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Albemarle Corporation (NYSE:ALB)

Q1 2014 Earnings Conference Call

April 17, 2014 9:00 a.m. ET

Executives

Lorin Crenshaw – VP, Treasurer and IR

Luther Kissam - CEO, President

Scott Tozier - CFO

Matthew Juneau - SVP and President of Performance Chemicals

Michael Wilson - SVP and President of Catalyst Solutions

Analysts

Angel Castillo - Goldman Sachs

Alex Iffrema - BofA Merrill Lynch

Ben Kallo - Robert Baird

Dmitry Silversteyn - Longbow Research

Steve Schwartz - First Analysis Securities

Mike Klein - Piper Jaffray

Robert Walker - Jefferies & Company

Chris Kapsch - Topeka Capital Markets

James Sheehan - SunTrust Robinson Humphrey

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Albemarle Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. And now I’d like to turn the presentation over to your host for today to Lorin Crenshaw, Vice President, Treasurer and Investor Relations. You may begin.

Lorin Crenshaw

Thank you, Francis, and welcome, everyone, to Albemarle's First Quarter 2014 Earnings Conference Call. Our earnings were released after the close of the market yesterday and you'll find our press release, earnings presentation and non-GAAP reconciliations posted on our website under the Investors section at albemarle.com.

Joining me on the call today are Luke Kissam, Chief Executive Officer; Scott Tozier, Chief Financial Officer; Matt Juneau, President, Performance Chemicals; and Michael Wilson, President, Catalyst Solutions.

As a reminder, some of the statements made during this conference call about the future performance of the company may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call.

Please note that our comments today regarding our financial results exclude all nonoperating pension and OPEB or special items, reconciliations related to any non-GAAP financial measures discussed may be found in our press release or earnings presentation, which are posted on our website.

As a reminder, we filed an 8-K in March showing the reorganization from 3GBUs to 2 and from a functional to a GBU organization, all year-over-year and sequential comparisons throughout this call are based on those restatements.

Before turning the call over to Lu, I would like to remind investors and analysts to continue registering online for our 2014 investor day in Houston, Texas. It will begin at 11 AM with an exhibit hall on May 15 and with an investor briefing to commence at 1:30. There will also be a tour of our refinery catalyst plant and R&D facilities on the morning of May 16. We look forward to seeing you there.

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

Luther Kissam

Thanks, Lorin and good morning everyone. I will start with some high level comments on the quarter, Scott will then review the performance of our business segments and financial results, and I will end by providing some perspective on our current outlook. At the end of our prepared remarks, Matt and Michael will join us to address your questions.

We began 2014 by delivering first quarter net income of $77 million or $0.96 per share which was in line with the expectations that we shared with you in January. Net sales were $657 million. EBITDA was $137 million, and profitability as measured by EBITDA margin was 21%.

Scott will discuss our financial results in detail in a moment. However, at a high level, our businesses performed essentially as expected. Refinery catalyst was down sequentially after a very strong fourth quarter of 2013 but still performed well with double-digit FCC catalyst volume and profit growth year-over-year driven by strong demand in heavy oil upgrading and favorable mix in clean fuel technologies.

Performance chemicals’ profitability while up nice sequentially was down year over year on lower volumes and pricing and higher energy costs. Previously, we discussed with you our strategy to focus on strengthening our core businesses of catalyst and bromine. During the first quarter, we took several actions consistent with that strategy that we expect to lead to stronger results in the future.

Yesterday, we announced that we've entered into an agreement to divest our antioxidants, ibuprofen, and propofol businesses, including our Orangeburg, South Carolina, and Jinshan, China, manufacturing facilities to the SI Group, a leading global developer and manufacturer of chemical intermediates, specialty resins, and solutions.

In terms of size, in 2013, these businesses generated aggregate revenue of around $250 million on low-single digit segment margins. As we assessed the competitive landscape in these businesses, it became clear that consolidation and/or integration and certain other capital investments were needed in order to drive profitability improvements. We believe this transaction represents the optimal choice of maximizing value to our shareholders and giving the business the best opportunity for growth and success in the future.

While subject to typical regulatory approvals and closing conditions, we would expect the transaction to close midyear, and we would expect to take an after-tax charge of approximately $80 million to $100 million, the bulk of which would be non-cash. We estimate that the transaction will be accretive to overall company’s segment margin rates by 100 to 150 basis points. That translates to a 150 to 200 basis point improvement for catalyst solutions and a 100 to 150 basis points improvement for performance chemicals, all on a full-year basis.

We also took steps this quarter that should in time lower our costs in our aluminum alkyls and bromine franchises. On the aluminum alkyls side in recent quarters, it has become clear that the industry is in a position of excess capacity. For over a decade, a strategic partner in Europe has [tolled] (ph) manufactured aluminum alkyls for us. We supply a portion of the alkyls back to this partner with the remainder being sold by us on emerging market.

During the first quarter, we provided notice required by the contract of our intention not to extend the toll agreement past its stated expiration date. This tolling facility represents about 10% to 15% of Albemarle’s global capacity. However, we have ample existing capacity at our lower cost, world scale facility in Texas to absorb this volume. This move should reduce our overall costs and take our highest cost production off line, resulting in an improved alkyls utilization rates and contributing to enhanced profitability within our performance catalyst solutions division at the expiration of the contract currently scheduled for 2016.

In connection with the providing of our intent not to renew, we triggered certain financial obligations per the contract on our part. While it is too early to determine the exact amount of the obligations at this time as we’re still in discussions with our partner, we have taken a charge this quarter what Scott will discuss in more detail that we believe represents our best guess as to our ultimate obligations. Upon reallocation of the volume to Pasadena, which will likely happen in the 2016 timeframe, we would expect segment margin income in catalyst solutions to increase by between 50 and 75 basis points.

In addition, in February, Jordan Bromine Company and our partner in that joint venture, Arab Potash Company signed a 15-year agreement to purchase natural gas from reserves extracted from the Tamar natural gas fields off Israel's Mediterranean coast from a consortium of investors led by Houston-based Noble Energy. Today, JVC is already the lowest cost bromine facility in the world but as is the case with most of Jordan, its electricity costs are tied to #6 [fuel oil] (ph). For a minimal investment, we will retrofit our JV facilities over the next 18 to 24 months to make it a multi-fuel facility that is able to run on either natural gas or fuel oil.

The current estimates would have natural gas going to JVC by 2017, I caution you that the timeframe for the completion of the pipeline is out of our control and could be delayed. Once again, this flowing, however, the cost-benefit will make JVC’s cost position even stronger in the global bromine market for the term of that contract and could also provide the opportunity for other capital efficient, cost reduction projects onsite. This makes Albemarle an even stronger, global leader in the bromine market.

Last year, we successfully brought online expanded capacity for clear completion fluids, HBr, and elemental bromine in Jordan. In the first quarter of this year, the expansion began paying dividends. This quarter, we shipped near record levels of clear completion fluids, facilitating in large part of the new capacity of JVC, which allowed us to meet customer demand in that region in a timely manner and avoid losing orders due to capacity constraints.

Without the new capacity in Jordan, we simply could not have met the volume demands we saw in March. As growth in these areas of the world continues, we are confident in our ability to continue capturing more than our fair share due to the foundation of our business being stronger and more flexible than ever before.

Scott will go into detail later but our cash generation exceeded our expectations for the quarter largely due to improvements in working capital. As a result we were able to increase our dividends for the 20th consecutive year and also execute and accelerate the share repurchase program under which we will repurchase $50 million of stock by the end of April. That program is proceeding on plan and is in line with our guidance in January.

As we previously disclosed absent an acquisition, we would expect to continue entering into quarterly accelerated share repurchase agreements in sizes sufficient to maintain our capital structure target of one times net debt to EBITDA. Currently our expectation is that we would enter into another accelerated share repurchase agreement in May of around $100 million, that program would likely be completed by July timeframe.

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

Scott Tozier

Thank you, Luke. First of all, before getting into the numbers this quarter marks the first time reporting under our new organizational structure which became effective January 1. Our businesses are now aligned under two global business units, the performance chemical segment is comprised of fire safety solutions, specialty chemicals and fine chemistry services, consolidating our bromine, mineral and custom manufacturing assets under one business unit.

The catalyst solutions segment includes refinery catalyst solutions, performance catalyst solutions and antioxidants. We released an 8-K in March detailing four years of restated financial results, including quarterly data for 2013 and 2012. In connection with this realignment certain costs have been reassigned and certain divisions have moved around. One change that’s clear when you compare numbers under the new structure to the old structure is that a higher proportion of people costs, mostly SG&A and R&D are now charged to catalyst solutions than were previously allocated to them, while lesser charge to performance chemicals. This reflects the impact of changing from a functional structure where share costs such as sales, some technical groups and the like were allocated to each business on a ratio basis, to a more fully accountable GBU structure under which such costs are aligned in charge directly to each respective business based on the people in that GBU.

As a result, catalyst segment income and margins are somewhat lower than under the old structure and performance chemicals segment income and margins are somewhat higher. Fundamentally of course nothing has changed regarding the growth expectations or prospects for either business.

I'm going to review our two business segments and then turn to the details on our P&L and cash flow. Overall our net sales rose 2% to $657 million year-over-year driven by solid catalyst solutions performance. Segment income was $128 million or 20% of sales, down 5% year-over-year as modestly higher catalyst solution profits were offset by weaker performance chemicals results reflecting a combination of continued sluggish electronics demand and energy costs.

Catalyst reported first quarter sales of $296 million, up 6% year-over-year and segment income of $57 million, up 4% year over year on segment margins of 19%. Refinery catalyst solutions performed well delivering double-digit volume and profit growth offset by lower pricing and the impact of higher fixed cost within performance catalyst solutions and overcoming higher energy costs.

Specifically heavy oil upgrading which is primarily comprised of FCC catalysts experienced double-digit volume, revenue and profit growth driven by strong demand and favorable pricing. Clean fuels technologies, which is mainly HPC catalyst, also reported double-digit earnings growth despite lower volumes on favorable mix.

Within performance catalyst solutions as anticipated, the impact of higher fixed cost and baseloading our new Saudi joint venture plant with volumes previously produced out of our wholly-owned facilities in the US was a drag on profitability on a year on year basis, a dynamic we expect to continue through the balance of the year.

Volumes were higher year-over-year but pricing remained weak within both polyolefin catalyst and electronic materials. Performance chemicals reported first-quarter net sales of $361 million in line with year ago levels and segment income of $71 million, down 11% year-over-year on segment margins of 20%. A combination of lower fire safety solutions profitability and higher energy costs offset strong fine chemistry services growth and modestly higher specialty chemicals results.

Specifically profits declined year-over-year within fire safety solutions which consist of our brominated and mineral flame retardants, reflecting weaker enclosures, printed wiring board and construction demand. These dynamics offset strong growth in several non electronics related applications for AdChem [ph], one of our core brominated flame retardant product lines, including wiring cable as well as plastic films into the construction, household appliances and automotive electronics end markets. The breadth of AdChem’s application has become increasingly evident in recent quarters.

Finally mineral flame retardants also had a solid quarter profit wise benefiting from a better term to the European economy. A soft year-over-year electronics results we experienced masked the tone of several market indicators that tend to correlate with current period results including the IPC book to bill ratio which has improved in recent months remain below 1.0 at 0.99 in February with shipments still well below the 2010 levels.

In addition, IDC and Gartner reported first-quarter declines in PC shipments of between 2% and 4%. Within specialty chemicals which consist of all bromine derivatives that are not flame retardants plus our curatives and specialty aluminas, volumes and profits rose modestly year-over-year. The primary drivers were combination of exceptional clear completion fluid volumes where strength was evident in the Middle East and the North Sea and outstanding curatives growth which benefited from milder winter weather in Europe and the commencement of a number of infrastructure projects globally, including Europe, North America and China.

Fine chemistry services which consist of our custom synthesis business reported excellent volume and profit growth year-over-year driven by a combination of more normal order patterns within the ag intermediates relative to the year ago period and good momentum in electronic materials with select consumer-electronics experiencing broadening acceptance in the marketplace.

Overall for the first quarter, we reported all in diluted earnings per share of $0.71 or $0.96 per share excluding special items. Our largest special item related to a pre-tax charge is $70 million, which amounted to a $0.14 loss per share after taxes associated with consolidating high cost aluminum molecules capacity; we expect to start seeing benefits of this consolidation in 2016.

The second special item of $0.11 per share in non-operating pension and OPEB items reflects the net of our mark-to-market pension actuarial loss of $15 million pre-tax or $0.12 per share after tax and the curtailment gain of approximately $0.8 million or $0.1 per share after-tax. Ordinarily we would not be required to record pension gains or losses more than once a year during the fourth quarter.

However, the workforce reduction plan we commenced during the first quarter reduced our global workforce by approximately 230 employees. This triggered the curtailment gain for one of our U.S. defined benefit plans which required us to re-measure our assets and obligations for these plans.

Negative asset performance and a decline in the discount rate for our domestic pension plans year-to-date resulted in the mark-to-market actuarial loss for the first quarter of 2014. SG&A expenses were $67.6 million during the quarter up 4% year-over-year driven by higher incentive compensation cost and commissions. Our quarter SG&A expenses are expected to remain in the mid $70 million range with the increase from 2013 driven largely by occurring for on target incentive based compensation in 2014 versus an extremely low payout in 2013.

R&D expense ended the quarter at $23 million, up 13% consistent with our realignment goals to redeploy resources to growth areas. Free cash flow defined as cash flow from operations adding back pension contributions and subtracting capital expenditures was strong at $120 million for the first quarter, up 178% year-over-year, driven by working capital reductions and lower CapEx.

As we stated last quarter, we have stepped up our focus on working capital and established our goal to permanently reduce working capital by at least $100 million by 2015.

Our initiatives are underway and showing early progress as we seek to achieve a meaningful portion of that $100 million goal in 2014. Specifically, net working capital improved by $40 million versus year end levels and sequentially fell 165 basis points as a percentage of sales to 22%, mainly driven by lower receivables and inventory.

CapEx was $24 million, down over 50% year-over-year, a trend we expect to continue throughout 2014 that reflects the fact that our major capacity expansions are now complete. Our current view is that CapEx will likely decline to between $100 million to $125 million this year, about 20% lower than the range we expressed back in January, reflecting changes in the timing of certain projects and investments.

From a total shareholder return perspective, we returned approximately $70 million to shareholders to this quarter of which $20 million reflected dividends and $50 million related to executing the accelerated share repurchase program that will be completed at the end of April.

Overall, our balance sheet remains a source of strength and flexibility with strong liquidity at $524 million in cash reserves, net debt of $537 million excluding non-guaranteed JV debt. And net debt-to-EBITDA at 0.9 times roughly in line with our targeted capital structure of 1 times.

Our effective tax rates excluding special items and non-operating pension and OPEB items for the quarter was 23.7%, down 90 basis points year-over-year driven by geographic mix and benefits from a favorable mix of income and lower tax jurisdictions. At this time with the same exclusions we expect our full year rate to remain at that 23.7%.

From a raw material standpoint, as we indicated in January, we are currently forecasting an increase in energy cost of approximately $10 million to $12 million for the full year primarily driven by the impact of higher natural gas prices. The first quarter profit headwind from higher natural gas prices was approximately $4 million.

And with that I’ll turn the call back over to Luke to discuss our outlook.

Luther Kissam

Thanks Scott. Looking forward in catalysts, we continue to expect double digit segment income growth for the year. However, in January, we expected the earnings pattern for this business to be more evenly split between the first and second half of the year. Due to the changes in the timing of certain refinery catalysts orders, we now expect growth that is more second half weighted than the first. With the second quarter catalyst segment income being similar to the first, and both the third and fourth quarters showing year-over-year growth. There is always a risk that refiners will change delivery dates on catalysts orders due to startup schedules or myriad of other issues or opportunities they may be facing.

But this is our best estimate based on the information we have today. We continue to believe that refinery catalysts solutions will be the largest contributor to earnings growth. Specifically, heavy oil upgrading should benefit from continued strong demand globally for FCC catalyst designed to handle heavy resid-based feedstocks, maximize propylene production and address the metal contaminants found in North America shale oil. We have more than enough capacity to meet our growth objectives and the de-bottleneck occurring at our Bayport facility which those of you attending Investor Day will have an opportunity to tour is on track for completion in the second half of the year.

Once online this de-bottleneck, which will increase our FCC capacity in Bayport by approximately 15%. Similarly, we continue to expect improved earnings in clean field technologies in 2014 driven by similar volumes in 2013, but with a better product mix. The outlook for performance chemicals continues to call for modest year-over-year segment income growth. This growth is primarily driven by clear completion fluids and curative performance within specialty chemicals, stabilized brominated flame retardant pricing and mineral flame retardants volume growth within fire safety solutions and a solid electronics materials and polymer pipeline in fine chemistry services.

Our current view of the market and order book trends lead us to assume that while bromine pricing trends seem to have stabilized, we don’t expect meaningful year-over-year growth in brominated flame retardants. As we roll up all of various factors by business from a total concrete segment income standpoint, we continue to expect growth in the range of 2% to 7%, but again with a greater second half weighting than we would have expected in January.

That assumes catalyst orders, specifically the clean fuels technology division shipped as per our customer’s current expectations. Second quarter segment income should be roughly flat sequentially with the first quarter with the third and fourth quarters showing around an 8% to 10% type year-to-year growth.

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 at this time, but before you do so, I would like to remind everyone to please limit your questions to two per person at one time so everyone has a chance, then feel free to get back in the queue for follow-ons if time allows. Please proceed, operator. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question will come from the line of Mr. Robert Koort from Goldman Sachs. You may begin.

Angel Castillo - Goldman Sachs

Hi, good morning, gentlemen. This is actually Angel Castillo on for Bob. Congratulations on the announcement section. I just wanted to actually ask you guys about that, so could you quantify what you have remaining in your portfolio from API and maybe just help size that contribution still there, and then kind of along those lines, with that remaining in the portfolio, what other parts are candidates for further assets sales?

Luther Kissam

Yes. I’ll try to take that. If you look at the business, the only thing we divested from our custom services business was ibuprofen and propofol, that was it. So, two really good product lines and we still have the full resources and capabilities and product lines that we offer at our South Haven facility as well as Tyrone, Pennsylvania.

So, we’ll give more color when we’re able to, and we’ve got some confidential obligations obviously. So you’ll see some things in our queue which (inaudible) more clearly, but we remain committed to the custom services businesses, and in fact believe that this move will strengthen our overall custom services. With respect to candidates for divestiture, I’m obviously not going to speculate it to what may or may not happen in the future.

Angel Castillo - Goldman Sachs

Got it, thank you. And then just going on to BFRs, you talked about a little bit of improvement there with – are you seeing stabilization in bromine pricing and also are you seeing some improvements on trailing 12 months for BFRs? Could you talk about what you are seeing in that market specifically in enclosures, just more broadly in the end market there?

Luther Kissam

Yeah. Matt, you want to take that?

Matthew Juneau

Sure. So if you look at BFR, overall volumes continue to trend in line with our expectations in the first quarter. The enclosure segment was not particularly strong in the first quarter as expected, but it was about where we thought it would be. As noted in the call, where we’re really seeing improvement, I’d say are in the areas that go beyond enclosures, so some of the areas that we sell 8010 into that go into broader applications or continue to show volume growth, wire and cable markets showed good volume movement in the first quarter, but enclosure specifically about in line with expectations.

Operator

Your next question will come from the line of Mr. Kevin McCarthy from Bank of America.

Alex Iffrema - BofA Merrill Lynch

Good morning, This is Alex Iffrema for Kevin, just wanted to follow up on the previous question on the weakness in enclosures. Could you maybe talk about the reasons why you see that? Is it the number of units of consumer electronics that is being sold or is it just smaller volume of plastic being used on those units, or maybe its competitive BFR solutions that are being used? What are the main reasons there?

Luther Kissam

Sure. I’ll take that one. If you really are talking enclosures again specifically, the biggest use, single use for enclosures for flame retardants is in television space, and what we’re seeing in the television space right now is just relatively flat sales particularly in the developed world where most of the televisions are flame retardant, and those flat sales are translating to relatively flat just off demand in the enclosure space. I don’t think the competitive dynamics have changed significantly frankly over the last year or two in terms of whether it’s inter-resin substitution, FR competition, it really reflects the sluggish demand in the TV market.

Alex Iffrema - BofA Merrill Lynch

Thank you. And again, a follow-up on the same business, could you talk about price trends in brominated flame retardants?

Luther Kissam

Sure, I’ll do that. We talked in the first quarter call that we were seeing more signs of stabilization and that’s really where we are right now. We’ll continue to be watching and then observing what’s going on in the market for demand and seeing where things are going, but right now we feel we can overall maintain pricing about where it is for the year.

Alex Iffrema - BofA Merrill Lynch

And just a follow-up, when you talked about stabilization, do you mean basically flat prices on a sequential basis or is it something else?

Luther Kissam

Our model overall cost for flat pricing sequentially.

Operator

Your next question will come from the line of Ben Kallo with Robert Baird. You may begin.

Ben Kallo - Robert Baird

Hi, thanks for taking my question. I want to stay on the bromine business. Could you just talk about the competitive landscape and any new volume coming online, and how that’s impacting pricing in the context of you guys also bringing on your new volume? Thank you.

Luther Kissam

Yeah, I’ll take that to start off with, and then I’ll turn it over to Matt. He can talk a little bit more about it, but if you really look at the volume that we’ve brought online, there is lot been written about because of that, that’s pressure and price down. And if we were running those assets flat out, I think there would be credence on that, but the fact of the matter is when you look at the way we are operating our facilities in the first quarter, we were down at 60%, which is not bringing that JVC volume [alone] (ph). So, I don’t think that it is a supply situation that’s causing the price. As Matt has alluded to time-after-time, it’s really the volume. I’m not aware of any other new volume for bromine coming over at all.

Matthew Juneau

No new additional volume that’s been brought online over the last year other than the small amounts that we’ve run in JVC when it makes sense as noted in the call.

Ben Kallo - Robert Baird

Great, thanks, because there were some rumors out there of new volume coming online. One follow-up question. Luke, as you look at bringing on all of your new capacity, do you still think this is a ramp-up where we see this running closer to full utilization rates by mid end of next year? Is that how we should think about it?

Luther Kissam

Are you talking about Bromine?

Ben Kallo - Robert Baird

No, not just Bromine, but all new capital projects that you go through.

Luther Kissam

I think that if you look at Bromine, I don’t know it’s probably a little bit longer window on that. I think that was really designed for the clear completion fluids that were coming online as well as the mercury removal, so I think that there was some good news and Matt can talk about a little bit about from the EPA court ruling that we got yesterday that came out. But I think that’s a little bit longer term. I think that’s over a 3 to 4 year kind of timeframe you’ll see that level in the end is my expectations on Bromine.

If you look at in the performance chemicals -- in the PCS business and catalyst, I think that we got to see the LED market take off. We want four people in the LED market there. So for that capacity to fill up, it’s going to be – we’re going to need that LED market with lighting and back lighting can really take off to get that bills, so it’s a matter of when that is going to happen. And then I think you saw take some actions with this facility in Europe where we’re going to try to take some of that capacity to stock, as we’ll take some of that capacity to our text aside. We we’re going to take steps, I think it’s all too early to say it’s going to happen next year. But I think over the course of the next two to three years are going to see those facilities are filling up.

Ben Kallo - Robert Baird

Thank you very much, guys.

Operator

Your next audio question will come from the line of Dmitry Silversteyn with Longbow Research, you may begin.

Dmitry Silversteyn - Longbow Research

Good morning, guys. Just wanted to get a clarification on the couple of things, first of all, when you talk about the backend loading nature of the catalyst market expectations or catalyst business expectations for this year, was that mainly related about around HBCD capital projects or are there some delays in FCC catalyst sales versus your previous expectations?

Luther Kissam

Yeah, I think, versus previous expectations, the second quarter will be weaker from an FCC standpoint than we expected. But we got a contract. It’s matter of there are some refiners doing some commercial trials with some other products that will have the volume down and we expect to get that back in third and fourth part of the contracts.

Dmitry Silversteyn - Longbow Research

Okay, so it’s an FCC side and not the HBCD side. Okay?

Luther Kissam

It’s both – it’s both Dmitry. I’m sorry.

Dmitry Silversteyn - Longbow Research

Can you give us a little bit more detail on the performance of the businesses within the performance chemicals, especially on the specialty chemical side? I am still a little bit confused, and forgive me if I'm not as fluent with your new divisional structure, but -- are the curatives now part of the fire solutions or specialty chemicals, or where are they now?

Luther Kissam

I’ll give that to, Matt, and he can take that. But, I think generally, if you look at that you got fire solutions, you got all non-brominated flame retardant plus non-mineral, non-flame retardant minerals and bromine as well as curatives and specialty chemicals and then in custom services you’ve got all the custom services work, where he can take each of those. What I’d say is, specialty chemicals had a very good quarter. And if you look at custom services, remember what’s muted in custom services there as the good work that, that group has done to replace those contracts that expired in the 2013. So, with that I’ll turn it over to Mark, he can give a little more clear.

Matthew Juneau

Dmitry you’ve got it right. So, specialty chemicals contains all of the bromine derivatives that are not flame so that's our products for oilfield, water treatment, elemental bromine HBr, frag and pharma etc. it also contains curatives and then the alumina products, mineral products that are not flame retardants and so in first quarter specialty chemicals performed basically as we expected in January, as always there's a few ups and downs in there but the overall business performed as expected and we highlighted two areas that really were truly outstanding, great oilfield volumes were then record levels by about 200 tons frankly, so very close to an all-time record quarter in volume driven by the Middle East, the North Sea and then the curatives business had a very good quarter, it was very strong globally and we got some benefit I think from mild winter in Europe. We didn't have that in the US but the US itself was strong as well.

Specialty, FCS or fine chemical services really unchanged from a business point of view, it’s the same products that were in there before, the one thing that will change now is with the announced sale of the ibuprofen, the propofol business and as well it performed as expected to a little bad [ph] I would say driven by electronic materials and last year we had some ups and downs in ag that were related to timing. We did not have that in the first quarter this year.

Operator

Your next question will come from the line of Steve Schwartz from First Analysis.

Steve Schwartz - First Analysis Securities

I think it was on the fourth-quarter earnings call, you noted that the former fine chem segment was facing some expiring contracts, and I'm wondering what portion, if any, of that comment related to the ibuprofen and propofol businesses that you have sold?

Luther Kissam

Yeah it didn’t, it was none of it. Yeah, there were no expiring contracts in ibuprofen and propofol that… when we talk about that, those were ones that were tied to our Tyrone facility and our South Haven facility.

Matthew Juneau

Specific to the customs service is part of that business, where you have one supplier one customer type relationship.

Steve Schwartz - First Analysis Securities

Okay. And with respect to your opportunity for lower energy costs in Jordan, how or to what extent can that benefit some of your other competitors who work on the Dead Sea? Or is it isolated just to Jordan's side?

Luther Kissam

What’s happening is they are building a pipeline from and there has been a very public about agreements between Jordan – the shipment of natural gas I don't see that it’s going to, that my competitors on the Dead Sea already there have the natural gas, they are already using it. So I don’t see as an additional advantage to them, whereas our electricity while somewhat subsidized by the government is all Jordan is, based on number six fuel oil. So it’s going to be a cost-efficient, it’s going to be lower cost for us, based on what the contract is today, and what we are paying and in addition, what it does it, it opens us up for some other capital projects that could further reduce our cost there that will make same [ph] based upon natural gas they financial don't make sense today. So it is not going to happen tomorrow, it’s not going to happen next year but over the long term giving natural gas to that facility will make it a much stronger facility than it even is today.

Steve Schwartz - First Analysis Securities

That sounds really good. If I could ask just one question on the reporting segment change, the catalyst solutions business, less the antioxidants business you sold, is it now just the old catalyst segment?

Luther Kissam

Once the sale goes through that is correct.

Operator

And your next question will come from the line of Mike Ritzenthaler from Piper Jaffray.

Mike Klein - Piper Jaffray

It's actually Mike Klein filling in for Mike Ritzenthaler this morning. One quick question on the divestiture. What are stranded costs expected to be once the sale is complete?

Luther Kissam

Stranded cost is expected to be minimal, couple million dollars and we will have a plan to manage that.

Mike Klein - Piper Jaffray

And have the tetrabrome price increases from last year been sticking? Would you stand by your comments from January that pricing has stabilized or have flame retardant prices been showing signs of life?

Matthew Juneau

I think I have already said I stand by the January comment, rep stabilization overall there's ups and downs in there always but if you look at overall brominated flame retardants pricing we stabilized sequentially. And as we talked in January the tetrabrome price increase has not totally stuck at this point.

Mike Klein - Piper Jaffray

Okay, great, and if I could just ask one more. We have heard that rates for deep and ultradeep rigs are declining, signaling that demand is waning. Are there industry dynamics that give you conviction that clear bromine supply will remain tight through the rest of 2014?

Matthew Juneau

I think the way I would answer that is that you have to look at the business beyond just Deepwater drilling. Deep water drilling for us is still holding up okay. The Gulf of Mexico was okay in the first quarter but as we highlighted I mean our benefit was really the Middle East and the North Sea, those were very strong regions. This business has become a lot more global in the last 5 to 10 years and specifically in the last 5 I would say. And so I look at it as more drilling overall is what's driving our growth as opposed to just Deepwater. Deepwater in the Gulf specifically probably I would add.

Operator

Your next question will come from the line of Mr. Robert Walker from Jefferies.

Robert Walker - Jefferies & Company

With respect to balance-sheet leverage, you have given a floor target. Do you see a path to move net debt to EBITDA to 1.5 times or higher for buybacks?

Luther Kissam

I mean at this time I don’t see that, we always have the flexibility to do that going forward but I would like to maintain some dry powder for acquisitions and some other organic growth opportunities. So right at this time I think that's a good level for us to be but we always have that flexibility in the future, if we determine to do that.

Robert Walker - Jefferies & Company

And given the high valuations private equity is placing on free cash flow streams, is Albemarle the best owner of the bromine business or do you think it would make sense to find a way to swap into a more technology-driven business?

Luther Kissam

I think right now if you look at Albemarle, I think Albemarle is certainly the best owner of the bromine business. I think this quarter what we do there is great growth opportunities out there for that business over the long-term. Our technology that we have in that business and if you look at the cross selling opportunities we have in catalyst and some of our elemental bromine customers and things like that, so I think that Albemarle is the best owner in the world for bromine assets.

Operator

Your next question will come from the line of David Begleiter from Deutsche Bank.

Unidentified Analyst

This is actually Germaine Brown [ph] filling in for David Begleiter. Can you provide more color on the near- to medium-term trends that you are seeing in catalyst, particularly pricing within FCC and volumes within HBC?

Michael Wilson

Sure, this is Michael Wilson. First of all in pricing and FCC, I mean as we indicated in the fourth quarter call we expected pricing to be moderately favorable in 2014 relative to 2013, we saw that play out in the first quarter. Again we announced a price increase in the second quarter of 2013 and we continue to work diligently to put that through.

With regard to the clean fuel business and HPC volume I think on the whole for the year we see those relatively flat although with a improved mix which we certainly saw play out in the first quarter and we would expect that trend to continue.

Unidentified Analyst

And what areas -- regarding the sale of the antioxidants, ibuprofen, and propofol businesses, you made the comment to answer the question before mine that you'd like to retain some dry powder to make some strategic investments. Within your portfolio, what areas would you consider making these strategic investments in?

Luther Kissam

As we have said before, we are looking for something that would either drive new usage of bromine or make us a stronger bromine to strengthen and grow our bromine franchise or strengthening to grow our catalyst franchise. So if you look it will be tied in the area that we are looking, in one of those -- in one of those areas.

Unidentified Analyst

And within BFR inventory levels at the customer levels, what are you seeing there

Matthew Juneau

I will take that one. I don't see that we have any significant inventory overhang from what we can tell from our customer levels, we have talked before as you go down the value chain there's always some risk that we lose track but the messages we’re getting is that there's not an inventory issue out there and we as well are operating our assets very carefully and managing inventories very closely, we don't have an inventory overhang in our sites at all.

Operator

Your next question will come from the line of Chris Kapsch - Topeka Capital Markets

Chris Kapsch - Topeka Capital Markets

A follow-up on the pricing discussion on FCCs, in particular. I am just wondering the variance that you saw in the first quarter, is that more a function of just the absence of benefit from the rare earth passthrough, which we are cycling now here in the first quarter, or is there net-net positive pricing with your mix of customers?

Michael Wilson

We don’t see any – comp comparison issues at all right now. So it’s really all business performance that’s driving that.

Chris Kapsch - Topeka Capital Markets

Okay, and then, so the volume performance of greater than 10% growth year over year, last year you did win some business based on technology, as you put it, and I guess it takes -- once you win a trial, it takes a while to -- for refiners to shift over the FCC unit. I'm just wondering if this volume performance is a function of that more so than the overall market, or maybe you could disaggregate the growth that you are seeing from, say, the overall market versus share gains that are now starting to flow through your topline?

Luther Kissam

Yeah, I will take a piece of this and then I will turn over to Mike, I think it's hard to determine whether or not you got share gains. So let me give you an example here, where you’ve got a customer in FCC unit that goes out of business or shuts down in the US on the East Coast and new one comes online in the Middle East or new one comes online in Asia that’s bigger and larger and you win that unit I don’t see that as really share gain in the traditional sense. I mean you’ve got volume moving the other areas of the world that are looking for different types of technology because they are handling different types of crude. So I think a lot of the volume shift going on and I think market shares have been relatively stable for the year if you get back and look at FCC volume, we got some movement going on from new refiners coming online handling new crude slate that have really benefited our technology portfolio and we continue to do well there. And I think this year we’re still confident in the growth that we are seeing in spite of some of our customers using some commercial trials for some other suppliers in the second quarter. Michael, do you have anything to add on that?

Michael Wilson

I mean I would just say, there is three components to the growth overall, you talk through the sort of customer wins, some case it’s coming from new refiners, a piece of it clearly market growth and then I would say the third aspect is how turnarounds vary from year to year, we've noted before that in 2013 there was a higher number of customer turnarounds particularly the first half of the year than certainly that we have seen in the first quarter of this year. So I think that's a benefit year-over-year the company contribute to double-digit volume growth which clearly seems out of line with what you would expect from a market growth only standpoint.

Chris Kapsch - Topeka Capital Markets

Can I just follow up on -- so you are calling out that -- in the second quarter, your guidance is for the growth not to look as strong and it's a function of commercial trial. So you're suggesting that some customers are -- a commercial trial, you have to run a FCC unit on a new catalyst for a period of time to determine if the refinery economics still work. So are you suggesting that's disrupting your core business and affecting the comps in the second quarter, but you feel like for the full year, your growth is going to be comparable to what you have seen in the first quarter?

Luther Kissam

What I would say is, if you look but that always happens. So I am not, I don’t want to use that as a problem, that happens every quarter, so [indiscernible] commercial trial, just happen how much volumes move around in those. So we got a difficult comp in the second quarter, I think you will see sequential volume in FCC down somewhat and rebound in the third and the fourth as we got new units coming online that we won that business and overall I think for the full-year you will see the second half stronger than the first and you see catalysts assuming everything goes as our customers anticipate and we got today [ph].

Operator

Your next question will come from the line of James Sheehan from SunTrust.

James Sheehan - SunTrust Robinson Humphrey

Hi, Luke, I recall you speaking in the past about some areas of your business, like antioxidants, being on a short leash and you were looking to address those, focus on raising profitability before you might consider other strategic options. I was just wondering, where is your focus now on similar efforts like this to improve operational performance?

Luther Kissam

I think it’s across the board, if you look I mean one of the main focuses that we have and we have taken since past this quarter, if you look, two and half years ago at the profitability of our PCS business and you look at it today there has been degradation, there is too much capacity in the marketplace, prices in the electronic materials, year and a half ago two years ago versus what it is today price has fallen almost 75%, 80%. So there is a lot of people and we make solid margins on business and other people see it and try to get into that business and that's what we had and as a market leader we have had to protect our term from some actions of some competitors. So we're got plan over the long-term, it is not going to happen overnight but we've got to focus on PCS, it’s core to our business and we will continue to try to find ways to drive that, as we will on all our businesses, I think every day we wake up trying to figure out how we're going to help our customers make more money and how we’re going to get a piece of that so we can also make more money. So I don’t look at it as we’re going to fix business, a and then turn business b, and turn to business c, it’s every day every business is looking up to see how they can be more profitable by helping their customers be more profitable.

James Sheehan - SunTrust Robinson Humphrey

Very good, and in the new segment, performance chemicals, I was just wondering if you could update us on what is the breakdown of bromine derivatives usage by end market, such as electronics or clear completion, and what have you?

Matthew Juneau

I'll take that, generally if you look at electronics it continues to be an important part of the business, it’s roughly between 15% and 20% of our sales. When you talk electronic there's a lot of pieces there, some that are performing better than others where I think people have been focused on that weakness in PC and televisions, those are frankly becoming less important as other parts of electronics grow. The next biggest base from a volume point of view is the oilfield or clear brine space, the completion fluids and that's on a very strong growth curve which has been on for going on about, almost 2 years now.

James Sheehan - SunTrust Robinson Humphrey

And where do you see the mix of your bromine derivatives going over the next two to three years?

Matthew Juneau

So if you go back and look five years ago it probably would've been in excess of 60% related to FR. Today it is down less than that, FR is still important., it is still the big issues but what we are seeing is some of these other businesses and the specialty chemical space are growing faster and they are helping to balance the portfolio. This is one of the topics we will tackle at investor day if you have someone there at our event In Houston in May and it’s becoming a declining portion of the business right now because – not that, it’s not really growing that much, it’s that the other businesses are growing faster.

Operator

And at this time I would like to turn the call over to Mr. Lorin Crenshaw for closing remarks.

Lorin Crenshaw

I just thank everyone for your time and your attention and invite you to call me with any further questions. Have a good afternoon.

Operator

And ladies and gentlemen, this concludes your presentation, you may now disconnect. Enjoy your day.

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