, despite numerous challenges based in 2012 are a reflection on the dedication to operating excellence that exist among our 4000 plus Albemarle employees around the world. These people are committed to our strategy and the execution thereof, regardless of the circumstances and are committed to delivering these results in a responsible, safe and sustainable manner.

From a safety standpoint, I’m extremely proud of the efforts that our employees made to make 2012 the safest year in the history of Albemarle, with injury rates at our sites at an all-time low and likely near to the top quartile of the global specialty chemical industry. We were honored in 2012 to be one of three companies recognized by the American Chemistry Council as a responsible care company of the year, a great recognition for the way our employees go about performing their jobs each and every day.

From a capital expenditure standpoint, each major project is nearing completion own budget. The Bromide, HBR and clear completion fluid phases of our expansion in Jordon are on track to start production in the first half of 2013. As, we disclosed previously, the Tetrabromide expansion in Jordon is on hold at this time.

Our performance catalyst solutions projects, the TEA joint venture in Saudi Arabia, our polyolefin catalyst center in Korea and the organometallics in the U.S. will be on line and scheduled in 2013. Additionally, we recently announced an expansion of our high purity metal organometallics production capabilities in Korea that we would expect to start up by year end 2013.

In short, in 2012 we invested for growth. We'll have a head win in the first half of 2013, as we start all these projects up and get products from those units qualified at customer’s project commercial productions and sales in the second half of the year. Strategically, however these are the right actions to take today.

While we invested for growth in 2012, we also engaged in a strategic review to identify underperforming businesses, where we felt that were disadvantaged from a location, scale or product mix standpoint. As a result of that review, we exceeded the phosphorus business and that action is largely complete.

We will remain vigilant to ensure that businesses we own or own operate meet our profitability and return expectations and allow for sufficient technological differentiation to allow us to price for value.

Finally, we took several actions that move us towards a more sustainable strategy of managing our post retirement obligations by freezing our U.S. defined benefit plan as of the end of 2014 and announcing the plan to migrate all U.S. non-union employees who were in that plan to the fine contribution plan. We followed that action with a fourth quarter announcement of a change in our pension accounting to a mark-to-market methodology.

The combined impact of these actions will reduced the volatility of our earnings related to pension accounting matters and improve the predictability of our future retirement obligations and the transparency of our operating results.

Overall, 2012 was a year that positioned Albemarle well for future. We delivered solid earnings in a tough economic environment by sticking to our strategy and managing our cost; eliminated a business from our portfolio that were struggling from a profitability standpoint, begin a transitional way from our U.S. defined benefit plan and expanded our manufacturing footprint in areas of the world where our customers are located and aimed at serving markets that are forecasted for growth over the next decade; overall, a very solid year.

And with that I’ll turn the call over to Scott.

Scott Tozier

Thanks, Luke. I’m going to start with a review of our business segments and then turn to the details on our P&L and cash flow. Catalyst reported fourth quarter net sales of $294 million, up 2% year-over-year and segment income of $79 million, down 6% year-over-year on segment margins of 27%.

Hydroprocessing catalysts finished 2012 with outstanding performance year-over-year, as fourth quarter net sales growth 61% and profits were up 85%. Fourth quarter HPC volumes were up 71% year-over-year and a good mix of specialty products drove record profit levels for the quarter.

For the full year, catalyst reported net sales of $1.1 billion, down 4% year-over-year and segment income of $292 million, down 11% year-over-year on segment margins of 27%. For the full year, HPC volumes were down 4%, our profits rose 11% on that favorable customer mix.

Fluid cracking catalysts volumes were up 14% in 2012, but this was not enough to overcome the precipitous decline in rare earth prices from an average price of $99/kg in 2011 for lanthanum to an average price of $26/kg in 2012 and ending the year at about $10/kg. Excluding the impact of this rare phenomenon in 2011 and 2012, both FCC revenue and operating profits were up nicely in 2012.

Operating profits at Performance catalyst solutions have grown at a healthy compounded growth rate over the past several years, and the business delivered 7% year-over-year growth in 2012.

During the quarter and for the full year, polymer catalyst continues to benefit from its strong global positioning amid an ongoing market shift of petrochemicals catalyst spending budgets and R&D efforts towards Single Site Catalyst to drive specialized products, innovation and process efficiencies.

Polymer Solutions reported fourth quarter net sales of $200 million, down 4% year-over-year and segment income of $36 million, down 3% year-over-year, on segment margins of 18%. These weaker sequential results which we forecasted in our October analyst call were driven by a weaker electronics market, European construction and automotive trends deteriorating further, and unfavorable manufacturing absorption on the order of $20 million during the quarter.

Year-over-year, quarterly Brominated Flame Retardant sales and volumes were down 4% and profits were up 23%; while Mineral flame retardants volumes weakened sequentially, approaching the historic lows of the fourth quarter of 2011.

Our Stabilizers and Curatives portfolio had a good quarter to complete a year during which it delivered solid growth with fourth quarter sales up 11% and profits up more than double prior year levels, driven by higher infrastructure spending in the U.S. in particular, which boosted Curatives results in our Antioxidants business benefitting from better volumes and manufacturing variances related to new customer wins and growing sales outside of China.

For the full year, net sales were $892 million, down 11% year-over-year and segment income was $203 million, down 16% year-over-year. This business was most impacted in 2012 by the downturn in Europe, overall lack of consumer confidence leading to lower electronics demand and low operating rates in our production units. Nevertheless Polymers delivered annual segment margins of 23%, nice profitability for such conditions.

Fine Chemistry reported fourth quarter net sales of $193 million, down 7% year-over-year, and segment income of $36 million, down 19% year-over-year. This business ended a year of excellent growth with a down sequential quarter profit wise, mainly due to the timing of shipments associated with a few large custom services contracts that simply run their course for 2012.

This weakness offset great results in our industrial Bromides business during the quarter. The global clear brines environment was robust with our business experiencing record volumes up 33% sequentially and up 34% year-over-year and record profits of 55% year over year. Annual net sales of $785 million were up 5% year-over-year and segment income of a $166 million was up 15% year over year.

Annual segment margins of 21% were an all-time high for this segment. Fine Chemistry services drove a majority of the absolute increase in Fine Chemistry’s earnings growth on net sales that were up 11% and operating profits that rose 43% as a growing diverse pipeline of custom services projects continue to support what has now been a three year run of double digit growth.

Several new contracts, went into production or expanded in 2012 with projects in the agriculture, custom pharmaceuticals and renewable chemistry markets having the greatest impact on the year.

There's a lot of activity on the P&L this quarter, so let me try to simplify what's going on. Overall, for the quarter we reported all in diluted earnings per share of $0.42 and a $0.17 per share excluding special items of $0.75 per share that we incurred this quarter.

The special items essentially fell into two buckets, pension and restructuring. The largest special item amounted to $0.60 per share, driven by an $86 million pretax mark-to-market actuarial loss in Q4. This was caused by the change in our discount rate from 5.1% to 4.1%, partially offset by positive performance in our pension portfolio.

The other $0.15 per share in special charges related to an assortment of restructuring, pension and tax related items. Restructuring component was driven by various activities across our businesses to approve our operating efficiencies and the pension component related to a one time contribution made in the fourth quarter to our defined contribution plan as part of the transition for our U.S. employees moving from a defined benefit plan to that defined contribution plan.

Let me also should shed some light on our earnings versus expectations. The $0.17 per share of adjusted earnings includes approximately $0.11 per share related to a low amendment expected tax rate, attributable to our earnings makes simply coming in considerably better this quarter than we discussed with you on our October call and $0.05 per share related to our change in pension accounting to mark-to-market.

So if you back out the $0.11 of tax favorability and nickel of pension accretion, we essentially reported core earnings per share on the order of $1.01. However, I note that the tax savings, albeit different than our previous guidance, is not based on any one time items but merely on a geographic mix of our earnings. This resulted in an overall tax rate for 2012 that is higher than was the case in 2011.

Excluding special items, the quarterly and full year effective tax rates were 18.3% and 24.5%. The ex-special quarterly rate is down 540 basis points compared with the 2011 rate of 23.7%, while the full year rate is up 90 basis points compared to the 2011 rate of 23.6%.

Now to highlight a few other P&L items for the year, R&D expense ended the year at $79 million, up 2% as we continue to invest in a number of organic growth opportunities including several strategic adjacency initiatives. For the full year, R&D costs as a percent of revenue were 2.9%, up roughly 20 basis points year-over-year.

SG&A expenses adjusted for specials ended the year at $270 million down 11% versus 2011, principally driven by lower performance-based incentive compensation levels declining about 70 basis points as a percentage of net sales to 9.8%.

Free cash flow, defined as cash flow from operations, add back pension and post-retirement contributions and subtracting capital expenditures, was $230 million for 2012, down $126 million year-over-year, due to mainly to higher capital expenditures. Cash from operations closed the year at $511 million, down 7%.

Overall, our balance sheet remained strong with net debt of $205 million excluding non-guaranteed JV debt, down $66 million year-over-year while net debt-to-EBITDA ended the period at 0.3 times and net debt-to-cap was 10%.

Net working capital as a percentage of sales ended the year roughly 300 basis points higher at 21%, compared with 18% in 2011 as networking capital rose to $576 million year-over-year. This increase was driven mostly by accounts receivable, although our day sales outstanding remained healthy at around 55 days. Inventory was flat year-over-year, as we were successful at managing our operating rates in the fourth quarter.

Looking forward to 2013 from a financial metrics perspective, we expect CapEx to decline to somewhere between a $150 million to $175 million. While lower than the past two years, these projected CapEx levels are still 50% to 75% higher than average annual spending levels during the five year period of 2005 to 2010, signaling that we still have good growth opportunities.

In 2013 we expect operating cash generation in the range of $500 million to $550 million and net debt to approach negative levels, absent any significant share repurchases or acquisitions.

Finally for 2013 we are targeting working capital in the range of 20% as a percentage of sales and that our tax rate will be in the range of 25% to 26%, excluding specials. With that I will turn the call back over to Luke to talk further about our outlook.

Like Kissam

Thanks Scott. Looking to the future, Albermarle is well positioned for success. The strength of our balance sheet continues to give us financial flexibility. We have invested in capital and businesses that are forecasted to experience above average growth in areas of the world that should give us a competitive advantage. That puts us in a good position once the economy rebounds. While there is much uncertainty for 2013, we expect to grow earnings in 2013, but expect the growth to come in the second half of the year.

Looking at each segment, we remain bullish on the prospects in catalyst. Within Refinery Catalyst we expect to continue experiencing volume growth in geographies where fuel demand and fuel standards are rising the fastest, including the Middle East, India and Latin America where several new units are starting up with our technology.

Crack spreads in general remain healthy, which bodes well for refinery production rates and demand for high-performing catalyst. The organometallics market outlook is also favorable in view of the continued shift among customers toward designing and producing higher value specialty plastics which require our high performing metallocene activators. This dynamic is expected to drive continued volume growth in polymer catalyst.

We also expect demand for LED technology to grow rapidly over the next few years, which bodes well for our pure growth family of high purity products. China has banned the 100 Watt incandescent light bulbs, with the 60 Watt ban scheduled for 2014 and a 15 watt ban in 2016.

LED lighting is forecasted to grow from 4% to 30% of the total Chinese lighting market by 2015 with lighting in general in China expected to grow by 10% to 14% per year. Asia will undoubtedly lead the way in LED technology, which is why our Greenfield side in Korea is so critical to our strategy.

We stated in prior calls that 2013 would be a step out year in catalyst and it will be a solid year, however a number of developments have occurred that will shorten the step just a little. A number of our FCC customers have major turnaround scheduled throughout the first half of 2013 that will cost us between 5000 and 6000 metric tons of volume, about 5% of our 2012 volumes.

Additionally, the large FCC project in the Middle East that awarded us the FCC business is coming online later than originally anticipated in 2013 and could possibly slip to 2014, resulting in lower FCC volumes than we originally thought. However, these are special situations impacting FCC in 2013 and not the future. Once those matters are behind us, we expect volume growth in 2014 to drive this business to new heights.

What we are planning from volume growth in HPC in 2012, the mix is not appear to be as favorable as 2012. As a result, we expect profitability to be relatively flat. We worked hard to improve that mix but that number one priority remains to provide the most effective solution to our customers specific needs.

As you know, we've invested significantly in PCS over the last two years and these projects are coming online in 2013. The highly specialized products produced at these sites require long lead times for qualification runs at our customers. We are experiencing great development interactions with our customers in Asia.

Our catalyst development unit in Korea doesn’t have an open day schedule until July. As a result, while we currently have operating costs for our sites in Korea as well as Saudi Arabia for startup and qualification runs, we won't see revenue from commercial operations until the third or fourth quarter, resulting in a drag on earnings in the first half of the year.

In addition, the volume from the new TEA joint venture with SABIC in 2013 is largely coming from what has historically been Albemarle volume. It’s the right strategic move to have a TEA joint venture in the Middle East, near the customers in collaboration with the world’s largest consumer of TEA but it is a revenue and profit headwind for Albemarle in 2013.

In Fine Chemistry, demand for industrial bromides is expected to continue to be strong in 2013. International and Gulf of Mexico offshore rig counts are expected to remain at 2012 levels and we should see the benefit in 2013 of the completions of these increased rig counts from 2012.

However, under the joint bromine company government’s documents in 2013 the profit allocation between the partners shift and that shift is a profit headwind of approximately $6 million for our segment in 2013.

Custom services should continue it’s positive trajectory as the impact of capacity expansions to service existing contracts and new contracts in support of electronic materials are put into service. However, the timing of the growth comes mainly in the second half of 2013, based on the timing of when our customers have forecasted the need for product delivery.

Finally polymer solutions enters the year with the widest range of possible outcomes for growth. There is a lot we simply do not know regarding the macro outlook for this business in 2013. However, for planning purposes, our view of third party market indicators and order book trends had let us to assume a flat to slightly higher year-over-year earnings result.

To get more significant growth, we need genuine recovery in construction and electronics demand, not just a temporary inventory re-stocked. At this time, market indicators suggest that weak electronics demand could persist into 2013. Specifically, the most recent rating of the IBC book-to- bill ratio which has historically correlated reasonably well with our tetrabrome volumes trended down to 0.93, versus 1.02 at the time of our last earning’s call and continued a 9-month downward sloping trend.

In the same vein, the most recent Gardner and IBC data on year-over-year fourth quarter global PC shipments indicated decline of 5% to 6%. Our view with third party data related to global TV panel shipments versus retail sales data indicates the global TV panel inventory at retail and its said makers have risen substantially, almost 25% above average inventories in recent quarters. The current levels are approaching those, that would indicate a correction could be coming, which would impact our outlook for our products used in enclosures in particular.

On a positive note, the December reading of the Bishop Report Connector Conference Survey recently showed a meaningful uptick to 47.3 from 34.8, driven by improved sentiment in North America and Asia, exclusive of Japan.

This should signal improved volumes for our Brominated polystyrene family of products. However, one data point does not make a trend and we would like to see this survey rise above 50 and remain there for a couple of months before considering it a true positive signal.

Mineral Flame Tolerance should be above flat at 2013 but this business remains dependent on improved demand for wire and cable in automotive, energy, constru8ction and infrastructure products. We expect Curatives and Stabilizers to show the most year-over-year improvement among Polymer Solutions Divisions, as we expect this sector to benefit from the improved cost position and higher customer operating rates.

Given all of those moving parts, we expect our 2013 annual adjusted earnings per share excluding special items and onetime items to be flat to up 6% from 2012. The businesses remain solid, however the ability to grow year-over-year will depend somewhat on macroeconomic trends.

We will plan to update this annual view on our subsequent quarterly calls. We would also expect a weaker first half of 2013 than compared to either half of 2012, with first quarter results likely to be weaker sequentially and year-over-year for Catalyst and Fine Chemistry while Polymers is likely to be flat to slightly up sequentially, but down year-over-year.

Despite the current global uncertainties, we entered 2013 convinced of our strategy and confident in our ability to execute against our strategic objectives. The investment rationale supporting our major capital projects remain intact. A number of global secular trends will have a long term positive impact on our markets. We continue to demonstrate an ability to leverage our base technologies into new adjacencies that will ultimately become meaningful contributors to our business.

We have the financial flexibility to allow us to fund growth and return capital to shareholders. Most importantly, we have the right people in place to execute our strategy. In short, the foundation to our business is stronger at the beginning of 2013 than it was at the beginning of 2012 and we are well prepared for whatever 2013 brings.

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

Lorin Crenshaw

Operator, we're 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, then feel free to get back in the queue for follow-ons, if time allows. Please proceed.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of PJ Juvekar of Citigroup, please proceed.

PJ Juvekar - Citigroup

Last quarter you talked about utilization rate in Bromine and BFR's to be in the range of 40% to 60%. Can you give us an update on that and are you taking most of the downtime in Arkansas versus Jordan, just sort of elaborate on that?

Lorin Crenshaw

PJ, the first part of the question on utilization rates, if you look at Bromine for the fourth quarter and then you look at our bromide flame retardants, if you look at Bromine overall we were in that mid-70 range for the fourth quarter, like we said we're going to be and then if you look at the derivatives, we were operating at that low 40% level in the fourth quarter.

We are approaching both of those upticks in the first quarter of 2013 for Bromine to the low to mid 80's and Bromine derivatives in the 50% range, 50% plus range which really put us in the range where we were operating across the whole year of 2012. And then PJ, I'm sorry but I didn't understand the last piece of your question, you faded out.

PJ Juvekar - Citigroup

What I was asking was the downtime that you took, was it more in Arkansas versus Jordan?

Lorin Crenshaw

I think the downtime one way or the other, it was about the same. We ran clear completion fluid hard both places. We had a very strong clear completion fluids quarter and we ran Jordon and Magnolia hard on completion fluids and in fact sold some of the inventory levels into the inventory levels in the fourth quarter. Otherwise, we didn’t run tetrabone very hard and that’s the only really too comparative. So it’s pretty equivalent across those two.

PJ Juvekar - Citigroup

And secondly in BFRs, is there is a structural shift in your business that you are selling less into smartphones and tablets than PCs and is that a structural shift and then how does project Gemini relate to that?

Lorin Crenshaw

It’s not a structural shift into what we are selling. We are still selling into the same products that we were selling before. I think as I interpret your question it’s really, are we in a secular trend away from PCs into tablets and you read as much as I do about that. I think it depends upon what area of the world that you are looking at. It depends upon what price points people are trying to sell but I don’t think if you look at the data on the PC shipments and you look at tablets in the developed world at least, they are moving more to tablets and in the developing world, it’s a still more of a PC type phenomenon as we have discussed before.

We are not in the bulk of tablets, maybe in some printed wiring boards and things like that with the enclosures. We are largely not in that. There could be some modifications to what people are talking about from iPhones and to go into tablets to make them cheaper, at a more cost competitive price point and if they do that, it depends what resin system they are going to go to. If they go to polycarbonate, probably not a whole way probability for growth and Brominated Flame Retardants if they go hips (ph) or ABS, there would be opportunity there and where that ultimately shapes out would depend upon the cost of the entire resin system.

Our product Gemini is getting good response from our customers. We are running some test, all kind of great. Our reports in that may give us opportunities in certain areas with connectors , chargers, wiring boards and things like that at higher ends. So we are really excited about the possibility of that being a real commercial contributor into the future.

Operator

And your next question comes from the line of Robert Koort of Goldman Sachs. Please proceed.

Robert Koort - Goldman Sachs

Luke, it looks like you are down to about, as low at a debt to cash ratio as we’d see in the industry and we have seen other companies take advantage of that, you guys did buy some stock back but you seem maybe a little reluctant. Are you getting the ammo ready for a big deal, or what’s holding you back from being a little bit more aggressive, especially if you think 2013 has got a little bit of backend loaded hockey stick. Wouldn’t now be the time to get more aggressive before that ramp up in the second half?

Luke Kissam

Yeah, I think we are constantly monitoring the situations out there in the markets and our cash and as we said, as we are trying to taking the call, we are going to look for ways to both grow the business and return substantial cash to our investors, and I would expect in the first half of the year we will be studying that and looking out at the possible actions we can do to drive that shareholder value even higher.

Robert Koort - Goldman Sachs

When you look at acquisitions, does the scope of those acquisitions lean more towards bolt on technologies in regions that grow the business or synergistic deals where you might have a cost advantage or some takeout opportunity to make a deal work? What’s the spectrum look like in terms of deals that you are considering?

Luke Kissam

I think Bob, the way I’d look at it is, it would be more bolt on, the ways that would complement our technology and allow us to grow the business, as opposed to a take out. If we saw an opportunity for a takeout that made sense that we could do that, in certain of our businesses that would be doubling down on some exposures that make us hard enough to model as it is. So I think we are looking at ways to try to grow the business and use that complementary technology to allow us to do so.

Operator

And your next question comes from the line of Vincent Andrews of Morgan Stanley, please proceed

Vincent Andrews - Morgan Stanley

Could you just talk a little bit more about the inventory levels in Polymer Solutions? I know in one of the slides you talked about bringing the operating rate up but how should we think about that trend, given it sort of flattish year-over-year in the quarter but down sequentially. How should we think about that as we move through ‘13?

Luke Kissam

Yes so Vince, I think, we worked hard in the second half of the year to bring our inventory levels back into line with, kind of historical averages and we were successful doing that; not just in Polymer Solutions but in all three of our businesses. As we go into 2013 we are expecting to build demands tighter this year and have a smoother operating rate.

As Luke mentioned in the Bromine and the Brominated Flame Retardants, we are expecting that to be in the low to mid-50 ranges, going up maybe to the upper 50 range from an operating rate perspective. We will see something, traditional levels in our HPC and FCC catalyst factors as well in kind of that mid-70 to upper 80 ranges depending on what the timing of shipments are. So we're expecting to have a better profile there for inventory next year.

Vincent Andrews - Morgan Stanley

Okay and this is a follow up, did you say what the comparable tax rate was going to be 2013?

Luke Kissam

Yes, we were expecting between 25% and 26% again, a lot of uncertainty out there with what's happening in the U.S. government but based on the big driver for our tax rate has almost always been certainly less several years the mix of our earnings depending on which country they're coming from. And our current outlook would point us to that 25% to 26% range.

Operator

And your next question comes from the line of Kevin McCarthy of Bank of America. Please proceed.

Kevin McCarthy – Bank of America

Question on polymer solutions. Your volume number there at plus seven looks like it was the best since the third quarter at 2010. On the other hand though pricing at minus six was the lowest since the first quarter of 2010. So maybe you can help us understand the economy there a bit. Has anything changed from a pricing or U.S. to city perspective, as far as Albermarle is concerned or is that simply a function of what you're seeing in the end use markets or at the market level.

Luke Kissam

Yes, Kevin I think one of the things that you got to be real careful about that is the mix between mineral flame retardants Bromine and flame retardants and curatives and stabilizers as you look overall at polymer. So let me just talk generically as you look at that. On curatives and stabilizers not a whole lot of price change, maybe a little bit around the edges, not much and we had some good volume growth there but on a lower base.

If you look overall at mineral flame retardants, that’s an area we talked about in the past where if you remember the end of 2011 was historical low from a volume perspective there both in our fine percept and in our ground. So really when you look at those two together 11 was the lowest volume we had and we had to give up some price in minerals in order to get some of that volume back up to some operating rates at our German facility. So that's the way it worked. We did that and Europe still been very weak and a lot of that is the European market.

So we had to give up some price in mineral flame retardants in that market to be competitive with what’s going out there, given the overall macroeconomic demand in minerals. In Brominated flame retardants, we've had pricing up's and we've had pricing down's in that we’ve seen you remember when Evonik had the explosion in CDT, which was a key raw material for brominated flame retardant was tight that everybody was able to raise prices.

Now, because Evonik’s back up running, the CDT prices are come back down and you’ve seen people have to adjust back to historical levels fir HBCD (ph) pricing. So I think there has been some movements in specific areas on brominated flame retardants and some around the edges but the philosophy hasn’t changed in the overall price structure and market dynamics are still the same as they have been for the last couple of years.

Kevin McCarthy – Bank of America

Has Tetrabrom stabilized, Luke?

Luke Kissam

Tetrabrom always get some nibbling around the edges. That’s the first to go and when you say has there been some nibbling around the edges, yes, but it has been you know a couple of pennies on a kilogram here versus $0.50 or something like that. So, it stabilizes as much as Tetrabrom are always stabilized.

Kevin McCarthy – Bank of America

Okay and then the second question if I may on catalysts. It sounds like some timing issues in FCC, I think I heard you say HPC profit was perhaps looking flat for the year. What is your outlook for profit in polyolefin catalyst for 2013 versus 2012?

Luke Kissam

Overall for the year, I would expect that profit to be up and I think that the fact they are up is going to mask, they are going to be able to overcome some of these additional headwinds costs that they had in the beginning of the year for startups from transition from Albemarle volume to our joint venture volumes.

So I expect big things out of PCS this year, I think it will be a good growth trend and a piece of that is going to really focus on the LED markets and our pure growth family products and if you listen to the other calls and listen to their LED markets and then the market data, that looks to be a back half of the year, that’s how people view it is. It is going to be start slower and build during the course of the year, the transition to LED. So that’s a part the big growth that we are looking forward to in PCS in 2013.

Operator

And your next question comes from the line of Mike Ritzenthaler of Piper Jaffray. Please proceed.

Mike Ritzenthaler – Piper Jaffray

On the clear brines, we are wondering why the volumes didn’t benefit the margins a bit more in Fine Chemistry. Is it a function of the relative size of clear brine into Fine Chemistry or is there a some sort of read through on pricing there?

Luke Kissam

I think the big driver on fourth quarter being down for Fine Chemistry is just coming out of the custom services and some high profit projects that really just didn’t have shipments there, and that really overcame that big growth in clear brine that we talked about. So I don’t think there is any read through there. It’s really just a mix between those products that caused the drop.

Mike Ritzenthaler – Piper Jaffray

Okay that makes sense, and on the volume gains in the mineral flame retardants, can you give us a little bit more color on which end markets in 4Q kind of drove those results and the relatively robust outlook that you were talking about in your prepared comments?

Scott Tozier

I think for the fourth quarter, as Luke mentioned, we were approaching what we had in 2011 fourth quarter. In fact if you just do, we are about 10% up in volume but that’s still only 90% of what we were in the first half of 2009. So very-very low volumes there, even though that year-over-year trend was favorable.

Product line there, construction, wire and cable is the big driver here and construction, automotive, particularly in Europe, little bit here in the U.S.; so the drivers for that market. We are seeing a little bit of early quarter uptake right now. We think that’s mostly just inventory recovery out of customers as they burned off inventory in the fourth quarter of last year. So, but more to come, we are watching that area very carefully. As Luke mentioned, a highly competitive segment for us, and one that we will make sure we drive good profit.

Luke Kissam

And I think in the fourth quarter, what we saw mainly was a lot of driving down inventory levels in the fourth quarter. So I think you have seen this order pattern. It remains to be same whether it’s restocking or whether it’s actually through demand build across the chain.

Operator

And your next question comes from the line of Laurence Alexander of Jefferies & Co, Please proceed.

Rob Walker – Florence

This is Rob Walker on Florence. I guess at first, have your inventory cost in Catalyst on the FCC side normalize now with current market prices for rare earth, and what was the full profit impact in 2012 from the rare earth price decline?

Luke Kissam

Yeah, we had given out the number for the full profit declines. We have only stated that it was significant, but if you look at the inventory levels, I’ll ask Scott to address that. The only thing I will say is, you say has it normalized and I guess normalized to what? It was $4 before at end of the year, $4 before all the escalation came up per kilo. If you look at, at the end of the year 2012 it was roughly 10. So it was still twice as high as it was in 2010, but it's probably 10% of what it was it points in time in 2011 or 2012 but Scott may have more specific color on that.

Scott Tozier

Yes, just to add to that, from an inventory levels we have been able to tighten up that inventory level a little bit. So going into 13, we shouldn't see it, we shouldn't clearly seek nearly the impact that we saw in 2012. It will be a small amount in the first half as the price of lanthanum has continued to drop. At the end of the year it was around $10 to $12. We’re forecasting it’s going to get down close to the $4/kg at the end of the year right now. So there's still some continued drop there. We'll see how that plays out. A lot of the dynamic between China, Mali Corp, Lynas in Malaysia, all those are playing out here and we will see what happens.

Rob Walker – Florence

And then finally how much do you anticipate mark-to-market adding in 2013, versus your adjusted 485 number? It looks like it would have been $0.35 in 2012 but only about this quarter $0.05 was in your adjusted 2012 number.

Scott Tozier

Well let me state it this way; on a year over year basis, on an adjusted EPS perspective mark-to-market will not have any impact next year; it'll be very-very small. Obviously there would be a mark-to-market actuarial adjustment based on gains and losses that we would recognize but that would be in our U.S. GAAP or fully reported numbers.

Now if you compare our results versus how we traditionally accounted for pensions, it's roughly a $0.20, $0.19 to $0.20 improvement in that adjusted EPS number. So, if you look at 2012, it was a $0.19 improvement and we would expect something similar in 2013 and that's driven by removing or having previously recognized, restated out the amortization of deferred gains and losses and so that effect will slowly go down overtime as that amortization effect goes away.

Rob Walker – Florence

Just to clarify to make sure I understood that, so next year you anticipate about almost $0.20 improvement, which could be about 4% earnings growth.

Scott Tozier

Now versus the 45. So the 45 already has mark-to-market pension accounting in that. So the year over year impact in 2013 is flat, so there's no impact.

Operator

And your next question comes from the line of Mike Sison at Keybanc Capital, please proceed.

Mike Sison - Keybanc Capital

Just curious, when you think about how the quarter’s role, you sort of commented the first half would be challenging, maybe flat. Then you also noted in the fourth quarter 2012 you got the taxes and the help there. So that’s a tough quarter to be up. So does the most of the earnings growth, if you get it come in the third, is that sort of the way to look at the year?

Luke Kissam

Yes, I think you have got to look at it by division. The way the catalyst is shaping up right now, they have got cost in the first half of the year and they have got some increased volumes built in over the second half. So catalyst I think you will see a study build, with some pretty big in third and fourth quarters if those volumes come out the way you expect.

You would expect a backend year for Fine Chemistry services. So I would see that being kind of, higher progressively into the second, the third and then the fourth and then most of the time for polymers, as we will come back from Chinese New Year and see what happens although with the last half of the first quarter, usually a stronger second and third quarter with a weaker fourth but I think that weaker fourth in polymers will not totally offset the strength that we expect in catalyst if that volume comes through.

Mike Sison – KeyBanc Capital

Okay and then just trying to gauge your sentiment Luke. You sort of noted as you did today a lot of positives and headwinds coming in. Do you feel better as you head into 2013 than you did maybe two to three months ago?

Luke Kissam

I feel better. Yeah I feel better about the strategy, I feel better about, we have more information a day. So with more information, you are able to plan better. I feel good about the sites. We have always said these projects could online, on time and on budget and we have always expected them to and they were always tracking but I was able to go to Korea and see that start up with that Greenfield site.

The biggest development I see is the work in the catalyst development unit that we have over there is filled up. So that bodes well for filling up that site quickly in the second half of the year and we are seeing some pickup in our pure growth family of products in catalyst; so that feels good.

I just don’t know what is going to happen in electronics longer term; it feels better today than it did three or four months ago. There is some good data and bad data but there is more clarity. So you can plan for when you have more clarity and we pretty well feel good about the clear completion fluids. So, overall I would say today, I feel better than I did four months ago.

Operator

And we have time for two more questions. Our next question will come from the line of David Begleiter of Deutsche Bank. Please proceed.

David Begleiter - Deutsche Bank

Luke in Bromide, as far as getting a very low utilization rates, are you thinking about closing or probably shuttering some capacity gains, some additional pricing power?

Luke Kissam

No, because I don’t feel the need to operate those sites wide open. It’s a no win situation if you go out and try to chase that volume and to shutter it down, if you remember, in 2009 and 2010 whenever it’s crying backup, if you remember back, we will run in as hard as we could run and still could not meet the customer demand out there for that build.

So to take it out puts me at risk of not being able to meet a customer’s need when the market rebounds there. So we will operate them efficiently as possible from a cost standpoint. We will cross train employees, we will ensure that we are operating them as efficiently as possible but to take them out of service, all that does is I got to write off for the asset that that’s no longer in service. So it’s really, I don’t see where that does us a whole lot of good from an industry standpoint.

David Begleiter - Deutsche Bank

Okay, and just on the JBC agreement and the change in the structure for leading to reduce earnings, a little more color on that, any other structures in agreement that could result in your having reduced profitability from that, that data?

Luke Kissam

What I would tell you is and this is public data, that our potash coal pricing is put there before. So originally the bulk and there are some gradations of this but originally what’s been disclosed publically is that the original profit share was 70% - 30%. 70% Albermarle 30% and it’s being reduced to 60% - 40% in 2013.

Operator

And our final question will come from the line of Steven Schwartz of First Analysis. Please proceed.

Steven Schwartz - First Analysis

In Fine Chemistry, this fourth quarter lull due to campaign timing, I presume that is related to you just meeting your volume requirements for your customer, and if you could so just confirm that for me and then, as we start 2013 I presume that you then resume producing volume for those customers plus you have these new awards. So can you frame up what the bump might be in volume and/or profit in this first quarter versus first quarter of 12?

Luke Kissam

Yes, so the lull that occurred in 2012 in the fourth quarter 2012, related to existing time price where they had produced all that they have requested for us to produce for the year and there was a lull in their demand in the fourth quarter or from the timing of the campaign. If you look at the first quarter, some of those contracts are still not up to previous levels and are expected to be for the later in 2013. So you will not see a pickup in 2013, first quarter versus fourth quarter 2012 in those specific businesses.

Steven Schwartz - First Analysis

Okay so but then some of the newer contracts might kick in and help offset some of that.

Luke Kissam

It might offset some of it but I would still say that, as I said it’s more second half. So they will likely be sequentially down in the first quarter, Steve.

Steven Schwartz – First Analysis

And then as my follow up, hopefully just a quick answer for you, Luke you gave the volume impact in FCC due to the turnarounds of that 5000 to 6000 tons or 5%. With respect to the Middle East refinery project, can you give us a reference around that 5,000 to 6000, what’s that worth for you?

Luke Kissam

Yes, it's hard to give the reference around that because we don't know when they're going to start up and it wasn't volume that was in 2012. So other than that, I can't really get into the details of what it is other than say it's a very large unit that's coming on line that we’re excited that our technology was slated and awarded that contract and we're looking forward to servicing, whether it comes online at the end of 2013 which we hope, which would give us a little kick that I've already figured in when I told you what I thought that volumes would be year-over-year and if it does a role in 2014 and we'll have the volumes in it.

Steven Schwartz – First Analysis Corp.

Okay, but relative to your prior thinking, it sounds like it was more than 6000 tons, your prior thinking was.

Luke Kissam

Yes, so whenever we talked about it I’ll you this project, whenever we originally got it, it was going to be first half of 2013 and now it’s third quarter and now it could slip into 2014. So it’s relative to our thinking at a point in time Steve and I'm not trying to be evasive in the answer but depending upon whatever we've talked in the second quarter or third quarter or fourth quarter, there was a different volume expectation that we have for 2013. And what I'm saying is, the most we're going to get on that is maybe a quarter, a volume and it could slide in 2014. So at a point of time, it was pretty significant, whenever we talked about step out but from where it is today, whether it's in the fourth quarter or whether it's in the first quarter, it's sizeable but it's still significant volume.

Operator

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

Lorin Crenshaw

I would just say thanks for your time and your interest in our results, and invite investors and analysts to call with any further questions. Thank you.

Operator

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

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