Chemtura (CHMT) Craig A. Rogerson on Q1 2016 Results - Earnings Call Transcript

| About: Chemtura Corporation (CHMT)

Chemtura Corp. (NYSE:CHMT)

Q1 2016 Earnings Call

April 29, 2016 9:00 am ET

Executives

Matthew Sokol - Director, Investor Relations & Corporate Development

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

Analysts

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

James Sheehan - SunTrust Robinson Humphrey, Inc.

Rosemarie Jeanne Morbelli - Gabelli & Company

Christopher J. Kapsch - BB&T Capital Markets

Michael Joseph Harrison - Seaport Global Securities LLC

Dmitry Silversteyn - Longbow Research LLC

Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management)

Operator

Good morning. My name is Tracy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Chemtura Corporation First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Mr. Matthew Sokol, Director of Investor Relations and Corporate Development, you may begin your conference.

Matthew Sokol - Director, Investor Relations & Corporate Development

Thank you, Tracy, and good morning, everyone. With me today are Craig Rogerson, Chemtura's Chairman, President and Chief Executive Officer; and Stephen Forsyth, Executive Vice President and Chief Financial Officer. This morning, we will review summary highlights of our first 2016 operating results. We will also provide an update on our share buyback activities and we will share our outlook for the second quarter of 2016 and beyond.

Last night, we issued our earnings press release providing our first 2016 results and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. Now, if you listen to one of our earnings call during 2015, you've heard us use the term core segments to describe our Industrial Performance Products, Industrial Engineered Products, and Corporate segments alone. In doing so, we excluded the results from our previously divested Chemtura AgroSolutions business and the continuing contractual relationships we have with the buyers of that business. Since the results from our Chemtura AgroSolutions business drop out of the comparative prior-year period starting with the first quarter of 2016 and as we have a full year of comparative performance under the ongoing supply contracts, there is no longer a need to refer to core segments.

As a reminder, some of the statements about our future performance of the company may constitute forward-looking statements within the meaning of the federal securities laws. Please note the cautionary language about our forward-looking statements presented in our 10-K that same language applies to this call. Reconciliations relating to any non-GAAP financial measures discussed on this call may be found in our previous filings and press releases which are posted on our website. Finally, this call is being broadcast and recorded and will be available for replay on our website. Your attendance on this conference call constitutes your consent to the recording and broadcast of the call.

Now, I'll turn the call over to Craig Rogerson, Craig?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Thanks, Matt. Good morning, everyone, and thanks for joining us. This morning, I am going to take you through our first quarter business performance results and our outlook for the second quarter of 2016 and beyond. I will cover a few additional topics at the end of our discussion before handing the call over to Stephen who will discuss our financials in more detail.

Let's jump into the first quarter business performance. First quarter 2016 was the fifth straight quarter of year-over-year improvement in adjusted EBITDA for our Industrial business segments. Overall Chemtura's adjusted EBITDA for the quarter was $75 million, up $24 million, or 47%, versus the first quarter of last year. Sequentially, adjusted EBITDA was up $20 million. In short, Chemtura had an excellent start to 2016. Our focus specialty chemical portfolio continues to demonstrate versatility and the ability to deliver superior results even in a less than optimal business climate.

Our adjusted EBITDA margins continue to trend toward our long-term goal of 20%. For total Chemtura, adjusted EBITDA margins in the first quarter were 19%. In our Industrial Engineered Product segment, adjusted EBITDA margins were 17%; and in our Industrial Performance Product segment, they were an impressive 25%. Let me go into a little more detail in each of our operating segments.

IPP had a strong earnings quarter despite overall flat demand compared to last year. Revenue declined $60 million, or 7%, compared to a year ago. The fall in oil prices as a major contributor to the decline in revenue as was the case for much of 2015. The reduction in oil prices that started in the second half of 2014 resulted in the reduction of many of our petroleum-based input costs in 2015. We are required by contract to pass these cost savings onto our customers which led to overall lower sales prices this quarter compared to a year ago.

IPP revenue was also impacted by lower sales of certain petroleum additive products, unfavorable product mix, and unfavorable volumes in our urethane products line particularly those used in mining and oil and gas application as those industries continue to struggle, and moderately unfavorable foreign currency exchange. In our last earnings call, we explained the sales to large oil company customers slowed in the fourth quarter of 2015, which we attributed to year-end inventory management. In the first quarter of 2016, sales to our large oil customers rebounded as we predicted, although, sales remain somewhat below expectations.

I should also note that certain of our key lubricant additive products had strong sales in the current quarter, offsetting volume headwinds in other parts of the IPP portfolio. Sequentially, revenue was up $18 million, or 9%, compared to the fourth quarter of 2015. The improvement was due to the increased sales to large oil company customers as I just mentioned in addition to higher volumes across most product lines, somewhat offset by lower selling prices.

On the bottom line, the continued benefit of lower raw material costs and firm execution of IPP's business plan led to solid results. Adjusted EBITDA in IPP was $53 million in the first quarter of 2016, an increase of $10 million year-over-year. IPP experienced margin benefit from higher sales volumes in the aggregate, especially for certain key lubricant additives, lower input cost due to lower priced oil, favorable manufacturing cost, and favorable foreign currency translation. IPP also benefited from favorable SG&A spend versus a year ago. I note that SG&A for IPP in the first quarter included income of approximately $1 million from a technology license fee related to certain petroleum additive know-how but this is a non-recurring item.

These positive results were offset by lower overall sales prices which, again, were due in large part to lower input cost being passed along to customers. Sequentially, adjusted EBITDA rose $16 million led by improved volumes across most product lines compared to the fourth quarter where we saw some certain customers reduce orders to manage inventories. Sequential performance in IPP was also aided by favorable raw material costs, improved SG&A and manufacturing costs, and favorable foreign currency translation.

Now turning to IEP. Adjusted EBITDA in the quarter was $29 million, more than double the amount from year ago. Sequentially, adjusted EBITDA was flat with last quarter but recall that the fourth quarter of last year was a relatively strong quarter for IEP. Revenue in the quarter declined by $3 million, or 2%, compared to the first quarter of 2015. There were number of factors influencing the small decline. First off, the fall off of clear brine fluid sales that we predicted for most of last year finally happened. As many of you know, these products are used in offshore oil drilling applications and the softness in that industry finally caught up to our sales. I'll talk about the outlook for clear brine fluids in a moment.

IEP revenues were also impacted by the closure of our Adrian, Michigan facility in mid-2015. This facility was closed after we concluded obligations under a supply contract, following the divestiture of our consumer products business at the end of 2013. Sales under other post divestiture contracts were also down in the quarter but, similar to the products we supplied from our Adrian facility, these sales carry minimal profit margin by design. So, the net impact to IEP's bottom line was small relative to the impact on the revenue.

These headwinds were significantly offset by increased sales of bromine and bromine derivatives, tin products, and the polymerization co-catalysts. Also, sales prices for bromine and bromine derivatives were higher in the first quarter of 2016 compared to a year ago, demonstrating the stability of the bromine price recovery that occurred last year. Pricing was up particularly in elemental bromine and flame retardants used in certain electronic applications, which helped offset volume softness elsewhere in IEP, as well as sales price declines for certain tin products in our Organometallics business due to the pass-through of lower tin ingot pricing.

IEP also benefited greatly from improved pricing and robust sales of our Emerald Innovation 3000 product in the quarter. This is a tremendously positive sign as Emerald Innovation 3000 is a key component of IEP's business plan in 2016 and beyond. Our Emerald Innovation 3000 unit is running reliably at high rates, product conversion continues to progress, and our price increases are largely in place for 2016 contracted volumes. Overall, Emerald Innovation 3000 continues to be a great story for Chemtura and for our investors.

Sequentially, IEP revenue was up $3 million, higher sales volume for tin products and certain LED and Specialty Organometallics products, along with strong sales and better pricing for bromine and the Emerald Innovation 3000, offset volume weakness in clear brine fluids and certain flame retardants used in electronic applications. Sales of fumigant products were also down due to seasonal order timing.

As I mentioned earlier, IEP continued to produce strong bottom line results as it did in the second half of 2015. Year-over-year improvement in adjusted EBITDA of $15 million was driven by improved bromine and bromine derivative pricing, lower raw material and manufacturing costs, lower SG&A spending, and improved product mix within our bromine product lines. These benefits more than offset headwinds caused by the fall in clear brine fluid sales and unfavorable product mix and lower contribution from tin products in our Organometallics business, which is mostly due to order timing.

Sequentially, IEP adjusted EBITDA was about the same as the fourth quarter. Great Lakes Solutions improved but Organometallics fell back from their performance last quarter. Great Lakes Solutions offset headwinds in Organometallics to improve sales pricing aided in part by the new contract pricing in 2016 for Emerald Innovation 3000, coupled with improved product mix. However, Organometallics was constrained by negative manufacturing cost absorption due to mix and the timing of fourth quarter and first quarter production. This offset the benefit of lower inventory adjustments in the current quarter. While volume of OMS products increased, it was slower than we had planned resulting in negative manufacturing cost absorption. We also saw lower selling prices at the change in the cost of tin affecting pricing levels.

Let's turn to the outlook for the second quarter. We expect that overall top line and bottom line performance to be roughly similar to our results in the first quarter. In IPP, we expect sales volume for most products will improve somewhat over the first quarter levels. However, oil prices started to decline modestly in March and April which will likely cause some pressure on certain on our raw material costs in the second quarter. Given that our ability to raise prices in some cases lags the increase in raw material cost, raw material headwinds could result in modestly lower bottom line results for IPP in the second quarter. In addition, the technology license income that I mentioned earlier will not recur in the second quarter.

In IEP, we anticipate that bromine pricing will remain steady even as we enter into the season where Chinese production volumes typically come back on line. We expect that clear brine fluid sales will remain depressed, although they will likely rebound modestly from the first quarter lows. We expect fumigant sales to increase in the second quarter corresponding with the summer growing season and Emerald Innovation 3000 should continue to deliver strong results.

In Organometallics product lines, new strategic agreements for polyolefin catalyst and tin products are ramping up and are expected to deliver improved volume and revenue and that lower raw material and manufacturing cost will lead to improved bottom line performance compared to the first quarter of 2016. Overall, we expect that second quarter bottom line performance in IEP will exceed the first quarter.

Our view of the balance of 2016 is that revenue growth will remain our challenge. We're gaining volume on our major product initiatives but general industrial demand continues to be lackluster. However, we believe that the plan we laid out our Investor Day in December remains valid, and we continue to target 20% improvement in adjusted EBITDA in 2016 compared to 2015.

Now, before I hand the call over to Stephen, let me address our share buyback activity and our strategic portfolio initiatives. In the first quarter, we took advantage of the pullback in the stock market and repurchased a significant amount of our common stock at attractive prices. In total, we repurchased approximately 3.5 million shares at a cost of about $89 million. This represents 5% of the shares of our common stock outstanding as of December 31, 2015. At the end of the first quarter, we had approximately $82 million remaining under our board-authorized share repurchase program.

Finally, we continue to work hard in finding the next transformational move for Chemtura. As we explained during our Investor Day at the end of last year, our focus was on finding a transaction that fits our strategic criteria and that is actionable in the near term.

With that, I'll now turn the call over to Stephen Forsyth. Stephen?

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

Thank you, Craig, and welcome, everybody. I'm going to focus my comments today on a discussion of margin improvement, earnings per share, taxes, and cash flows.

As Craig has described, with the mix of revenues this quarter, a benefit of lower input costs and tight control in spending, our margins were exceptionally strong this quarter. Gross profit margins were 28% on a managed basis compared to 21% a year ago and 24% in the fourth quarter of 2015. Managed basis operating income percentage margins were 13% compared to 6% a year ago and 7% in the fourth quarter of 2015; and consolidated adjusted EBITDA percentage margins were 19% compared to 12% a year ago and 14% in the fourth quarter of 2015.

While these percentage margins are close to where we have long targeted to perform, we still have more to do before we can sustain these percentage margins at this rate. We therefore expect our percentage margins to expand in 2016 compared to 2015, with the benefit of many of the initiatives we have taken and more to come. Full-year margins, however, may not reach the levels we have reported this quarter unless we see a more robust industrial demand than is currently evident.

With $75 million of adjusted EBITDA for the first quarter 2016, we are at the rate we need to sustain during 2016 to meet our stated goals for this year. While actual results will no doubt vary from quarter-to-quarter and the fourth quarter may be lower if customers manage inventories in that quarter, it is encouraging to say that the start of the year is at the pace we need to achieve for the year.

The last 12 month's adjusted EBITDA, the end of March 31, 2016, provides further evidence that we are on track to achieve our improvement goals for 2016. Our 12-month EBITDA performance as of March 31, 2016, stands at 261 million, up 10%, compared to December 31, 2015. Excluding the inventory write-off with discontinued product in the fourth quarter 2015, we're actually at $269 million LTM adjusted EBITDA run rate.

So, let me turn to earnings per share. The loss per share on a GAAP basis was driven by the pension settlement related to the purchase of the group annuity contract by U.S. qualified pension plan. On a managed basis, diluted earnings per share were up 55% compared to the first quarter of 2015 and $0.01 higher than the fourth quarter of 2015 and I will explain that phenomenon in a moment.

While the growth in net income was the primary driver of earnings per share growth, you will also see the contribution of our share repurchases over the last 12 months. Average weighted shares outstanding were down 5% compared to the first quarter 2015 and 3% compared to the fourth quarter of 2015. Our share repurchases in the first quarter made a bigger impact on the weighted average shares outstanding in the subsequent quarters of 2016 than you see in this quarter and you will see the average share count continue to decline.

There's one aspect of net income and earnings per share to which I would like to draw your attention. In the other expense income net line in our income statement in the first quarter 2015, we recorded $11 million of income due to the large translation gain on the obligations denominated in foreign currency as the U.S. dollar appreciated quickly against major foreign currencies. This quarter, some of those foreign currencies modestly strengthened against the U.S. dollar resulting in an expense of $2 million in the quarter, due to the translation loss related to those same obligations.

In the fourth quarter 2015 on a managed basis, we had actually reported $2 million of income in other expense or income on that line in our income statement. The $4 million swing between the fourth quarter 2015 and the first quarter 2016 is the primary reason why reported managed basis earnings per share only increased by $0.01 this quarter. If you adjusted for these currency translation effects, the underlying growth in earnings this quarter was clearly stronger than reported (18:04)

So, moving to taxes, and I'll be pleased to say this quarter our tax accounting is relatively simple and my comments can be brief. If you put on one side the tax treatment of the settlement charge arising from the purchase of that group annuity contract in our U.S. GAAP results, taxes were as expected. The managed basis tax rate for the quarter was 28% that we had indicated for 2016 both on our last earnings call and at our Investor Day and that's where we continue to believe it will track for 2016.

The first quarter is usually a low cash tax quarter, as few corporate tax returns get filed in this quarter and estimated taxes tend to be lower at the start of the year. This quarter followed that trend with a net cash payment of just $2 million. In the first quarter 2015, cash taxes net of refunds were $18 million due to the tax payments related to the divestiture of our Chemtura AgroSolutions business.

So, let me now turn to cash flows. Due to the growth in working capital and the timing of payments, free cash flow this quarter was not as strong as usual. Investors will recall, we define free cash flow as a sum of cash flows from operating activities as stated in our GAAP statement of cash flows, adjusted to exclude the cash contributions made to pension and other post-retirement employee benefit plans, or more simply, OPEB plans, and less capital expenditures for any given measurement period.

As you can see from the earnings release, operating activities used $32 million of cash in the first quarter 2016. This was due to $49 million of cash contributions made to pension and OPEB plans. Now, you recall, as we described in our call in February in conjunction with the U.S. qualified pension plans purchase of a group annuity contract, we contributed $35 million to the plan to restore the percentage funding of that plan to approximately the same level at which it stood prior to the annuity purchase.

The first quarter also saw the more significant annual cash contributions we make to some of our foreign plans. As noted in our 10-Q, the cash contributions to pension OPEB plans for the remaining three quarters of 2016 will be much lower. We estimate it in the order of $14 million for the remaining three quarters in the aggregate. These are primarily the payments we make to plans where we require to fund benefit as paid rather than to build assets to fund future obligations. These types of plans are often called pay-as-you-go plans and now make up the significant majority of our net pension obligations that you see in our balance sheet. The results are the many actions we've taken over the last few years to manage and de-risk our net pension and OPEB liabilities.

So, returning to free cash flow, we exclude the cash contributions to pension and OPEB plans as such payments constitute more capital allocation decisions than operating cash flows. Having added back that $49 million, operating activities provided $17 million of cash in the quarter. We then deduct for capital expenditures of $15 million and you will see that our resulting free cash flow for this quarter was just $2 million.

Investors will recall that our net sales were depressed in the fourth quarter 2015 in part due to the timing of customer orders as they manage their year-end inventories and we also believe had an eye to the declining oil prices. This reduced working capital in the fourth quarter. As sales recovered this quarter, we had to build $34 million in working capital, the net change in accounts receivable, inventory and accounts payable which is why free cash flow this quarter was unusually low. While using cash to build working capital is a necessary cost to both, we see opportunities for improvement in working capital efficiency. Implementing initiatives to drive that efficiency will let us recover some of this quarter's working capital increase by the time we get to the second half of 2016. We, therefore, continue to target delivering free cash flow for 2016 as equal to or greater than what we delivered in 2015.

The reduction in our cash balance between December 31, 2015, and March 31, 2016, was driven not just by those cash pension contributions but, more significantly, by our repurchases of common stock under our share repurchase program. As Craig has described, we spent $89 million this quarter to repurchase 5% of total shares outstanding as they were at the end of 2015. As you could all see, our balance sheet remains very strong. Our total leverage to ratio, the ratio of total debt-to-adjusted EBITDA, is now below our long-term target of 2 times adjusted EBITDA.

To some of you, our debt values may look different despite the fact we did not repay any long-term debt this quarter. This is the result of a change in GAAP effective this quarter to now deduct capitalized financing costs from the face value of the debt just like issuance discounts have been long been presented. Our only planned significant debt repayment in 2016 is to repay with cash the $40 million stub of our 2016 term loan on or before its maturity this August.

That completes our prepared comments. 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

Your first question comes from the line of Ivan Marcuse from KeyBanc. Your line is now open.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Hi. Nice quarter. Thanks for taking my questions.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Good morning.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Morning. On the IPP side, you referenced that you saw some probably a little bit of restocking. Did that restocking accelerate into the March month and will that phenomenon, sort to, continue with April as oil continues to rise sort of how to think about that, I guess the moving parts of the volume? And then on top of that with – I understand you had some raw material headwinds last year in decene. Is that resolved and will that continue to help results on a year-over-year basis as well?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

The answer, we continue to see strengthening through the quarter relative to the volume, so yeah, March was stronger than January. I would say that our expectations are for those March levels to hold and it varies by product line. In the first quarter the additives – some the additives areas, the inhibitors, the detergents, the – some of the intermediates that go to our customers also make some of these inhibitors were strong. The PAO was a bounce back to some degree from that soft fourth quarter and that's mainly because of the, we believe, the restocking at the oil companies that we had talked about had happened in the fourth quarter at the February call.

To your question around decene, yeah, we've got the alternative source of decene in place and that clearly gives us the opportunity to sell more PAO – produce and sell more PAO. As I mentioned again in the February call and is still the case, those products are sold to oil company customers and that's a more challenging environment to sell into than it has been historically, just as their profits are depressed because of oil prices.

So, there's two sides of that coin: if some of that pressure is relieved, we have opportunities potentially to get some volumes back at the pricing we like; on the other hand – the other side of the coin is raw material costs go up and as we increase price, there is typically a lag in there and it's one of the reasons why we've kind of talked about the same year-over-year – or quarter-over-quarter performance second quarter to first. We expect IEP to be better, as I mentioned in the prepared remarks.

IPP, a little bit concerned that if prices continue to rise on the oil side and that translates into higher raw material costs, there may be some lag in our ability to pass it through and that may affect marginally margins in petroleum additives and urethanes in the second quarter. But generally, volumes have bounced back and we expect them to hold at March levels as we go into the second quarter.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Great and then as a quick follow-up. How much was Emerald 3000 improvement a contributor to EBITDA on a year-over-year basis and is that fully ramped up now where it'll be sort of level going forward or will growth in that business sort of continue accelerating in terms of volumes? I understand pricing probably stays relatively stable through the year.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Volume has – is up considerably and it has sequentially versus the first quarter and sequentially versus the fourth quarter as we've gotten, I mentioned, reliably running that asset. It's running reliably at above nameplate rates now, so that's positive and we expect that to hold through the year. So we're kind of at the rate that we expect to be at. We continue to try to squeeze more out of that asset and there is lot of work around that and we believe we can sell more if we can produce more, so that's a very, very positive story.

Relative to pricing, the pricing is pretty much in place. Though I will say that we'll likely see more of an impact to that improved pricing beginning in the second quarter than we saw in the first, because it was ramping up in the first quarter. So, more of the full effect will show in the second quarter. So, volume won't be the improvement second quarter versus first, you should see some on margin because the pricing will be more fully baked in in Q2.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Is your competitor for Emerald 3000, are they up and going now or could this turn into sort of a tightening situation where there's upside to price and I guess your volume in general for Emerald 3000 as we go through the year?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

My understanding and, Matt, you may have a better feel, but my understanding is yeah they're up and running and that's important. We talked about that during the whole ramp-up process as we moved from HBCD to this new technology, it's important there be more than one of us running. So yes, we believe that they are operating. That being the case to your point it's still I think relatively tight, right?

Matthew Sokol - Director, Investor Relations & Corporate Development

That's right.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

I mean, based on if we can make more, we can sell more, I've got to take that as an indication that it's still a relatively tight market particularly (29:40) price for the big customers more of annual pricing, so we kind of know where the pricing is. That's what's going to show up in the second quarter fully. Some of smaller customers, you can move – price moves a little more, so maybe some opportunity there. But Emerald Innovation 3000 clearly is the top story for Great Lakes Solutions in 2016 versus 2015.

Operator

Your next question comes from the line of James Sheehan from SunTrust Robinson. Your line is now open.

James Sheehan - SunTrust Robinson Humphrey, Inc.

Thanks. Could you guys quantify the amount of volume decline you're seeing in clear brine fluids and whether you expect that to deteriorate materially in the second quarter or maintain kind of the decline you saw in the first quarter?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yeah. Sure. It dropped, let me put it, sharply, in the first quarter. We expect – as we're in now, we see where April looked like and where the orders are for May and June, we expect it to rebound in the second quarter. So, it won't be back to where it was in the third or fourth quarter but up significantly from where it was in the first quarter. Some of that is order timing. The first quarter was a real drop versus any kind of a recovery I think, but we view that for the full year, it's in the range that we had kind of projected, though the first quarter was more significant than that. Again, we see somewhat of a bounce back in Q2.

James Sheehan - SunTrust Robinson Humphrey, Inc.

Great and could you talk about bromine conditions in China? You talked earlier about tightening of supply/demand there, environmental regulations pressuring some of the higher cost competitors. Are you still seeing the benefits there that you expected?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yeah, I was just there last week and had discussions and, yeah, pricing remains, as we go into the second quarter, solid for bromine pricing and the bromine derivative pricing. Kind of I said my remarks, typically, this is the time when you start to see more of the Chinese bromine just because of the seasonality come into play and that may still be the case on those that are operating. There is still viewed to be some restriction, government restrictions because of the issues you just mentioned.

But with all that, as we are – as of last week, pricing looks like it's holding and maybe even in some select cases, strengthening in China. So it should be a good story in Q2. It's – every quarter is a different quarter, but as we sit in Q2, yeah, pricing looks strong in China.

James Sheehan - SunTrust Robinson Humphrey, Inc.

Great and in terms of decene and your alternative raw material, are you saying that in the first quarter you didn't see any benefit from decene because of the market conditions and that's sort of your outlook going forward, until profitability of your customers improves?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

I think we saw some improvement in PAO. We are not restricted in how much we can make any longer due to the decene shortage or constraint that we had last year. So, what I'm saying is we could sell more decene or more PAO from decene if we had the customers, the profitable customers to do that. The challenge is that product goes to the oil companies and that's the point I was making. So, we looked at considerations of volume versus price and made some decisions on where we're going to support the business and where we're not and that's kind of the challenge that we have this year that wasn't in place before oil prices started to drop when the demand was high and we were constrained.

So, one of those cases. But the timing is probably not exactly right. We alleviate the constraint when things got tougher in the marketplace but I think over the long term and that long term may be subsequent quarters in 2016, clearly not having that constraint is going to be positive year-over-year for us.

Operator

Your next question comes from the line of Rosemarie Morbelli from Gabelli. Your line is now open.

Rosemarie Jeanne Morbelli - Gabelli & Company

Thank you. Good morning, everyone.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Good morning, Rosemarie.

Matthew Sokol - Director, Investor Relations & Corporate Development

Rosemarie.

Rosemarie Jeanne Morbelli - Gabelli & Company

Following up on the clear brine, why do you expect to second quarter rebound, is that because Exxon for example is starting a small project or is it another reason and how long will that rebound last, in your opinion?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

We are seeing it just – I mean, I don't know that there is anything specific new project that's driving the change, I think it's more order timing. We saw – we had a very – as we talked, we had a very strong – surprisingly to us, a strong fourth quarter and then correspondingly, surprisingly to us, versus what we kind of expected, weak first quarter. The second quarter is just back where we expected. So, I think there was an adjustment in the first quarter that is now over and my expectations on the rebound in the second quarter because we have orders on the books and we know we shipped in April. So, it's looks like it's kind of back to that normalized rate that we thought it was going to be.

We had talked about, I think, in Investor Day and other places that we thought it may be off by 20% for the year from last year which again was our best year. I think we're reviewing that that's kind of where we'll for the year, it's just it isn't even quarter-by-quarter; first quarter was a bigger dip and again a little bit of bounce back in Q2 and we expect that to hold through the year.

Rosemarie Jeanne Morbelli - Gabelli & Company

Okay. That is helpful. Thank you. And on the bromine pricing, you said that you are seeing some strengths if I can phrase it this way in China in the second quarter. Would that translate into an additional price increase for you or are you mostly ruling out the price increases that were previously announced?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

I think it's more – when I was out there, more talking about bromine, elemental bromine, and you could see how that pricing is moving and it moves month-to-month, kind of – a lot of it is spot and so that's kind of where I was referring to. That tends to translate into the derivative pricing, not automatically, it's still a negotiation and not across all cases. But if you looked even through last year quarter-to-quarter you see pricing relatively up significantly from it was in 2014 but it wasn't the same every quarter; it moved, and it's doing the same thing now. So, you are just seeing kind of ups and downs in specific cases and elemental bromine seems to be the indicator of that and last week the indicators were that the arrows were going up again a little bit. Again not everywhere and not consistently, but the trend was moving back up again from where it was in the first quarter.

Rosemarie Jeanne Morbelli - Gabelli & Company

Thanks and lastly, can you update us on mercury removal what you are seeing and whether you are beginning to benefit from the changes?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

We didn't see much of the first quarter different than the fourth quarter. We had kind of expected that with April being the timing, like now, right, when the implementation was supposed to be in place, that we'd see some kind of a ramp-up in the first quarter. It's been relatively consistent but no ramp-up. So, good news is that once the ramp up occurs, we can get a benefit of that that wasn't in the first quarter number. So, that – whether it comes in the second quarter or not is still a question, but it's been relatively stable but no kind of an inflection up that we had expected in the first quarter yet.

Operator

And your next question comes from the line of Chris Kapsch from BB&T Capital Markets. Your line is now open.

Christopher J. Kapsch - BB&T Capital Markets

Yeah, if I could follow up on the comments about bromine pricing. This morning, you didn't – it sounds like your – the strength you're seeing in China was focused a little bit more on elemental. In your Q that you filed, though, you explicitly said that increased prices for, and this is quoting from the Q, for bromine products serving the insulation and electronic markets in particular were noteworthy. So, I'm just wondering if – that to me implies that this pricing is starting to migrate downstream.

So I'm just wondering how that looked on a sequential basis. And then also if you could just maybe in the context of how that pricing is migrating into derivatives, just talk about demands in – demand in electronics in general, any nuances there regarding timing around Chinese New Year and so forth.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yeah, the insulation is an easy one because that's primarily driven by Emerald Innovation 3000 and I commented on that. So, pricing; again, the pricing contracts were really be fully baked in into Q2, so you will see that improvement in Q2.

Relative to electronics, again, the pricing on elemental bromine tends to migrate into the derivatives. And for Asia, electronics would be the biggest market. We see the volume is in the first and second quarter kind of at the average of last year, but last year it moved around a lot. Remember, our Q3 number, we were concerned about – we saw a real fall off in Q3. It bounced back to kind of the average of the first half in Q4, and Q1 was not as good as Q4, but well better than Q3. It's kind of that same kind of number.

We expect Q2 to be a little bit better than Q1 but kind of like the average of last year. From a pricing perspective, as I mentioned when Rosemarie asked, the pricing kind of moved around on the tetrabrom as well as it did on the elemental bromine, and it does tend to flow through more directly in that product because it's an Asian product primarily.

Q1 was a good price quarter, not as strong as the probably average in the second half but well stronger than the average in the first half of the year and we're kind of at that rate in Q1 and Q2 as well. Again based on what I saw and what I heard last week, I would expect to see the pricing strengthening a little bit probably more than we had expected when we put our plan together for the second quarter, months ago. We'll have to see. It tends to move – it moves regularly and relatively quickly but, as of last week, the trend was up on elemental bromine and, to your point, would translate into tetrabrom typically.

Christopher J. Kapsch - BB&T Capital Markets

Okay. And then just a follow-up, the margin for the IEP segment although down sequentially, obviously up very strong year-over-year and in spite of this, it looks like acute shortness or downturn in clear brine fluids in the quarter and the absence of any benefit from incremental mercury removal demand, so just like sequentially prices continue to improve in derivatives and you get a bounce back in clear brines and you probably see some incremental match related demand. I assume that sets up for pretty nice sequential performance in IEP margins in the second quarter, is that fair?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yeah, that's fair. I think that all those things you mentioned in Great Lakes are true, the 3000 improvement and pricing should help. Clear brine fluid, as we mentioned before, has got lower margins than our average margin, lower than the flame retardant margin, so more of that isn't necessarily – obviously a good thing to bottom line EBITDA but not necessarily to margin percentage because of the mix effect.

But generally what you said is exactly right, but the biggest improvement in IEP margins quarter-over-quarter will be the improvement in Organometallics in the second quarter versus the first quarter. The difficult first quarter actually a lot of it was due to timing and I mentioned that kind of that cryptically in the prepared remarks but both purchase price variances on tin and the tin products manufacturing variances flowing from the fourth quarter into the first quarter won't occur first to second.

And so, we will see a significant bump in the EBITDA performance of Organometallics in the second quarter versus the first. And while much smaller than Great Lakes, on the margins it matters quite a bit to the absolute margins of IEP. So, all those things in Great Lakes are directionally correct but even bigger than that would be the improvement that we expect to see and we started to see in April already in Organometallics as it contributes to IEP.

Operator

Your next question comes from the line of Mike Harrison from Seaport Global. Your line is now open.

Michael Joseph Harrison - Seaport Global Securities LLC

Hi. Good morning.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Good morning, Mike.

Michael Joseph Harrison - Seaport Global Securities LLC

Craig, I'm glad you touched on some of these margin dynamics in Organometallics. I was hoping that you could maybe comment in a little more detail on exactly what was going on with some of the timing issues both in terms of the tin pricing and how that affected things. It sounds like there was an order timing issue, and you mentioned that there were some contracts that are going to be kicking in. So, I was hoping that you could comment a little bit on the volume expectations as we get into the rest of the year?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yeah. We will start with the back end, the last part of your comment. Yeah, the volume, the contracts we've been working on are in place and while we put the plan together, we assumed we'd have a full-year impact starting in the first quarter. A lot of those major ones are really kicking in in the second quarter both at DayStar, which is the kind of the high purity product plant that we build in Korea and at Bergkamen.

The issue around manufacturing cost variance is there's a three month lag typically at Bergkamen and when we make adjustments like we did in the fourth quarter to manage cash flow and when we saw some of these things in the early part of the quarter pushing into Q2 these contracts, we took adjustments to the manufacturing operating rates which affected the cost structure. So that impacted the first quarter dramatically.

On the tin products, we have pass-throughs on tin. So when tin prices are – but there is a lag. When tin prices go down, we drop our average; we drop the selling price on the tin products that we produce. But it's the cost run through inventory; those low-cost tin products don't necessarily show up until three months later, much like the manufacturing cost variances. So, we go into – and now tin prices are going up. So, pricing is starting to go up and now we have low tin prices. So, low tin costs in our product cost, you kind of get a double bang the positive side the first quarter – or in the second quarter and kind of contrary to what we saw in the first.

So, it's the three month lag at both purchase price variances versus the way we price on that side of it and the manufacturing variances that both hit Q1 very hard for Organometallics and we will get that benefit in Q2. So, Q2 at the end of the day may look better than the actual performance would indicate much as the first quarter was bad, okay. That's kind of how it rolls through. And while those numbers aren't big for Chemtura, they are huge for Organometallics and very material for IEP.

Michael Joseph Harrison - Seaport Global Securities LLC

And then just in terms of the petroleum additives business and the pricing dynamics there, it sounds like that's really a raw material contractual pass-through thing but I was wondering also, are you seeing any competitive pressures and you are having any issues getting the new synthetic base-stock materials spec-ed in with some of these larger customers that you referred to?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Getting spec-ed in has not been a major issue. We are using that product primarily in Elmira. We're doing running trials in Ankerweg, (45:30) but it's primarily an Elmira product right now, we're running it there and it makes a product that is essentially identical both in spec and in performance to the traditional decene. So, that's not an issue. The first part of your question, I'm sorry, that was relative to the decene and the performance of the decene. What was the first part of the question?

Matthew Sokol - Director, Investor Relations & Corporate Development

Mike, are you there? All right.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Why don't we go ahead to the next question. Yeah, I'm sorry.

Operator

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

Dmitry Silversteyn - Longbow Research LLC

Good morning. So, let me see if I can follow-up on Mike's question.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Good. Thank you.

Dmitry Silversteyn - Longbow Research LLC

Yes, you're welcome. So I'm just trying to understand the dynamic of not being able to get the synthetic lube volume up and running now that you have access to the raw material pricing. I mean, my understanding is that business is still growing or that market segment is still growing very nicely.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yes.

Dmitry Silversteyn - Longbow Research LLC

So, what is that you're struggling with in terms of getting that business back?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

It's not an issue relative to our ability to produce...

Dmitry Silversteyn - Longbow Research LLC

Right.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

It's a commercial issue. So, you're right, the market is growing and we're growing with the market. We have the opportunity with this new supply constraint begin eliminated to produce more but there are competitors and in this marketplace with the competitors in place, there is an excess of high-viscosity PAO out there and we're competing on a commercial basis for some big chunks of business. And in some cases, we have made a decision that we are not going to drop the price such that it would take to get that business. So, it's an overall bottom line decision, like always, of margin versus volume and, in some cases, we've chosen margin.

Dmitry Silversteyn - Longbow Research LLC

Let me ask you this in a different way, Craig, then. If you did not have the disruption that you experienced in 2015, would you be giving this business up because of the price competition?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Probably not, but it wouldn't have been an issue because we were constrained on how much volume we had, so that's the issue. This is the additional business more than it is the business that we had last year before the constraint was relieved.

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

The way I would configure the situation is for a year or more we constrained how much supply we could give to our customers. And so for them to serve their needs, they took whatever steps were necessary. And so, we can't expect them just to turn on a dime now that we are able to supply them and automatically reallocate demand back to us.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

And to turn on a dime would be the way we could get them to do that is with price and we have chosen not to do that.

Dmitry Silversteyn - Longbow Research LLC

Okay. Okay. So, basically, you are going to win this business over again now that you have the volume to supply it?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yes

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

Exactly.

Dmitry Silversteyn - Longbow Research LLC

Very good. Secondly, sticking with petroleum additives. As you know, New Market reported yesterday – and they don't provide a lot of detail but they did talk about seeing accelerating volumes in that business particularly in March compared to January, February in the fourth quarter suggesting that, to the extent that there was de-stocking by customers, it seems to be over and we may be in a restocking phase. So, what – outside of the PAO decene business, did you see anything in your PET (49:29) additives business that would either support or contradict that view?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yeah, I would support. We've seen in the additive side is where we've seen the volume growth. So, they have done through this commercial excellence a lot good work around value pricing in the additive side and now with volume – as New Market indicated, with volumes being relatively strong in their packages that they are selling, we're seeing that improvement in the inhibitors, the detergents on the additive (50:00) side and even in the intermediates that we sell to others that make some of these inhibitors, that volume has been up as well in the first quarter. So, that's been a real positive part of the story in Q1 and we expect that to be the case in Q2 as well.

Dmitry Silversteyn - Longbow Research LLC

Okay, very good. Switching back to Emerald 3000 really quickly, I think you talked about previously the market in Europe needing a third plant with yours being one and ICL's being the other one probably sometime in 2017 and then you would have to make a decision on whether or not you're the guys adding the capacity by 2016. Can you talk about any changes to that dynamic and are you any closer to making that decision?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

I don't think there is any change in the dynamic from the demand side. From the supply side, we are probably more optimistic that we can de-bottleneck the current asset to a higher rate than we were a quarter ago, based on the performance over the last 120 days and based on some of the engineering work that's been going on. So, that may allow us to push the decision a little bit longer, but your basic premise around the need for a third plant especially as this expands beyond Europe is right and the timing maybe – we may or could be able to push that by a quarter or two because of some of the work that we've been doing if were successful as we expect to be in de-bottlenecking the current asset, but everything else you said is right, I don't think anything has changed.

Operator

Your next question comes from the line of Ivan Marcuse from KeyBanc. Your line is now open.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Hi. Just a couple of quick questions. Where do you expect the diluted share count to be in the second quarter and going forward? How to think about that and then a quick follow-up to that is where do you – what's your expectations in terms of EBIT for your corporate expense for the year?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Stephen, you maybe you can...

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

Yeah. Certainly. So, you always have this complication of the weighted average effect. So, the count for the quarter, because you do two weighted averages, you do the year-to-date, the year-do-date earnings, and you do the quarter for the quarter. For the quarter, we'll be below 65 million shares in the second quarter. The weight – the year-to-date average will still be a little bit above 65 million in the second quarter but by the time you get to the third quarter, the quarter's average is probably getting closer to 64 million and the year-to-date probably breaks under 65 million in the third quarter. And of course we still have money we can spend to buy shares, so we can keep moving that number.

In terms of corporate expense, our guidance is I think very much where it was at our Investor Day. So I think in terms of something in the order of $40 million on an EBITDA basis and on an EBIT basis that translates to something around $60 million, that's for full year, so divided by four for quarter rates.

Ivan M. Marcuse - KeyBanc Capital Markets, Inc.

Great. Thank you.

Operator

You next question comes from the line of Chris Kapsch from BB&T Capital Markets. Your line is now open.

Christopher J. Kapsch - BB&T Capital Markets

Yeah, just a quick couple of follow-ups. On Emerald 3000 and I think there was a subtle comment, Craig, you just made and it sort of gets to my question is, this has always been a market that's been predominantly in Europe because of I guess the nature of construction over there. But just wondering, I'm getting the sense that maybe in fact there could be an opportunity in North America over time and you did just hint that once this expands beyond Europe, so can you just talk about what do you see an opportunity for Emerald 3000 beyond the scope of Europe and over what timeframe?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Yeah and Matt can probably comment better but Japan is already in place, right. China is the big one and the timing on that is four or five years, something like that.

Matthew Sokol - Director, Investor Relations & Corporate Development

Yeah it's beyond really our horizon and while we think it eventually going to happen just because HBCD will sunset everywhere in the world at some point, it's hard to see at this point.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

In North America again the construction types are different, so the market is not nearly as big but there is timing on that as well.

Matthew Sokol - Director, Investor Relations & Corporate Development

Yeah I would say pretty well in front of China, but still probably, from the regulatory transition period, probably still a year or two out.

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

So our customers' goals with XPS and EPS foams is to develop the North American market and substitute some of the traditional insulation foams. So, they see that as the larger growth opportunity

Matthew Sokol - Director, Investor Relations & Corporate Development

And to the extent they've switched. Large customers, they don't want to use additives, so they will go with the new polymeric version as opposed to the old incumbent. (54:44)

Craig A. Rogerson - Chairman, President & Chief Executive Officer

The requirement beyond the two plants unless the de-bottlenecking on both side is significant, the two plants name plate capacity, the expansion beyond the third facility somewhere – third line somewhere is not dependent on China or anything else, it's dependent on kind of the current market and the growth in the current geography. So, that's kind of what we've been looking at more than the big potential out there with China or if there is some success in moving the kind of types of insulation used in North America. It's based on basically Europe and a little bit in Asia Pacific that's currently in place.

Operator

Your next question comes from the line of Ben Kallo from R. W. Baird. Your line is now open.

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

Good morning, Ben.

Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management)

Hi. Can you hear me?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Now we got you.

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

Now we got you, yeah.

Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management)

Perfect. This is Tyler Frank on for Ben. Can you guys just discuss potential opportunities that you're seeing in the M&A market and try and provide a little bit color on any sort of acquisition or any sort of, I guess, end market you guys might target for a strategic acquisition whether that'd be a tuck-in or a larger scale buy?

Craig A. Rogerson - Chairman, President & Chief Executive Officer

The tuck-in or the bolt-on as we talk about it, I mentioned this we had discussions in the past and certainly at Investor Day. If you look at the funnel of things that we are actively looking at, more of them tend to be in the IPP side and more of those tend to be in the petroleum additive side. And there is lot of reasons for that, it's availability of potential targets to look at and because of the regulatory changes that are driving the need for either the additive side, the synthetic side being so prominent reduce emissions, improved MPG, whatever. There seem to be more opportunities there.

We've had a hard time getting one done probably because of the value issues. Our expectations on what we are going to get versus what we are willing to pay is always an issue when we go into these things and that's probably – not probably, that has been probably the defining issue why we haven't closed on one, but we continue to work hard on those.

On the broader, the transformational thing that we talked about it, I've mentioned that we continue to look at things that clearly make strategic sense that would make sense to you without having a lot of story to be told around it. The perfect deal would be something that also offers us some other verticals that leverage our technology base or go-to-market strategy that have more growth opportunities, be bolt-on or organically. So we continue to look at those and again depending on whether they're big or smaller or more our size determines whether it's a buy, sell, or merge basically. So, we continue to look at those.

Probably the difference between last year and this year and I mentioned this a couple of times too is kind of the initial screen we look at we look at when we evaluating these alternatives, is it actionable in a relatively near term? Can you get it done, it's not just some idea that Craig has or Stephen or Matt has that this would be greater if we could it, then we have to convince somebody. This something that now we're looking at that is actionable if it make sense to both sides and there is a willingness to do something.

So that narrows down the group of – or the number that we're looking at but the ability to get them done is higher than a lot of the things we kind of evaluated last year. So, that's kind of how I position where we are.

Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management)

Great. Thank you.

Operator

There are no further questions at this time. Mr. Sokol, I'll turn the call over to you.

Matthew Sokol - Director, Investor Relations & Corporate Development

Thank you, Tracy, and thank you, everyone, for joining this morning. We look forward to talking to you on our second quarter 2016 earnings call in late July. Thank you.

Stephen C. Forsyth - Chief Financial Officer & Executive Vice President

Thank you.

Craig A. Rogerson - Chairman, President & Chief Executive Officer

Goodbye.

Operator

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

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