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Chemtura Corporation (NYSE:CHMT)

Q1 2014 Earnings Conference Call

May 1, 2014 9:00 a.m. ET

Executives

Craig A. Rogerson – Chairman, Chief Executive Officer and President

Stephen C. Forsyth – Executive Vice President and Chief Financial Officer

Dalip Puri – Vice President, Investor Relations and Treasurer

Analysts

Ivan Marcuse – KeyBanc Capital Markets

Mike Ritzenthaler – Piper Jaffray

Edward Yang – Oppenheimer & Co.

Dmitry Silversteyn – Longbow Research

Rosemarie Morbelli – Gabelli & Co.

Joe Stoff – Susquehanna Financial Group

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chemtura First Quarter 2014 Earnings Conference Call. [Operator Instructions].

Dalip Puri, VP of Investor Relations and Treasurer, you may begin your conference.

Dalip Puri

Thank you, Stephanie. Good morning, everyone, and thank you for joining us today. On the call today we’ll provide summary highlights of our first quarter 2014 operating results, our recent portfolio management activities, and share our outlook for the second quarter of 2014. With me today are Craig Rogerson, Chemtura's Chairman, President and CEO, who will present an overview of our performance and provide highlights for each of our business segments; and Stephen Forsyth, Executive Vice President and Chief Financial Officer, who will present select financial results achieved in the quarter. After the presentations, we will open up the lines for your questions and comments.

We filed our first quarter 2014 operating results and quarterly report on Form 10-Q with the SEC last night. And to complement our recent press release, we have also posted our quarterly investor call presentation, all of which can be found on the Investor Relations section of Chemtura’s website. 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 presented in our 10-K and press release. That same language applies to this call. Reconciliations related to any non-GAAP financial measures discussed on this call may be found in our press release or earnings presentation, both of which are posted on our website. Finally, this call is being broadcast and recorded and will be available for replay on our website. Your joining this conference call constitutes your consent to the recording and broadcast of this call.

I will now turn the call over to our first speaker, Craig Rogerson. Craig?

Craig Rogerson

Thanks, Dalip. Good morning, everyone, and thank you for joining us this morning. Today I’ll present a summary of our first quarter operating results and provide our outlook for the second quarter and full year 2014. I’ll start my presentation by discussing the significant steps we’ve taken to complete our portfolio management activities.

On April 17, we announced that we had entered into an agreement to sell our Chemtura AgroSolutions business to Platform Specialty Products Corporation for approximately $1 billion. When this transaction closes, we’ll have divested three substantial portfolio businesses in an 18 month period, delivering cumulative growth proceeds of approximately $1.5 billion. Some of you will recall that this is more than Chemtura was valued at in total when we emerged from our reorganization. I’m pleased to say that with these actions, we have now created a pure-play industrial specialty chemicals company, a company with the potential to deliver significant value to its shareholders. With our more streamlined portfolio as a global industrial specialty chemical company, we will apply sharper management focus and opportunities in our industrial performance products and industrial engineered products segments. We expect to benefit from secular growth, growth from the investments we have made and market synergies between our portfolio businesses and in time the benefits of macroeconomic recovery.

As I described, we announced the decision to explore the sale of our Chemtura AgroSolutions business and in our subsequent statements. We wanted a chance to see if we could create more value for our shareholders by monetizing this business and by maintaining it as part of our portfolio. We conducted a full auction process since last October to maximize the value we could unlock for Chemtura and our stakeholders. We believe the transaction that we announced in April 17 does unlock this value. The commitment we made when we announced this process as the allocation of net proceeds remains unchanged. We will pay down enough debt to maintain our total debt to adjusted EBITDA ratio at the level it was prior to the divesture and then return the remaining net after tax proceeds to shareholders.

We still have much work to do to compute the detail of the cash taxes arising from what is a complex global curve out. We had previously indicated that for modeling purposes, investors should assume that the taxes would be in a range of 10% to 15% of the purchase price. We believe we may come out toward the bottom end of that range. Investors ask us in what form we will return the net proceeds to shareholders. We’ll have to make the final decision based on market conditions after the transaction closes in the second half of 2014, but the options are open-market repurchases either directly or through a 10b5-1 plan, a tender offer or a special dividend or some combination of these actions. Investors also ask us whether we’ll use proceeds to reinvest in our businesses. As we can finance our organic growth from our free cash flow, this is really a question about M&A. While we remain interested in bolt-on acquisitions to enhance the growth of our portfolio, we see no purpose of holding cash against an undefined future purchase.

If such opportunities arise, we’ll finance them under their own merits. We were also asked, will we undertake further divestures. We now have a tightly focused portfolio. While we may look at opportunities to strengthen those businesses by divesting less attractive product lines and acquiring product lines or technologies that enhance their growth, we don’t plan to divest in other portfolio business. However, that being said, we’ll always be sensitive to an approach that offers greater value to us than we believe we can deliver. The discussion of the use of net proceeds from the sale of Chemtura AgroSolutions often overlooks our current share repurchases to return the net proceeds from the consumer products divestures to shareholders. We entered 2014 with approximately $196 million remaining under our share repurchase program approved by our Board of Directors.

As we noted in our earnings release last night, as of April 29, we’ve repurchased 3 million shares of our common stock year-to-date at a cost of $70 million. Our outstanding common stock at the same date is down to 94 million shares. Our goal is now to complete our existing share repurchase program before the sale of Chemtura AgroSolutions closes, expending the remaining repurchase authorization of $126 million. Depending on the rate and volume at which we execute on our authorized share repurchase program, we may have the capacity to further increase the share the repurchase authorization prior to completing the sale of Chemtura AgroSolutions.

Our operating focus is now on executing and delivering value from our industrial specialty chemicals portfolio. At our investor day in December 2013, we described our plan to grow revenues of this portfolio to $2.5 billion by 2016 and expand margins such that we can deliver adjusted EBITDA margins approaching 20% by the end of this three year period. This plan remains intact.

Now let me turn to our operating performance for the quarter. Our industrial performance products segment delivered a solid first quarter performance and their pipeline of opportunities remains robust. The business exceeded their first quarter 2013 performance, delivering a $2 million increase in adjusted EBITDA compared to the first quarter of 2013.

For the Petroleum Additives Business, sales of high viscosity PAO and corrosion-inhibitor additives out performed market growth. HVPAO performance was driven by demand for its base stocks using gear fluids and automatic transmissions. Inhibitors performance was driven by our strong customer portfolio and our market leadership position through the value chain as increasingly stringent global regulatory requirements, require improved MPG, Miles Per Gallon, and reduced emissions.

Synthetic fluids continue to enjoy a 5% market growth rate. And our finished fluids which go into a wide range of industrial applications, grew in line with the market, indicating that our customers are clearly recognizing Chemtura’s value proposition. The urethane markets have stabilized after a challenging period. Electronics is now showing incremental signs of improvement and the general sentiment in mining is also improving. Our business outperformed the market in the first quarter with a greater than 5% growth in sales and even stronger earnings performance.

We announced several price increases in the quarter for both businesses in this segment to cover raw material cost increases as the entire team remained focused on the business excellence initiatives.

Next, let me turn to our Industrial Engineered product segment. There are two separate components to the first quarter performance to which I’d like to draw your attention. First, sales volumes and prices in the quarter demonstrated the improved trends that are critical to the progressive recovery we forecast for 2014, but from a manufacturing cost perspective, this was a difficult quarter, as we advised investors in February that it would be. The issues that drove those cost impacts are behind us now that we’re into the second quarter and the business is poised to deliver quarterly year-on-year improvement in Q2.

Let me now walk you through these two components for the first quarter performance. Sales of flame retardants used in electronics applications saw volume improvement in the quarter and were up 16% sequentially and 6% compared to the first quarter of 2013. While we suspect there has been some inventory destocking to the first quarter demand, the electronics market appeared to be on a modest growth path. We recently announced price increases for our tetrabrome product line to deliver value that supports reinvestment economics, again value pricing. The primary end use application for tetrabrome is in printed wiring boards, one of our areas of strength.

In insulation foams, the trend of customers switching from HPCD to Emerald Innovation 3000 is gaining momentum as we anticipated. A great example is that on April 15, 2014, Dow Building Solutions issued a press released that announced they will convert all of their XPS foam plants in North America, Europe the Middle East, and Japan to the new polymeric flame retardant technology, that is our Emerald Innovation 3000 technology. As 2014 progressives, Emerald Innovation 3000 volume builds, you’ll get manufacturing cost leverage that expands our margins on this product. With the prospect that Europe will eliminate the use of HBCD in 2015, all of the major producers of styrene foams are now engaged in planning their conversion.

Brominated performance products had a solid performance in the quarter. Clear Brine Fluids experienced light demand in the Gulf of Mexico, but our international strategy is robust and progressing. Intermediates for Fine Chemicals and Pharmaceuticals are in line with our expectations. Mercury Control is performing as planned, but demand being primarily driven by the tax credit incentives until the March regulations take full effect. On April 15, the Federal Appeals Court upheld the EPA submission standards, which included mercury control. We believe this will sustain the pace of adoption of the March regulations. In addition, we’re working with partners in China to explore a potential mercury control trial to support future mercury control regulations there.

Organometallic continued to see competition in its catalyst metal alkyls product lines. There’s excess industry capacity that has been putting pressure on volumes and pricing for the past four quarters for our products used as components of polyolefin polymerization catalysts. Our tin-based organometallic products continued to perform strongly in line with the recovery you saw in the second half of last year.

The DayStar high-purity metal alkyls that are used in metal vapor deposition applications are benefiting from the manufacturing capacity increases we made since we acquired full ownership of DayStar last year.

Against this trend of improving demand and sequential price stability, performance of industrial engineered products in the quarter was impacted by the manufacturing cost variances, increases in inventory reserves and the year-on-year impact of HPCD price reductions in the second and third quarters of 2013. This year-on-year price impact was $5 million in the quarter, but should diminish in the second quarter when we start to lap those price reductions from last year as well as benefit from the substitution of HPCD sales by Emerald Innovation 3000.

With manufacturing costs and the associated variances, the year-on-year negative impact was driven by volume and its impact on unit product cost. In the fourth quarter of 2012 and in the first quarter of 2013 our plants were running at higher utilization rates than they did in the fourth of last year and the start of the first quarter of this year. We took shutdowns in late Q4 2013 for inventory control and the winter of 2013 was milder than the polar freeze conditions we faced in January of this year. The net result was a significant change in Q1 manufacturing variances year-to-date due to the lower capitalization of cost and inventory.

Sequentially, as we described in our fourth quarter 2013 call in February, as production volumes slowed as the fourth quarter progressed last year, we carried negative manufacturing variances into the first quarter of 2014. This was then exacerbated by the unusually cold conditions in January which caused plant stoppages and unplanned maintenance expense. The good news is that the manufactured output increased as the first quarter progressed. So we do not carry the same degree of negative variances into the second quarter that we carried into Q1.

Lastly, with the slow demand for the traditional insulation foam flame retardant HBCD and the conversions of customers to Emerald Innovation 3000, we increased our inventory reserves for this product. The net impacts of these costs and year-on-year price effects resulted in the reported adjusted EBITDA of $7 million for the quarter. In the second quarter the segment is expected to significantly improve and exceed prior year’s performance.

AgroSolutions continued to show improvement in all regions and all product families contributed to performance in the quarter. North America remained strong, especially due to low inventory levels in the keroside products coming into Q1. And Latin America continued up with strong sales in soybean and corn markets. Volumes in Europe were solid showing year-over-year growth in our most competitive and mature markets. Asia is also showing early signs of growth over 2013. Our product launches and portfolio development process is ahead of plan and in the quarter we launched 16 new products ahead of the 13 planned. Adjusted EBITDA for AgroSolutions was $25 million.

Lastly, and very important, corporate expenses showed the impact we can have by managing what we can control. We acted quickly in the quarter to eliminate the remaining the remaining stranded costs associated with the consumer products business we sold on December 31, 2013. As a result, corporate expense on adjusted EBITDA basis was $9 million for the quarter, having excluded the $4 million of expenses incurred related to the sale of Chemtura AgroSolutions. This was $6 million lower than the corporate expense of $15 million in the first quarter of 2013.

Now let me turn to second quarter outlook. Managed basis operating income in the second quarter of 2013 was $54 million and adjusted EBITDA was $83 million. We expect to exceed those performance levels in the second quarter of 2014. We will make a determination during the second quarter as to whether Chemtura AgroSolutions qualifies as a discontinued operation and advise investors of that outcome before we report second quarter operating results. However, even if we do not just apply discontinued operations treatment, continuing operations before any stranded costs will still deliver year-on-year on improvement.

Second quarter outlook for the industrial performance product segment continues to be positive as the second quarter is traditionally a strong quarter for this business. The segment is outperforming the market growth rates. As I’ve already discussed, we expected Industrial Engineered products to deliver year-over-year improvement in the second quarter of 2014. We have contracts or letters of intent with all major insulation foam customers covering the switching to our Emerald Innovation 3000 product line. The demand for EPS and XPS applications has stabilized and it’s continuing to gain momentum. We expect further growth in demand from electronics. We expect our DayStar products to continue to grow. Most importantly, the manufacturing variances will be materially lower and will start to lap the impact of the 2013 price declines particularly in insulation foam applications.

Lastly, the reductions we have made in corporate expense will be sustained. At such time as we treat Chemtura AgroSolutions as a discontinued operation, we will again recognize stranded costs in the corporate segment. We expect to address the elimination of those costs in the same aggressive manner we have successfully addressed the cost associated with Antioxidants and again with Consumer Products.

With that I’ll now turn the call over to Stephen, who will discuss certain aspects of our first quarter 2014 financial performance. Stephen?

Stephen Forsyth

Thank you, Craig, and welcome everybody. So first let me review our consolidated results for the quarter. Net sales for the first quarter were $28 million or 5% higher than the first quarter of 2013. This was driven primarily by higher volume of $31 million, offset by lower selling prices and the impact from favorable foreign currency translation. All of our segments contributed to growth in sales volume in the quarter.

Our gross profits on both the GAAP and the managed basis increased by $10 million for the quarter compared to the first quarter 2013. Gross profit as a percentage of net sales increased to 22% on a GAAP basis. On a managed basis, coincidentally it declined to a rate of 22%. The improvement in gross profit for the first quarter on a GAAP basis was due to a $21 million Environmental reserve we created in 2013 related to a legacy non-operating site in France. The decline in gross profit for the quarter on a managed basis was due to the weaker performance of Industrial Engineered Products compared to the first quarter of 2013. As Craig has discussed, we expect to reverse that trend in the second quarter of 2014.

Operating income on a GAAP basis for the first quarter increased to $22 million compared with $2 million in the first quarter of 2013. The increase was primarily due to the increase in gross profits of $10 million plus the reason -- for the reason I had just discussed and a decrease of $12 million due to facility closures, severance and related costs being lower this quarter.

On a managed basis, operating income for the first quarter decreased by $9 million on a year-over-year basis, as a result of the decreasing gross profit due to Industrial Engineered Products, partially offset by lower SG&A cost depreciation and amortization expense.

Now both on a GAAP and on a managed basis, operating income that I just described was reduced by $4 million of expense incurred in our process to explore the sale of Chemtura AgroSolutions.

Stock-based compensation expense in the first quarter declined by $1 million compared to the first quarter of last year. We anticipate the stock-based compensation expense for the full year of 2014 will be approximately $14 million. And I would remind everyone that stock-based compensation expense is a noncash expense.

I would note that our reported adjusted EBITDA is net over $4 million of expenses related to the Chemtura AgroSolutions sales process. Excluding these expenses, our adjusted EBITDA for the first quarter 2014 would have been $61 million compared to $68 million in the first quarter of 2013. The decrease of $7 million reflects the reduction in year-on-year performance by Industrial Performance Products, Chemtura AgroSolutions and corporate expense offset that decline in performance by Industrial Engineered Products.

On an LTM basis, our reported EBITDA decreased from $275 million as at December 31, 2013 to $364 million as of March 31, 2014. However if we add back the $10 million of LTM expenses related to the Chemtura AgroSolutions process, our LTM adjusted EBITDA would have been $274 million, which is relatively flat to where it was in 2013.

Interest expense for the first quarter was $12 million, which is $4 million lower than the first quarter of 2013. This demonstrates the initial benefits from the debt refinancing actions we took in 2013, as well as the initial benefit of a pay down of $110 million of our senior term loan in January of 2014.

GAAP income tax expense this quarter was $3 million compared to $7 million in the first quarter of last year. On a managed basis, we continued to apply a managed basis tax rate of 31%. Now current circumstances suggest this rate should be reduced. However, as we will need to recompute these rates in light of the Chemtura AgroSolutions divestiture, we have concluded to only adjust that rate in 2014 once we have that information of what that cost divestiture rates will be so that we can provide consistency for our investors in the reporting of tax rates.

Net earnings on a GAAP basis from continuing operations in the first quarter were $11 million or $0.11 per diluted share. That compared to a loss of $18 million or $0.18 per diluted share in the first quarter of 2013. On a managed basis, earnings from continuing operations in the first quarter were $13 million or $0.13 per diluted share compared to $17 million or $0.17 per diluted share in the first quarter of 2013. However, this comparison does not consider the impact of the $4 million of expenses related to the Chemtura AgroSolutions process. Those expenses amounted to an after tax expense on a managed basis of $0.03 per diluted share. So if we exclude these expenses, on a managed base we earned $0.16 per diluted share this quarter compared to $0.17 a year ago despite the weaker performance this quarter from our Industrial Engineered Products segment.

In concluding my comments on the income statements, might I draw investors’ attention to our investor call presentation that we posted to our website last night? This presentation summarizes in tabular form the components of the changes between 2013 and 2014 to our consolidated results as well as each of our segments and is a useful reference document.

Lastly, before concluding, let me discuss our cash flows in the quarter. If you look back over time, Chemtura has used cash in operating activities in the first half of each year and then generated cash flow from operations in the second half of each year, the net result usually being a positive inflow for the year. This is being driven by the fact that all our businesses have some element of seasonality to their cash flows and specifically to their working capital requirements. But this has been most evident historically in our consumer products and Chemtura AgroSolutions businesses. Having divested the consumer products business on December 31 of 2013, we now have the benefit that we did not have to finance that working capital growth in 2014.

So if you look at the first quarter of 2014, net cash used by operating activities, which by the way includes both cash from continuing operations and discontinued operations in the way that the cash flow statement is presented was $50 million, which compared favorably to the $75 million we used in the first quarter of 2013. So we’re now beginning to see the benefits of the reduction in seasonality in our operating cash flows. Now, within those operating cash flows for the first quarter was cash income taxes, net of refunds. This quarter they were $4 million compared to $3 million in the first quarter of 2013.

Moving down to cash flow statements, moving cash flows from financing activities in the first quarter was $22 million of costs related to our repurchase of 900,000 shares of our common stock and growth stock in the purchase program. As we move forward into the second quarter and thereafter, those outflows will increase significantly as we work to complete our authorized share purchase program as was described by Craig.

I think it’s also worth commenting on our capital expenditures in the quarter, which were $23 million, which was $26 million lower than they were a year ago. As we previously discussed, we’ve now completed the capital projects to produce the high viscosity polyalphaolefinin our Ankerweg, Netherlands facility. The spending related to our multi-purpose plant in Nantong, China is starting to tail down and there are a number of other growth projects where expenditures this year are lower than they were last year. As a result, our guidance has been for a significant reduction in capital expenditures and you can find that guidance plus guidance on a number of other aspects on our cash flows and balance sheets in the appendix to our investor call presentation that I referenced earlier.

Lastly let me just touch on where, we stand in terms of debt and net debt. As of March 31, 2014, total debt had decreased to $795 million compared to $898 million at the end of last year. The reduction was mainly due to the $110 million prepayment of our term loan facility in January. Total debt net of cash and cash equivalents as of March 31, 2014, decreased by $85 million to $434 million compared to the $349 million as of December 31, 2013. That increase in net debt was due to $38 million used to fund seasonal working capital requirements, $22 million for the share repurchases and $19 million of pension plan cash contributions.

Now that completes our prepared comments of this morning. I will now hand the call back to the operator so that she may assemble the roster of questions and commence the Q&A portion of our call.

Question-and-Answer Session

Operator

(Operator Instructions) Your First question comes from a line of Ivan Marcuse with KeyBanc Capital Markets. Your line is open.

Ivan Marcuse – KeyBanc Capital Markets

Hi, thanks for taking my questions. I guess the first one would be on the biggest topic recently on the Ag business. When you look at the bidding process and you look at the value that you've got, which apparently by the market reaction was under expectations, how did you sort of weigh selling the business here versus the other bidders and also versus creating shareholder value -- I guess, keeping the business. How would you look at that from that perspective?

Craig Rogerson

Yeah. This is Craig. Thanks, Ivan. We had said when we went through this process with the board and clearly internally where we thought we could value and I talked about numbers in 10 to 12 times. The $1 billion is in that range. And then so we had made a decision based on our evaluation of what we thought we could do with the Chemtura AgroSolutions business going forward and the value we could create, and as importantly what we could create with the remaining industrial businesses in making that decision. So once we got that number and once we decided that that was the appropriate bid we were well on the way towards making the decision that that was value creative.

Now we are aware of the bid process. It was a very robust process. There were a large number of early entrants and we winnowed that down as we went through the process. Clearly the value and the certainty were both considerations and Ag was the ongoing relationship, working relationship that we have with whoever ended up with that business because of supply agreements and things like that. At the end of the day looking at that balance, we made the decision that the platform bid in a platform transaction was the most value accretive for us. And then so we made the decision to move forward based on those different criteria.

Ivan Marcuse – KeyBanc Capital Markets

Great. And then I guess this would be a two-part question. If you look at -- with the sale, is there any -- first part would be is there any pension or any other liabilities there that are going to be going with the Ag business? And then, as you look at the return to shareholders that you commented on of doing a buyback, a tender or a special dividend, how do you sort of weigh versus just doing a tender or a special dividend? What kind of economics do you need to see in regards to that or what’s your -- I guess your strong preference at this point?

Craig Rogerson

Yeah. It all depends on where the value is. With stock prices at the time we actually get those proceeds. I think that then we can do a calculation or a determination of what’s the best approach. Right now with the kind of volume of proceeds we got from good deals like AOUV or Consumer we could do practically more of a program buy with that value. We are trying to do that. I don’t think that strictly a program buy would make sense if you had the net proceeds we are talking about from the Chemtura AgroSolutions deal. But again let’s see where the price of the stock is at that point and determine what’s the best way. Our objective is clearly to create the most value we can. Relative to pension and what’s going over, it’s not to the same degree that it was with the Consumer businesses because of the population and the demographics there. But I think Stephen, I don’t know if there’s anything else you want to add.

Stephen Forsyth

Yes. The population demographic is such that there’s very little that has to be transferred to this transaction. It reflects that population. Just adding to the discussion on use of proceeds, obviously there’s a couple of criteria here. One is we want to make sure that those who remain as shareholder get the same attention and treatment as those that may exit in a repurchase program or whatever form it takes. Secondly, we’re likely to back down the horse. You are going to pick some combination based on the facts and circumstances at the time because that’s the way you can try to maintain some equality in how a program like that works.

Operator

Your next question comes from the line of Mike Ritzenthaler with Piper Jaffray. Your line is open.

Mike Ritzenthaler – Piper Jaffray

I'm trying to get a sense for -- or is there a way to get a sense for a year-over-year, apples-to-apples comparison in IEP. Is there -- through quantifying the size of the manufacturing variances that were carried forward, plus the weather effects? And I guess as a related question on normalized margins going forward in 2Q with an IEP, how should we be thinking about that?

Stephen Forsyth

There’s two ways of looking at those variances. So if you look them on a year-over-year basis which is the way one normally looks at this, you’ll see from the various bridges and I’d draw people’s attention as I mentioned earlier to that investor call deck, those manufacturing costs absorbed were $17 million.

Mike Ritzenthaler – Piper Jaffray

Right.

Stephen Forsyth

If you look at it on a sequential basis, you’re down $9 million or $10 million. The reason you see the bigger difference on a year-over-year basis is that if you look at the level of production activity when the bromine markets were much stronger in the fourth quarter of 2012 and then as you rolled into the first quarter 2013, there was more unit volume flowing through the plants in general at that point. We also were carrying inventories associated with that high level of volume back then. You roll forward now, while we’re on an improving trend sequentially on a year-over-year perspective, we’re still at the lower set of unit production and then when you apply a mix on top of that, your total cost of producing your products on a per unit basis has gone up and that’s why you see that large variance.

And you roll forward to the second quarter, where you’re now then coming down the side of the mountain into this sort of valley of performance last summer. We’re going to – our season was on an improving performance trend. It started to go the other way on us. If we look sequentially though, the problem was smaller, but still substantial and that’s because we ran our plants slower as the year came to an end because we did not want to accumulate excess inventories. And so you had less volume running in Q4. You capitalized the manufacturing costs through inventory. So you turn it over a couple of months and so most of that higher unit cost appears in Q1 compared to Q4 and that’s the Q1 effect.

Now the good news is, as we enter Q1, we had the hiccups in January because it was so cold, the bromine freezes. For the first time in many, many years the temperatures were lower than the freezing point of bromine at Arkansas. It’s not built like they build the plants in the Northeast to operate in cold winter conditions. But as you got into February and March, production volumes picked up nicely, reflecting what you see in the revenue line on the income statements. As you now go into Q2 without dragging that baggage and then when you look sequentially at Q2, we’ll begin to lap those year-on-year changes in volumes. And so things will start to improve on a manufacturing costs perspective.

Mike Ritzenthaler – Piper Jaffray

Okay. Thanks for that. Go ahead.

Craig Rogerson

Mike, this is Craig. From my perspective, if you just look at it from a 2014 perspective, we clearly fell behind in the first quarter of our overall annual expectations that we saw these issues that the team is talking about, the manufacturing reverences as early as February when we talked about the -- and we had the fourth quarter call and talked about the expectations of the first quarter was going to be tough. The fact that we saw revenue where we saw it in volume, where we saw it gives me confidence that we will be on track for where we thought we’d be for the full year in the second quarter. Now the challenge will be, can you make up some of the hole that you’ve developed in the first quarter. I know the answer to that. It’s early, but early in the year. And so there’s a lot of things that can happen.

But where we sit right now again based on the signs that we saw from the commercial side and what we knew about the effects of the manufacturing variances flowing into Q1 from late fourth quarter and from January, we feel like we were back on track with IEP and we should see significantly better performance in the second quarter and as I said in my prepared remarks, it should be better than last year’s second quarter and that’s important. That’s an important indication that we’re back on track. The other indication is the positive responses we’re getting and the positive momentum we’re gaining on the Emerald Innovations 3000 and that’s critical. HBCD pricing and volume were critical to the downturn last year. This conversion will be critical to the improvement in 2014 and right now we’re optimistic based on what we’re seeing.

Mike Ritzenthaler – Piper Jaffray

Very good. One other quick follow-up. On topline growth within petroleum additives in particular, so top lines have been consistently double digits over the past four or five quarters. Was there too much customer inventory, given the weather in 1Q or were there other effects altogether?

Craig Rogerson

I don’t know why there was some slowing. The first quarter is typically a little bit slower than subsequent quarters. As I said again in my remarks, we’re very optimistic about the performance of this business, top and even more importantly bottom line from some of the commercial activities as the new assets, Nantong and especially Ankerweg take place and the conversions occur, qualifications occur as the year goes on. Pricing, they’ve been effective in getting pricing to cover raw material costs and in some cases doing a little better than that based on value pricing again. And as importantly the scope approach this commercial or business excellence program that they’ve got in all of IPP is really driving a very rigorous approach to product management and marketing really, which is how they’re determining where they can get value pricing and how they can price products. So I think that you are right. It was a little bit slower growth in the first quarter sequentially and versus prior year quarter that we’ve seen. But I don’t think there’s any – I wouldn’t take any indication that that improvement is slowing down. I think we’ll continue to see it accelerate as the year goes on.

Operator

Your next question comes from the line of Edward Yang of Oppenheimer. Your line is open.

Edward Yang – Oppenheimer & Co.

I was just curious. I think you had a comment, Craig, that you'll look at whether you could classify Ag as discontinued ops in the next quarter and I was wondering why there would be any sort of ambiguity at this point basically.

Craig Rogerson

Yeah. I’ll let Stephen tell you the answer to that.

Stephen Forsyth

If you go by the current accounting rules, you have to consider the ongoing relationship you have with the business you divest. And so we will supply the Ag purchaser with a lot of the active compounds for up to a full year period. We’ve guaranteed them supply for a full year period and maybe that will expand into a long term relationship. So we will have ongoing cash flows derived from our relationship with the buyer, which then means we’re going to thread that through the accounting literature around discontinued operations. So it’s not self-evident. However, the regulations relating to discontinued operations, has been just put out a revised standard. And so we’re also evaluating whether that standard applies and we might adopt it early. So there’s some technical accounting analysis to be done. We will complete that at some point in the quarter. We will advise investors once we’ve got to the end of it. Were we to come to a conclusion, it’s not a discontinued operation, we clearly give you give you pro forma data so that you’d be able to see the true comparable effect.

Edward Yang – Oppenheimer & Co.

Okay. And on IEP, Craig, you mentioned that you have some tetrabrome price increases out there. Could you handicap the likelihood of success and maybe just give an update in terms of operating rates for flame retardants?

Craig Rogerson

I would say these were officially started in April and because it’s tetrabrome, it’s primarily Asia. Again it’s going to the printed wiring board. I would say it’s dependent on the country. The initial reaction in some countries was relatively favorable and it went through. It’s hand-to-hand combat in other countries and we are still fighting that. I was there a couple of weeks ago and it was occurring as I was there. So we’ve already gotten some and we are cautiously optimistic we’ll get more. We won’t get everything and everybody, but it looks like it’s sticking to a reasonable extent and we expect that ...

Edward Yang – Oppenheimer & Co.

And any update on operating metrics?

Craig Rogerson

That’s better. So that’s better than when we had tried it in 2013, okay? So I’d say it’s sticking better than it did the last time we tried this. Our operating rates for most of the products in -- again, from the overall bromine we are very tight. From the flame retardant side we are tight and we are making what we can on the Emerald Innovation 3000. Some of the other new products, Emerald Innovation 1000 is -- again it’s slower qualification. Tetrabrome we are running as hard as we can and getting all we can get from the supply agreement. So we are relatively tight other than a few exceptions and operating rates are pretty high. So as we indicated, as you went through the first quarter, after the weather problems in January, February, March, April, we are running El Dorado hard.

Operator

Your next question comes from the line of Dmitry Silversteyn with Longbow Research. Your line is open.

Dmitry Silversteyn – Longbow Research

Thanks for taking my questions. A question on the petroleum additives part of the business. You mentioned synthetic growth or synthetic lube growth there was about net single digits. I think in the previous couple of years it was more of a double digit grower. Are we just getting to a sort of a larger number that you have to grow against or is it just seasonal? Has there been a slowdown in the growth rate of the industry on the synthetic loop side and what do you expect for 2014?

Craig Rogerson

Yeah. That was the market growth rate. We’ve been growing it. We grew about that rate in the first quarter because we’re capacity constrained until our customers qualify the new capacity in the Netherlands. So we couldn’t grow much faster than that. now, as these qualifications occur, we obviously have more capacity to supply and we’re doing a good job. That team is doing a good job of getting new customers and qualifying those new customers. So once that process is done, I think we’re in shape to again outperform the marketplace with those products, with the high viscosity PAO products. So the first quarter, again, we’re selling all that we could make from the qualified source, which is Elmira. So that was the limit in the first quarter but we still think we’ll outperform the marketplace, 5% growth rate like we had prior when the capacity is all qualified.

Dmitry Silversteyn – Longbow Research

And when do you expect the customers to qualify the Netherlands capacity?

Craig Rogerson

We’re in the process in the second quarter. It’s dependent on who it is. We should have product. Again some qualifications are much more detailed than others. We should be shipping some in the second quarter commercially and I would say more of those qualifications as we get into and through the second half.

Dmitry Silversteyn – Longbow Research

Okay. So really probably 2015 before you hit your full pace in terms of all the capacity being in line and qualified?

Craig Rogerson

I would say that’s right. Maybe sometime in Q4, but I would say that’s right. 2015 is the full year.

Dmitry Silversteyn – Longbow Research

Okay. Can you give us a little bit more color on what's going on in the urethanes business, both in terms of end-market demand and what's driving your growth there, as well as raw material and pricing environment? And then talk a little bit, if there is any updates to provide on the Caterpillar project.

Craig Rogerson

I think overall the improvement in urethanes is just recovery from the downturn that we saw. We were supplying new customers with new products like these thermoplastic urethanes that go into injection molding, but it was -- the effect of all that was muted by the downturn in both mining and electronics. And for us electronics is a lot of these CMP slurry pad applications. We’re seeing some recovery though gradual and modest, some recovery in electronics and the mining areas, which impacted the improvement that we saw in Q1 and we expect it to continue as we go forward. So, relatively strong recovery again staring to occur. Pricing and raw material costs, I think we’ve done a good job, continue to do a good job of recovering there. So that’s been a relatively solid story and continues to be.

Specifically to Caterpillar, both sides remain committed. We’ve got a lot of work going on, on the joint team. We’ve got products now being trialed out in the field and there remains optimism, but as all these product projects go, there’s a point where you’re going to say, yes or no. Right now everybody is optimistic that that’s going to be positive. We’re selling some commercial volume, very small. The overall objectives and projections on this program for both sides I think are very conservative, still significant, but conservative, so the upside is significant. Right now I’d say everybody’s still… all light are green but it’s a joint development project and there’s a lot of things that have to be done relative to these qualifications. These trails that are going right now in the field are critical and we’ll see how they conclude.

Dmitry Silversteyn – Longbow Research,

Is there a timeframe on those go or no-go decisions?

Craig Rogerson

I think there have been a lot of them and we’ve said go up to this date obviously. So it’s a typical project management process. I would say that we need to have positive trials in the field by the end of this year. I would say that’s kind of how the thinking is and right now people are very optimistic about that, but we’ll know when we know.

Operator

Your next question comes from the line of Rosemary Morbelli with Gabelli and company. Your line is open.

Rosemarie Morbelli – Gabelli & Co.

Thank you, and good morning. Craig, when we look at the 2016 target of $2.5 billion in revenues and close to 20% EBITDA margin, so let's call it 18% for the sake of the exercise, this seems to be a little optimistic, which I think it’s why the stock price has been under pressure in addition to Ag, which, to me, was at a reasonable valuation. Could you give us a feel for how you are planning in getting to those numbers in just about over two years? What needs to happen? Do you need acquisitions? Do you need a major pickup in some markets? Could you help us with that?

Craig Rogerson

I could try. Yeah, you’re right. There’s 32 months to be exact left to the end of 2016 and that’s kind of the way we’re looking at it and the way we talk about it internally. What has to happen is we have to fully utilize the capacity we’ve put in, in Nantong and in Ankerweg to get IPP up to the kind of numbers we’re talking about, to be part of that $2.5 billion. They’re on track to do that. As we’ve talked before, we don’t have any significant amount of Caterpillar in those numbers in 2016, so that could be upside. If you look at margins in their business, they’ve been ranging about 15% and again through product mix and through this product mix meaning more of the high viscosity PAO which is high margin product they’ll improve that into this pricing commercial excellence program. They’re getting some improvements as well. So I think that they can get to that number of about18% that you’re talking about.

When we talk about 20%, it means that IEPS could be in the low 20. They were there in 2012 and that’s seen a cyclical downturn in electronics. We need that to improve. We need margins to improve in insulation foam which the Emerald Innovation 3000 and those counterparts and that technology should drive recovery to. Again, you saw the decline in HBCB, but if they grow as they were on target to grow, in fact if in 2016 the buying is back like it was in 2012, add to that the mercury removals and margins are anywhere near where they were, they’re in the low 20’s so you can get to the kind of numbers we’re talking about. So this $2.5 billion is a challenge, but one we can clearly see a line of sight to. The close to 20% or approaching 20% margin really depends on IEP recovering to back where they were on a margin perspective to 2011 and 2012.

We think we have a path to do that, but we have to execute on that and again it’s not somewhere we haven’t been before. We’ve been there so that’s critical. The last part of that though is we have to continue to be successful in managing our corporate costs. We’ve done a good job at that with AOUV. We’ve done a good job of that in limiting stranded costs with consumer products divesture. We have to do that one more time relative to the effective consumer – of Chemtura AgroSolutions and again I’m confident we’ll do that. That’s under our control, but that’s a must as well if we’re going to hold our overall margins to numbers approaching 20%.

Rosemarie Morbelli – Gabelli & Co.

That is very helpful. Thank you. And looking at Ag, how much -- let's you say you put it as a distant commute. How much stranded costs are you going to be left with and how quickly can you get rid of it?

Stephen Forsyth

In terms of the stranded cost let me respond. So we’re still refining the analysis. That’s part of the work we’re doing, but you’re probably looking at something in the order of a full year basis of $15 million to $20 million. The process of eliminating, we’re going to try move as quickly as possible now because just like with the other business is, you pile it before you complete the divesture chip. You implement as quickly as you can after. And so the goal will be to rapidly remove those costs. Now some of that may be offset by providing services to the buyer so that may help to smooth that process. But the goal is that if we have a smaller company, we have to have a smaller cost base. There’s no other answer for it.

Rosemarie Morbelli – Gabelli & Co.

And following up on that, Steve, what do you anticipate the benefit from the supply agreement to be? Is that going to be showing up on sales? Is it going to be on the equity line and what is the magnitude?

Stephen Forsyth

You probably won’t it in the sales line because to the extent that you can, you’ll net the costs rather than against the reimbursements as opposed to reporting these as sales. We will recover our costs. We will drive efficiencies. So it will be a net contributor to what we do, but it’s obviously not going to be the major activity of the business. It’s just going to help us keep our plants operating efficiently and ensure that the buyer has to supply the key active components we need.

Rosemarie Morbelli – Gabelli & Co.

Okay, thank you.

Operator

Your next question comes from the line of Joe Stoff with Susquehanna. Your line is open.

Joe Stoff – Susquehanna Financial Group

So the expected close for Ag is approximately September or so? And can you just talk about -- there are no regulatory hurdles, correct? It's just the fact that the business administratively, a lot of countries, and so you have some work to do there. Is that a fair characterization of a targeted close, call it September?

Stephen Forsyth

We said in the second half of the year and that’s the big point. It’s as good as any at this point. In terms of why does it take that time? This is a complex carve-out. So a buyer has to set up each organization to receive the business. We’ve got to pull all the assets in a form that they can be transferred. We have to carve out an IT system jointly with the buyer to make sure they can operate the business from day one. That’s why this is not a 30 or a 60 day close. From a regulatory standpoint, looking at the buyer has no activities in what we are doing. So we are not anticipating there’s any regulatory hurdles here. It’s much more practical operating stuff by ourselves and the buyer so that they can receive the business.

Joe Stoff – Susquehanna Financial Group

Okay. And the remaining NOLs in the business largely will be gone?

Stephen Forsyth

No. We will exhaust in all probability the NOLs that are immediately available for utilization. You remember that we have on the books about $1 billion of U.S Federal NOL. Of that $350 million approximately currently utilizable and we will likely utilize them in this transaction. the remainder though will get released because we have to change the control when we emerge from the reorganization to get a relief that the rates of -- somewhere between $16 million and $17 million annually. And so for the next15 plus years we have the benefit each year of having $60 million to $70 million of NOL to apply against taxable income in the US. So we don’t lose the benefit. We just can’t use it all up front.

Joe Stoff – Susquehanna Financial Group

Okay. And then Craig, it was helpful as you walked through on the [ped-ed] side in the Netherlands business, how you go from kind of current capacity utilization or operating rates to projected full capacity. Can you also map out maybe a similar pathway as you think about your new manufacturing plant in China?

Craig Rogerson

Yeah. The first operation there that’s up and running is our grease plant. Again that different than Ankerweg where we had a feel for where we were going to sell that. This is more of a chicken and the egg where we are putting up a site in China of sufficient scale that when fully utilized will have a very, very solid cost structure. That was the idea. So it’s not like we had a bunch of customers who are waiting for the plant. So we are growing into it. Now they have done a very good job on the grease side and we’ll sell significant amounts as we go forward. But it’s nowhere near full utilized and I don’t think it will be even on the Greece plant in 2015, but they are growing in big chunks of business as they pursue that.

The next piece that will come in the middle of this year or in the third quarter of this year is the Finished Fluids plant also for petroleum additives. Again significant capacity and when fully utilized we’ll have the best cost structure we have in the company and maybe the best of anybody they’ll have in those assets -- in that product line. But again we have to get business and they are actively and they have been actively looking at ways to get big chunks of business, new customers in Asia Pacific primarily that they can achieve capacity utilization as we go forward. So again 2015 will be better than 2014. We’ll be qualifying product through the end of this year as we start that up in the third quarter, but expect to have significant upside in 2015. It should be a positive contributor.

The last piece is urethane. It’s also IPP, so I’m sure Simon Medley who runs all that is really excited about all this opportunity he has. But that starts up in the middle of the third quarter of 2015. And again we’ll transfer some of the assets to some of the accounts that we have out of our smaller Nanjing plant to that operation. But they’ll have significant new capacity to be able to pursue opportunities that are much bigger and much broader than they have been able to out of that smaller plant in Nanjing. So this is all -- whereas Ankerweg is going to be meeting a need, this is all upside and in Nantong. And so the capacity is much bigger. It will fill slower, but I think that again it should be a positive contributor in grease and in Finished Fluids as we go through 2015 and it will be 2016 before urethane contributes.

Joe Stoff – Susquehanna Financial Group

Okay. And then finally on the electronic product side, there's a natural debate that always occurs, given the EBITDA production here in 2013 at around $100 million. And that's down, obviously your reference point since 2012, it's down about $84 million. And obviously there are two drivers there, the cyclical part of what is the electronics end market, and then some of the foam positioning in terms of the competitive landscape. One of the things I wanted to ask is, especially on these rulings, what -- the legal rulings as in both Supreme Court and the Circuit Court, what does this mean in terms of how big this business can be for you? It's a newer end market, mercury removal. Is there any way to put some guesstimates in terms of how big this end market could be for you in terms of P&L?

Craig Rogerson

From a volume perspective we talked about -- and again what the ruling did is basically confirmed what we had in our timing in the plan, right? It didn’t slip so that was positive from our perspective. There was a concern it could slip. It didn’t slip. Depending on -- again I’ll give you our estimates. The numbers in North America for U.S had been approaching 100,000 tons of brominated products going into this application. We dropped that down because of the assumption that people will get more efficient and effective in utilizing this technology, the utility as well to more like 60,000 and if we get out third and right now we are in good shape, that’s 20,000 tons. That’s a big number if you look at our overall capacity if we can produce and supply it of not only 100,000 tons, so a big deal for us.

Now the pricing on that product, it’s not flame retardant pricing, but it’s brominated performance products pricing, like we saw in the fine chemicals or [Pharma]. So it’s good margin. It would not be harmful to our objective of having over 20% EBITDA margins in that business. So it’s good business, good stuff, quite a bit of upside. China is the jellybean numbers, right, if that happens. And I mentioned that we are out there working to get some trials run but we’ll see what happens there, but it’s a significant upside. And why it was so important for us to get additional bromine capacity not only right now, but much more importantly as we get towards 2016 to be able to hit the kind of numbers that we talked about in the $2.5 billion and approaching 20% EBITDA margins that Rosemarie kindly mentioned again.

So that’s a big part of the growth, again not the biggest part. I think that you mentioned the insulation foam because of the pricing and the margin on those products, the value that those products are offering in the marketplace. That’s very, very important. And that’s a near term issue for us and opportunity for us that right now we feel pretty good about based on the contracts and the LOIs that we have in place as we go into Q2 with the major foam producers.

Operator

I would now like turn the call back over to Dalip Puri for closing remarks.

Dalip Puri

Thank you everyone. And before we end this call, I would like to thank everyone that participated and joined today’s earning call. And we look forward to having you on our second quarter 2014 earnings conference call in July. Thank you for your participation.

Operator, you may close the call.

Operator

This concludes today's conference call. You may now disconnect.

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