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Executives

Mark Rohr - Chairman & Chief Executive Officer

Luke Kissam - President

John Steitz - Chief Operating Officer

Scott Tozier - Chief Financial Officer.

Lorin Crenshaw - Direct of Investor Relations and Communications

Analysts

David Begleiter - Deutsche Bank

P J Juvekar - Citi

Kevin McCarthy - Banc of America

Laurence Alexander - Jefferies & Co.

Michael Sison - Keybanc Capital Markets

Robert Koort - Goldman Sachs

Steve Schwartz - First Analysis

Dmitry Silversteyn - Longbow Research

Albemarle Corporation (ALB) Q2 2011 Earnings Call July 22, 2011 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2011 Albemarle earnings conference call. My name is Derrick and will be your operator today.

At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the conference. (Operator Instructions)

I would now link to turn the conference over to Mr. Lorin Crenshaw, Direct of Investor Relations and Communications. You may proceed.

Lorin Crenshaw

Thanks Derrick and welcome everyone to Albemarle’s second quarter 2011 earnings conference call. Our earnings were released after the close of the market yesterday and you will find our press release, earnings presentation and non-GAAP reconciliations posted on our website under the investor section at albemarle.com.

Joining me on the call today are Mark Rohr, Chairman and Chief Executive Officer; Luke Kissam, President; John Steitz, Chief Operating Officer and Scott Tozier, Chief Financial Officer.

As a reminder some of the maters discussed during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language about our forward-looking statements contained in our Press Release; that same language applies to this call. Also to the extent that we discuss any non-GAAP financial measures you will find reconciliations in our press release, which is posed on our website at Albemarle.com.

With that I’ll turn the call over to Mark.

Mark Rohr

Well thank you Lorin and good morning everyone. We appreciate you joining us today as we report second quarter 2011 earnings. I’ll kick off today’s call by sharing highlights of our financial results and the underlying drivers of business performance, before providing some context on the announced succession process and roles that Luke and I will assume in September.

Then Luke will discuss the trends droving our quarterly results and provide an update on several of the companies strategic efforts. John will follow with specifics about performance drives within each business segment and Scott will cover the financial highlights. As always at the end of our prepared remarks we will open it up for Q&A.

With that, I’m delighted to report that Albemarle performance reflects all-time record results in revenue, segment income and EPS for the second straight quarter. Solid volumes across most end-markets and good project contraction across our bromine and catalyst franchises drove net sale of $742 million up 25% year-over-year and 7% sequentially.

These factors combined with strong operational performance, high utilization rates and effective management of raw materials drove a 40% increase in segment income to $180 million, compared to $131 million for the prior period and operating margin expansion at 220 basis points from last year to approximately 24%.

Earnings for the period were an all time record, $114 million or $1.23 per share, up 38% versus second quarter 2010 EPS of $0.89. We are very pleased with this performance and our business performance during the quarter when we faced a variety of challenges, most predominantly the continued escalation of input costs and the pressures on production and businesses to fulfill exceptional customer demand across our key franchises.

These financial results are a testament to our employees’ ability to execute and the demand for our innovative technologies we bring to the market that delivers genuine and often unique value to our customers. Looking forward we expect the second half of this year to be similar to the first half, with the third quarter stronger than the fourth.

At this time I would like to switch gears to our leadership change we announced on July 18 and effective September 1, Luke fills in the role of Chief Executive Officer and I will continue my role as Executive Chairman of the Board. Luke and I have worked together since 2003. As the company begins the implementation of our Vision 2015, the Board and I thought it appropriate to take this next step and succession plan that we have been working on for the last few years.

As I said a couple of times recently, this is the time were going to be pressing the opportunity for Albemarle. I have the utmost confidence in the leadership team that we have in place and the commitment and capability of our 4,000 employees around the globe. Albemarle is well positioned to capitalize on these opportunities and we continue to generate strong shareholder returns, consistent with our Vision 2015 objectives.

With that I’ll turn it over to Luke.

Luke Kissam

Thanks Mark and good morning everyone. I am honored to have been named CEO of Albemarle and to have the privilege of leading what I believe to be the best in this innovative workforce and especially chemical space. I look forward to continuing to work with Mark, the Board and the rest of our leadership team as we implement Vision 2015.

Turing to our financial results; we are pleased with the performance of our businesses this quarter. Fine Chemistry and Polymer Solutions reported record sales in segment income, while Catalyst reported it’s second highest sales ever, an excellent quarter overall. Fine Chemistry’s net sale of $185 million were up 31% year-over-year and segment income of $37 million was more than double levels of a year ago.

Margins of 20% were up nearly 800 basis points from last year. These results were driven by strong volumes, high utilization rates across our bromine franchise and higher bromine prices year-over-year. We saw solid volume growth in both the performance chemicals and Fine Chemistry Services business. Among the factors driving these gains, were the continuation of a short year-over-year rebound in clear brine fluid volumes on the order of 60%, better ibuprofen production levels and good demand for Ag products.

Polymer Solutions net sales of $290 million were up 23% year-over-year and segment income of $77 million was up 64% year-over-year. Strong brominated flame retardant pricing and favorable product mix more than offset softer volumes, increasing margins approximately 700 basis points to 27%.

Total Polymer Solutions volumes were down year-over-year, mainly due to weaker mineral flame retarded volumes. Puritive (ph) demand was also weaker year-over-year as high-speed rail construction activity in China has slowed at this time. We anticipate that additional phases of the high-speed rail will commence over the next 12 months. As they proceed we remain well positioned to participate in that market.

In Catalyst, strong HPC and Polyolefin Catalyst volumes improved refinery catalyst pricing and successful pass through of metals cost drove net sales of 267 million, up 24% year-over-year and segment income of $66 million. Segment income margins of 25% were down 300 basis points sequentially. All of this was in line with our expectations. The margin decline was due largely to unfavorable mix in HPC and lower FCC volumes.

Turning to strategic initiatives; in May we talked about entering to adjacent market opportunities, where we see a growing market with an attractive profit pool, where Albemarle has a chance to achieve a competitive cost structure. One of these opportunities that we discussed was the extraction of Lithium from our Magnolia brines.

Our pilot plant is presently running and has successfully extracted the lithium from the brine; the technology works. This development is a great example of the innovative expertise of our employees, our current timeline to result and commercialization in the 2013 to 2014 timeframe.

With regard to bromine, our second quarter results reflect the benefit of the deep bottle necking projects that we completed at our bromine facilities in Magnolia, Arkansas and Jordan. In early March, we also announced a plan to double our bromine and derivatives capacity at our Jordan site.

During the second quarter we accomplished several milestones that give us confidence that we are on track to meet our original timeline and to bring phase I online during 2012, including placing orders to long delivery items and tracking with the regional engineering and construction firm that has mobilized and begun work. Once again I would like to reiterate that we intend to bring this capacity owned in phases as needed to meet the global demand.

One of the new applications projected to drive the demand for bromine over time is mercury-control as government agencies around the world consider regulations requiring industries to reduce airborne mercury emissions. The US EPAs proposed Utility MACT standard recognizes activated carbon, our Sorbent technology product line, as an effective method of reducing mercury emissions at coal-fired utility plants.

The regulation would require reductions in mercury emissions from coal-fired utilities in the US by 2015. Albemarle is uniquely positioned to benefit from mercury control regulations given our ability to supply a full range of products, equipment and services.

On the Catalyst side tighter fuel specs should continue to drive increased demand for our HPC catalyst, as developing economies join North America, Western Europe and Japan in demanding cleaner burning fuels with lower sulphur emissions.

With respect to the state of the global bromine supply demand, we are continuing to observe tight conditions overall, as demand driven by new application continues to rise, supplementing the already strong growth in traditional markets such as clear brine fluids and brominated flame retards. Overall our expectation remains that bromine and derivative supply will remain tight.

As you know the price of rare earth has increased dramatically over the past year; from under $10,000 a ton to current levels of roughly $145,000 a ton. We continue to have success-securing lantinum for our SCC Catalyst. China’s recently released photo on rare earth for the second half of 2011 was 15,000 net tons, slightly above the first half quota. This bodes well for our ability to continue accessing this key raw material in adequate amounts.

We are working with our customers to find ways to use less or no rare earth in our FCC Catalyst and at the same time provide the performance necessary for the refiner to handle the challenging crude slides. To-date we’ve made good success in this area and continue to be successful in passing through the increased cost of rare earth via an escalated clause in our sales contracts.

As Mark previously noted, the benefits of our focus on emerging economies was evident across each business segment this quarter. Within Fine Chemistry for instance, the rebound for completion fluids was principally driven by a year-over-year surge in orders from customers in Malaysia, Saudi Arabia and Egypt. While we should eventually benefit from rebounding rig counts in the Gulf of Mexico, the primary driver of that turn around in this business year-to-date has been markets outside of North America or Western Europe.

Demand for plastics in developing economies is contributing to a strong demand for the portfolio polyolefin catalysts that we offer. Finally our Polymer solutions business should benefit from the increased bio-safety standards and rising per capita demand for electronics and emerging economics.

In closing we believe that our solid results for the first half of 2011 indicate that we are on track to achieve the type of growth we outlined in Vision 2015.

With that I’ll turn the call over to John to discuss our growth drivers in greater details.

John Steitz

Thanks Luke and good morning everyone. For the second straight quarter the results for Fine Chemistry were solid, reflecting the impressive operating leverage as this business achieved record sales and income levels. These results represent a combination of new products success and continued development of our broad bromine based portfolio. Specifically rebounding demand from traditional applications such as clear brine fluids, as well as increased demand for new applications like water treatment and food protection drove revenues.

These factors combined with new product commercialization in our Fine Chemistry services model, drove operating margins exceeding 20%. Currently as that utilization rates remain at new maximum levels and as Luke stated, we project that the factors driving this dynamic will persist for the balance of the year.

Overall we’re experiencing increased demand across the portfolio of new technologies within the Fine Chemistry Services business. Drivers include the positive impact of having project Tiger, our Exxon lubricant business, fully commercialized and some additional advanced materials being delivered into the growing global polypropylene market.

Our agricultural related businesses have shown strength as well. We also experienced the strong pharmaceutical business and remain excited to fulfill future orders for the Seger Contract. We are in the process of finalizing another opportunity, which we’ll announce in the coming weeks, which continues to build an impressive portfolio of new products in our Fine Chemistry unit.

Polymer Solutions had a record second quarter, thanks to balanced and strong performance across the portfolio. We experienced strong private growth in our flame retardance business up 71% and our mineral flame retardance portfolio up 59%. Mineral flame retardance benefited from strong wire and cable demand and good price realization. We are also encouraged by the recent upper trend in the IPC book-to-bill ratio for printer circuit boards which stood at 0.99 in May, up from the year-to-date low of 0.94; that’s just one positive indicator for this business.

Our Catalyst segment had another good quarter and is on track for another record year. We continue to be encouraged by the improving trends in refining, especially improved customer margin, our technologies continue to help solve refining problems related to heavier and increasingly sour crude slates and the critical need for addressing added complexity due to rare earths cost.

Global demand for plastics, particularly in rapidly developing economies such as the Middle East and Asia remains strong and continues to drive sales of our Ziegler-Natta catalyst within our Polyolefin Catalyst business. Sales for this business rose 19% on a volume increase of 10%.

Additionally for some time now we have been executing the strategy of shifting the business towards higher value, specialized catalyst systems. We continue to see good customer reception to these technologies, as well as supplying advanced new products into the growing LED market.

On the acquisition front we funded the purchase of what we now call Albemarle Catalent Incorporation. The integration of this business has proceeded smoothly. Market interest is good and we’re running a pilot plant and testing various feedstocks’s as we speak.

With that, I’ll hand over the call to Scott.

Scott Tozier

Thank you John and good morning everyone. I will echo the comments already made regarding another stellar quarter and the company’s continued momentum.

For the second consecutive quarter on record sales of $742 million and 25% growth, we achieved record EBITDA levels of $178 million, up 31% from $136 million last year. Our EBITDA margin is up 110 basis points year-over-year to 24%. On the year-to-date basis EBITDA is at $349 million, up 38% from 2010. This is the EBITDA margin rate of 24.3%, up 270 basis points.

Now I’ll cover some expense details. Our second quarter R&D expense is up 36% versus Q2 2010 as we invest in our organic growth and adjacent the initiatives. For the first half of 2011 R&D cost as a percent of revenue is up 10 basis points to 2.6% versus the first half of 2010.

SG&A expense rose 24% versus Q2 2010. This will be driven by increased personnel related cost and sales commissions following our revenue growth. As a percentage of sales, this line item is actually down 60 basis points through the first half of the year at 10.8% versus 11.4% during the first half of 2010. Unallocated corporate expense in Q2 was $25.8 million, up $8 million year-over-year and this is in line with our ecstatic quarterly average for the year and reflects higher personnel related costs.

We expect to continue to see EBITDA margin expansion and with our continued focus on working capital management and asset returns, we remain confident that we will generate sufficient cash to fund organic growth, capital investments, strategic acquisitions, dividends and share repurchases as appropriate.

Our effective tax rate for the quarter is 21.7%, down compared to the second quarter of 2010 of 24.4%, driven primarily by continued increased profitability overseas in lower tax countries. At this time we expect our full year rate to approximate 22.9%.

Turing to cash flow, year-to-date through June, our reported cash flow from operations was $146 million. This is up only 9% from the prior operating cash flow of $134 million. However this includes $56 million of pension contributions in the first half of 2011 and $24 million of contribution in 2010. Excluding these contributions, our cash flow from operations was $202 million, up 28% versus last year.

Year-to-date free cash flow defined as cash flow from operations, adding that pension contributions and subtracting capital expenditures was $134 million for the period and is up 8.5% versus 2010.

Capital expenditures for the first half of 2011 was $68 million, double of what we spent in the first half of 2010, as we invest in the build out of our announced expansions in Korea and Jordan, domestic investments in our Polyolefin Catalyst business and continue to de-bottleneck our plants to produce that higher capacity levels. We still expect full year CapEx to be around $150 million.

Depreciation and amortization expense in Q2 was $24 million. That is $47 million year-to-date and is on pace with our full year expectation to be at or near $100 million.

Net working capital was up $99 million net of foreign exchange from December 2010 or 21%, mainly due to the business upturn. This compares favorably with our sales growth of 23% between Q2 this year and Q4 last year. Our past due accounts receivable balances continue to be well controlled at less than 10%.

Given our sales growth, the team has been very successful of making sure inventories stays under control. Inventory has grown only 10% net of foreign exchange from the end of 2010. More than half of this was driven by increases in raw material pricing and the remainder by volume. I am very pleased with the discipline we have shown in managing working capital during the first half in which we have experienced such rapid sales growth and increases in raw material costs.

Through June of this year we have invested about $15 million in new businesses. This includes the $10 million that we invested in the Saudi joint venture in the first quarter and about $5 million that we invested in Q2 for the Catalent acquisition that John highlighted earlier. Finally we continued to pay our quarterly dividend of $0.165 per share. At this level we are maintaining a 1% dividend yield.

We ended the quarter with $491 million of cash and equivalents and net debt of $255 million, excluding $26 million of non-guaranteed debt from our JBC joint venture. Our net debt had decreased by 16% from the end of 2010. Our debt to cap ratio is 30% and our net debt to cap ratio is 13% and both are down meaningfully versus year-end due to the debt reduction and strong profitability that has resulted in cash generation.

Our weighted average interest rate for Q2 was 4.8%. Approximately $704 million of our debt is fixed and $68 million is floating rate a 91% to 9% split. We expect the debt portion of our capital structure to remain heavily weighted towards fixed rate debt until such time as borrowings are needed in connection with acquisitions or other strategic initiatives of size.

Our weighted average floating rate at June 30 was 5% in line with last quarter, however it is up from last years rate. After paying off all of our US revolver debt in the fourth quarter of last year, our remaining floating rate debt is at subsidiaries located in countries where borrowing rates are much higher than in the US. Our average fixed interest rate stayed at approximately 4.8%.

Finally as a recognition of the quality of our balance sheet, fiscal policies and cash flow outlook, Standard & Poor’s upgraded our credit rating during the quarter to BBB plus table and Moody’s confirmed it’s rating of BAA1’s table.

With that I will hand it back over to Lauren for Q&A.

Lorin Crenshaw

Thanks Scott. At this time we’d like to open it up for any questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is coming from the line of David Begleiter from Deutsche Bank. Please proceed.

David Begleiter - Deutsche Bank

Thank you. Good morning.

Mark Rohr

Good morning David.

Scott Tozier

Good morning David.

David Begleiter - Deutsche Bank

Mark you mentioned that earnings wise the second half should be some of the first half. That imply earnings per share of around $4.75 for the full year, which is above where our consensus is right now. Is that where you were intimating?

Scott Tozier

You are awful specific there David. What I’ll say is there’s a lot of anxiety in the world today, but frankly we are not seeing that reflected in our businesses. We are seeing a strong third quarter and to be honest we don’t have a lot of visual in the fourth quarter, but you know classically fourth quarter is a bit weaker.

So if I kind of roll those, I’d say it’s a little bit of a mirror image for the year, with the third kind of similar to the second and the fourth probably a little bit similar to the first, but again, I’m guessing on the fourth.

David Begleiter - Deutsche Bank

And just on bromine prices, can you comment of element of bromine prices in China as well as where you are in flame retarded bromine prices.

Mark Rohr

Yes David, let me take that. We are continuing to see a lot of momentum across the bromine chain. Bromine flame retardant prices are up sequentially in the range of 10% and the entire I’d say bromine and bromine derivative changed quiet well.

One of the things we are really encouraged by David is we’re beginning to see our customers benefit from these activities, vis-à-vis because of the tightness and lack of supply in China. Our customers, competitors have found the inability to produce their product because they are not able to procure the necessary bromine derivatives which are really critical in some of these chemical processes and so we are beginning to see the start of that and I think that’s really encouraging, so just to give you a little color on that.

China bromine prices now are beginning to see a back up and because of some of these ongoing supply issues.

David Begleiter - Deutsche Bank

You do have an actual number for China bromine prices right now John?

John Steitz

David I haven’t seen anything in the last week, but it’s somewhere in the range of we’re talking 4,000 to 4,500 a ton, but I just kind of harping back to you two, you know we look at this whole portfolio.

Commercial bromine is just really a small piece of the total package here, because you have to look at clear brine fluids, what was the price of bromine, hydrobromic acid, some specialties that go into water treatment protection and then you have the whole portfolio of brominated flame retardant and not to mention mercury control and where those prices are, so our whole net back is higher than that $4,500 a ton indicator for commercial bromine. I just wanted to kind of highlight that to you.

David Begleiter - Deutsche Bank

Great. Thank you very much.

Operator

Your next question is coming from the line of P J Juvekar from Citi. Please proceed.

P J Juvekar - Citi

Hi, good morning.

Mark Rohr

Good morning P J.

Scott Tozier

Good morning.

P J Juvekar - Citi

You know in Polymer Solutions your volumes are done 1.5%. How much of that was due to curatives in China and how much volumes were down in China?

Mark Rohr

Yes, the curatives for the high-speed rail project P J are a big part of that. We didn’t see any benefit in the first half from that. We are encouraged that China has gotten through some of these problems related to the high-speed rail project and it appears to us that they remain committed to that. So we don’t have anything in our forecast now for the second half, but if that does come back into play that could help the overall business volume wise by a couple of 100 basis points.

The bigger issues year-over-year are mineral flame retardant volumes were down. Those are about double of what brominated flame retardant volumes and year-over-year brominated flame retardant volumes were right in line with last year. So if I look at Polymer, I think a good way to look at Polymer volumes is that its following a similar trend as last year, so the entire number is higher year-over-year than last year. So that’s the way we are currently looking at volume trends.

Scott Tozier

P J one of the tough things about volumes for us is we have and you’ll see those volumes in 800,000 ton range, all in the annual sales front. And two products represent 250,000 tons and so you know subtle changes in those overshadow volume from the higher value products that we have. So its one of the tough things about looking at a segment and volumes. We apologies for that, but that’s just kind of the way it is for us.

P J Juvekar – Citi

Okay and then in catalyst I understand the rarer situation and the pass through which lowers margins, but your absolute dollars were down in profitability. You mentioned unfavorable HPC mix and lower FCC volumes. I was wondering if you could just drill a little deeper into that.

John Steitz

Yes, PJ this is John. You know the first quarter was an absolutely stellar quarter for Catalyst and there was a very favorable mix of profitable products within HPC and that did not happen again in the second quarter though year-over-year we had favorable volumes in HPC.

So as you kind of look forward I think we are through the worst. As we said last quarter, we would see sequentially volume in FCC in the second quarter and we had that and we see going forward additional volume growth in the third quarter sequentially, which will be close to very, very low double digit in FCC.

So we are encouraged by that and as Luke really emphasized, I think the team is doing an exceptional job in dealing with a larger rarer dilemma as you highlighted in your question and I think there is no company in the industry who does a better job of dealing with inflationary issues than Albemarle. So we virtually made that a non-event in terms of working with our customers and working with our product line and executing on a global basis.

P J Juvekar – Citi

And just lastly as rarer prices go up 15 fold, are customers cutting back on the catalyst because of pricing.

John Steitz

Well, I think that consumption issue at our customer level is more a miles driven thing and we saw some softness in that in the second quarter and we are at least optimistic that that’s improving now.

They have attempted to use less rarer catalyst, but the fact is in part due to the Libyan situation, which is very sweet crude kind of being taken off the market and now its being filled with heavier and heavier more solid crude’s, it is really becoming increasingly difficult to reduce the rarer contact in these catalyst and get the products slate and yields that our customers desire.

P J Juvekar – Citi

Thank you.

John Steitz

Your welcome.

Operator

Your next question is from the line of Kevin McCarthy from Banc of America. Please proceed.

Kevin McCarthy - Banc of America

Good morning this is Alex (inaudible) for Kevin. I think John you mentioned that BFR prices were up about 10% sequentially in the second quarter. What is your outlook for BFR prices for the next couple of quarters?

John Steitz

Yes, we were in a process of implantation these most recent increase that we announced in May Alex. There is a partially a mix effect. There are two, but I think we’ll continue to see improvement in overall brominated flame retardant volumes, could be offset as we continue to watch what kind of inventory levels we need to support the customer base. As Mark said, there is lot of uncertainty out there. So there is a lot of puts and takes in or Polymers business but pricing remains overall positive.

Kevin McCarthy - Banc of America

So there is some carryover from prior price increases…

John Steitz

As we exit those to our customer base, that’s right.

Kevin McCarthy - Banc of America

And you mentioned softer, BFR demand in China in the press release. Could you quantity your current order level for BFRs, I guess versus first half level.

John Steitz

Yes, I think as you look at the sequential progression of BFRs in the second half. Right now in an absolute wrap of conservatism, we think volumes could be flat to down a little sequential. But they would be up year-over-year in the third quarter. We are seeing a stronger fourth quarter right now, but it remains -- you know as Mark said, there is always so much uncertainty out there. So we will just keep you informed as the year progresses on what happens in the fourth quarter.

Kevin McCarthy - Banc of America

And right and just a final question if I may again on BFRs, do you have visibility into your customers inventory? You mentioned that you might be reducing their inventories. Are they at the point were inventories are low?

John Steitz

Well, yes I personally the way I look at it, I think inventories are low. I mean, all this CNN type effect that we are all having, I mean everyone is concerned, there is a high level of anxiety about what level of inventories to keep, but things are pretty tight and we are continuing to see some level of emergency orders.

You know we had a pressing one come up just this past week from Wal-Mart who is looking to fill their pipeline in bean bag chairs. So we had an emergency order to flame retardant the foam for those bean bag chairs for Wal-Mart, but there is a couple of lessons there; one is, you never want your bean bag chair to catch on fire.

Scott Tozier

The one area that we got some recent reports back or may be a slight inventory bill is Japan, where I think we are worried a bit about some further electrical curtailments as they get into the third quarter. So there may just a bill there, but generally speaking we are seeing very little inventory built out there on part of the end users.

Kevin McCarthy - Banc of America

Great. Thank you gentlemen.

Operator

Your next question is from the line of Laurence Alexander from Jefferies & Company. Please proceed.

Laurence Alexander - Jefferies & Co.

Good morning.

Mark Rohr

Good morning Laurence.

Scott Tozier

Good morning Laurence.

Laurence Alexander - Jefferies & Co.

Can you give a little bit more color on HPC catalyst trends? What time sequentially into Q2 and then how you are looking at the balance of the year.

Mark Rohr

Yes, Laurence, HPC. Well we were encouraged by the buying trends we saw in the second quarter and I think that also partially mitigate FCC volumes as these refiners went through a higher level of turnarounds. We see a sequential decline in the third quarter, but it will still be over last years third quarter.

So we are still seeing double digit volume increases in HPC and the most encouraging thing you know we highlighted in our earlier comments was that the refiners are doing better now and I think that’s a good thing for overall trends in HPC and we are pretty confident that business is going to continue to growth over the next couple of years.

And then you add in with that some of the unique opportunities in Brazil that we have with Petrobras and some of the other growth that we are seeing in these developing economies and we are really very encouraged by that longer term.

Laurence Alexander - Jefferies & Co.

And in brominated flame retardant, did you reduce inventory levels yourselves? I mean throughout the Albemarle level in Q2 or have you done so in Q3 or plan to do so in Q3?

Luke Kissam

Well this is Luke. On the inventory levels we talked a little about it. Most of the increase we’ve seen in raw materials have flowed through to that inventory level. So the majority of any increase we’ve seen in brominated flame retardants or others have been tied to raw material increases.

We are watching the inventory levels of brominated flame retardants and all our other products on a weekly basis. You should not have the view that we’ve got a brominated flame retardant inventory level anywhere like we did in to 2008. We lived though that and we are working really hard to insure that we’ve got the right amount of levels inventory to service our customers, but not unless if we get caught with too much if there is any type of slowdown.

Laurence Alexander - Jefferies & Co.

So just to be clear on that, you don’t anticipate based in the order of trends you are seeing needing to do a production outage to rebalance inventories.

Luke Kissam

We do not.

Laurence Alexander - Jefferies & Co.

Thank you.

Operator

Your next question is coming from the lien of Michael Sison from Keybanc Capital Markets. Please proceed.

Michael Sison - Keybanc Capital Markets

Hey guys. Mark congrats on a great run by the way. I’m going to miss your enthusiasm there and congrats to you Luke as well.

Luke Kissam

Thanks Mike.

Michael Sison - Keybanc Capital Markets

In terms of the second quarter where bromine operating rates for the derivatives in elemental are pretty close to fall out.

Mark Rohr

Yes Mike they were close, it was 90% plus.

Michael Sison - Keybanc Capital Markets

90% plus, okay. And then when you think about the second half of the year Mark, sort of mirroring the first half. Were you thinking that the operating rates for bromine would stay pretty high?

Mark Rohr

Yes, that’s our expectations.

Michael Sison - Keybanc Capital Markets

Okay. So not too much of a sequential pull down.

Mark Rohr

No.

Michael Sison - Keybanc Capital Markets

Okay. And then when I take a look at the improvement in earnings for Palmarad (ph) is second quarter year over year. Is most of that pricing, meaning sort of the bromine pricing flowing though and sort of a similar question with Fine Chemicals.

Mark Rohr

Well, a lot of its pricing. We continue Mike as we said, we are encouraged by the overall volume trends of polymers is up year-over-year and the tune as I said, the trend follows a lot. The last year all be it it’s a little bit on steroids, so the pricing momentum has resulted in that. Has certainly you know, and then that’s mitigated by the concerns of our raw materials in the benzene phenol BPA chain that we had live with and now we have oil going up above $100 a barrel again. So we’ve got to continue to be nimble in our handling event, but pricing was certainly helpful to the overall improvement of the profit available, that’s for sure.

Michael Sison - Keybanc Capital Markets

Right and that should be sustainable, pretty sustainable in the third and fourth quarter with really good visibility, right, because well when pricing is up it sort of flows though.

Mark Rohr

You got it Mike. It’s more an issue of mix for us. You know so it for example tetrabrom volumes go down we are still seeing robust volumes in a lot of the specialties. So there is usually a positive impact from that.

Michael Sison - Keybanc Capital Markets

Got it and last question, HPC backlogs, you know they seem pretty good heading into the third, fourth and 2012.

Mark Rohr

Yes, I mean we are good. I think we are getting a lot of looks. You know continuing concern about environmental conditions around the globe and improving conditions in the refiner. So we see year-over-year in the third quarter will be up which is positive, but probably down sequentially and fourth quarter we are still keeping an eye on and then looks like we will start the year 2012 off very strongly as well.

Michael Sison - Keybanc Capital Markets

Okay great. Thank you.

Mark Rohr

Thanks a lot.

Operator

Your next question is coming from the line of Robert Koort from Goldman Sachs. Please proceed.

Robert Koort - Goldman Sachs

Hi. I just wanted to follow up on P Js question and understand if I am looking at margins for the second half of the year in the catalyst business. Do you guys look at more of mid 20s or should it be higher 20s going ahead.

Mark Rohr

Well, I mean overall for the year I think you know we will be in the range of 26% and that’s all including the JVs. So something plus or minus a few basis points feels pretty good to us. So if you look at that, you know we said longer term our margins are reduced of mitigated by this squarer effect and that’s kind of given us a curve ball we’ve had to deal with this year.

Robert Koort - Goldman Sachs

Okay, and the second part was in your bromine expansion as far as Arkansas is concerned, is everything up and running now. I mean you are targeting about 10% to 15% incremental capacity. Is everything on line right now?

Luke Kissam

Yes, this is Luke Kissam. The de-bottleneck that we talk about in Arkansas is in effect and we are running. There are a few other wells that we are drilled and maintain that capacity, but we are at the level that we will be operation at from the bromine miles to Magnolia right now.

Robert Koort - Goldman Sachs

And just one last question if I may; when you look at your doubling of capacity and that’s seen probably next year sometime, do you think there is enough demand out there or the fact that the Chinese supply is going down at a much faster rate. I mean is there a possibility that the supply might start out shipping demand because of so much incremental capacity coming online. Are you planning to bring it online more in phases?

Mark Rohr

Yes, as we said we are going to bring that on line in phases to meet the demand. With the capital we are putting out there, the limited amount of capital that we’re have them do and our cost competitiveness to increase that size and our cost position there, we are not in position that we got it started up on day one and we weren’t running it wide open. We are going to be great stewards in this bromine molecule and continue to drive the value that we can from that, but we will watch supply and we will watch demand.

But we also got an obligation to our customers, so that whenever they need a product we are there to supply and that’s why we are expanding this capacity this time, to meet that demand and meet the needs that our customers have.

Robert Koort - Goldman Sachs

Great, thanks guys. Thanks a lot.

Mark Rohr

Thanks.

Operator

Your next question is coming from the line of Steve Schwartz from First Analysis. Please proceed.

Steve Schwartz - First Analysis

Good morning guys.

Mark Rohr

Hey Steve.

Steve Schwartz - First Analysis

John, can we go back to catalysts and just talk about the year-over-year change again. If you look at your income margins it was down about 600 basis points and so you know you have for the segment nice volume growth year-over-year, but your high volume product FCC was down. So can you just aggregate?

You mentioned the mix effect, we talked about that in HPC, but can you just aggregate that 600 basis points around raw material cost versus that mix effect, because it doesn’t seem to make sense to me.

Mark Rohr

Yes, Steve you know I caution you on looking at quarter-to-quarter margin. You know we really look at margins annually and over the long term to really help drive and fund our businesses for growth. But year-over-year though HPC volumes were up, those margins were down and you know again, that was mostly due to a mix effect.

In HPC you have a large range of portfolio of different products that have a large variation in the profit that they produce, depending on what they are trying to achieve and the cycles that a customer is trying to achieve, the lifecycle. So a pretty significant difference there.

The other impact of course is the year-over-year rare earth issue. You know we talked about that and that’s pretty big, that’s you know longer haul. We said 300 bases points. I think between those two issues that’s pretty much it in terms of year over year profit margin. But last year remember second quarter was extraordinary margin for the catalyst business and what we really highlighted then was the margin potential that this business has, so…

Steve Schwartz - First Analysis

Sure, okay, thank you for that. If we could step out for the consolidated level now. What was your raw material inflation in the quarter and are you guys still talking 160 to 200 million for the year.

Luke Kissam

Hi Steve, this is Luke Kissam. Raw materials were roughly the same from – in the first quarter we talked to you about that call of about 160 million. We are roughly seeing about that same level of escalation and anticipation for the full year. I think you know about half of that was metal.

Steve Schwartz - First Analysis

Okay. So first quarter I think you said about $25 million. So was it up $25 million then? I mean, that doesn’t seem to make sense.

Mark Rohr

Yes, Steve. So in the second quarter you know you have some issues about what our production volumes are. So it’s not as simple as just raw material question, but the second quarter year-over-year is about low $40 million number inflation wise.

Steve Schwartz - First Analysis

Okay and then Luke, just a touch back on the Jordan expansion. So you mentioned the different phases. In your commentary you talked about ordering equipment and so forth. Can you just frame up for us when that phase I is going to be producing salable product and of the 60,000 to 70,000 metric tones you are adding, how much is phase I of that?

Luke Kissam

Phase I, the bromine production is phase I. So all that 60,000 met tones of bromine will be available into the second, beginning of the third quarter of 2012. But just because its available Steve, the point I’m trying to make is its available, but just because its available it doesn’t mean we are going to through it on the market place. We are going to have it available to meet the demands of our customers, but we don’t be responsible in how we move that product. We do not have to run it flat out from day one.

Steve Schwartz - First Analysis

Okay and then, I think you are planning on building out your derivates production capacity. So I’m presuming that would be phase II, phase III. When do you expect that capacity will come on?

Luke Kissam

Some of the derivative capacity will come on at the same time or even a month or two later than the bromine capacity. In other words we’ll trail it to the early 2013.

Steve Schwartz - First Analysis

Got you. Okay thanks for taking the questions.

Mark Rohr

Thanks Steve.

Operator

Your final question is coming from the line of Dmitry Silversteyn from Longbow Research. Please proceed.

Dmitry Silversteyn - Longbow Research

Good morning gentlemen. I’m glad I was able to get into the wire. I’m just trying to understand a couple of comments that you made. You talked about kind of the reason for downward volume in the Polymer Systems as mineral flame-retardants. But then I also though I heard John talk about mineral flame retardant volumes being up. So am I mishearing it or are you talking about sequential verses year-over-year that I missed.

Mark Rohr

Yes, we are talking about sequential versus year-over-year there Dmitry.

Dmitry Silversteyn - Longbow Research

Okay, so sequentially they were off but year-over-year they were down.

Mark Rohr

Right.

Dmitry Silversteyn - Longbow Research

Okay that’s fine. FCC volumes were all double digit according to your comments, that’s a pretty strong -- also as you see pricing was up double digits. You know we haven’t seen you know pricing like that probably since before the recession. So are we kind of back to the momentum that we saw in SECs prior to 2008 and can you update us if you can roughly on what the ton for SEC is currently and where you are trying to get it to longer term.

Mark Rohr

You know well, Dmitry the overarching of impact on that is the rare earth issue. I mean rare earth is gone from 7000 a tone to now somewhere between a 140,000 and 145,000 a tone.

Dmitry Silversteyn - Longbow Research

Right. So this is your capacitor of rare earth then that you’re having pricing.

Mark Rohr

Yes absolutely.

Dmitry Silversteyn - Longbow Research

So this is not above and beyond kind of your normal lets get the reinvestment economics and lets get the pricing up.

Mark Rohr

Yes, I mean this has been a matter of necessity, because it was such a critical, critical issue that the business faced. I think the customers by and large have understood that clearly. You know rare earth have been such a large issue globally. The catalyst industry is just one business impacted by it, there is electronics, there is hybrid automotives, there is a lot of down stream effects of that.

But I think the takeaway is you just need to know that our team is really focused on getting that passed though and we are encouraged by the volume trends that the catalyst cost is not impacted demand at all, its more macro economic trends that impact that. But we are encouraged by continuing to get the price needed to cover that rare earth going forward. So you will continue to see in additional to the volume effect we described and improving in pricing to cover that rare earth issue.

Dmitry Silversteyn - Longbow Research

Very good. On volumes being down you said they are related to mines driven. I mean obviously in a stage you know you had that several weeks or $4 plus gas that apparently as we reduced driving habits a little bit. But globally, I mean given that SEC is a global business for you, what’s the kind of lower mines driven globally and how does that trend look into the second half of the year.

Mark Rohr

Well hopefully we haven’t seen a report yet on the US for May, but I’m hoping it’s beginning to pick up. Globally we also had more turnarounds, so I think more customers on a global basis had more HPC related turnarounds, which also contributed to the reduction of SEC volumes during that period.

Dmitry Silversteyn - Longbow Research

Right, because they are going to shut down the column. Okay I got it. And then final question, on the printed wiring boards business or market and the flame retardants that are going to in to it, you talked about the book to bill looking better year-over-year at about 0.99, but you know there is a lot of concern about as you mentioned you know global economic weekends, but also particularly in electronics you know the results coming our are mixed, you know the guidance being provided by our companies in the electronics space from semiconductors down to consumer electronics is all over the place.

What’s behind your business plan for the second half of the year? What kind of expectations for the electronics industry are you looking to go through, you know a month of inventory correction or do you think that we’ll be able to do, you know finish the year without you know significant downside to call it.

Mark Rohr

I mean that’s a big question for this year, is there is so much uncertainty Dmetry created by all these news and mixed results and mixed reports you hear. So that’s why I think your hearing us being us being a little bit cautious, but right now I mean as Luke said we were managing these inventories on a week by week basis, getting as much real time feedback from our customers as we possibly can. We see our inventories still snug and the customer not building inventories. So we feel all very good that we are not going to see any kind of significant correction needed because of customer demand.

Dmitry Silversteyn - Longbow Research

Got it.

Mark Rohr

The only caution that I would lay out there is normally we see a slow down in December. So we will just try to keep you tuned in on that as we wrap up that third quarter. But I’m encouraged by a lot of the indicators we are seeing. The book to bill ratio is one. We also got a report on TV production that that’s picking up after a low in the second quarter and we are directly impacted by that. So as you said, it’s a really mixed bag and we will just try to keep you tuned in on where we see things.

Dmitry Silversteyn - Longbow Research

Very good. Thank you gentlemen.

Operator

At this time I’m showing no further questions in queue. Albemarle will like to thank you for participating in today’s conference. You may now disconnect and have a great day.

Mark Rohr

Thank you.

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