Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Albemarle Corporation (NYSE:ALB)

Q1 2012 Earnings Call

April 19, 2012 08:00 am ET

Executives

Lorin Crenshaw - Director, IR and Communications

Luke Kissam - CEO

John Steitz - President & COO

Scott Tozier - CFO

Analysts

David Begleiter - Deutsche Bank

P J. Juvekar - Citi

Bob Koort - Goldman Sachs

Rob Walker - Jefferies

Jeff Zekauskas - JPMorgan

Kevin McCarthy - Bank of America

Mike Sison - KeyBanc

Dimitry Silversteyn - Longbow Research

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2012 Albemarle Corp earnings conference call. My name is Kim and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of today's conference. (Operator Instructions).

As a reminder this call is being recorded. I will now turn the conference over to your host for today's call Mr. Lorin Crenshaw, Director, Investor Relations and Communications. Please proceed, sir.

Lorin Crenshaw

Thank you, Kim and welcome everyone to Albemarle’s first quarter 2012 earnings conference call. Our earnings were released after the close of market yesterday and you’ll 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 Luke Kissam, Chief Executive Officer; John Steitz, President and Chief Operating Officer; and Scott Tozier, Chief Financial Officer. Before we get started, I would like to ask everyone once again to please save the date for Albemarle’s 2012 Investor Day which will be held in New York City on Tuesday May 22nd. Registration and event details are available at our website under the Investor Section. We look forward to seeing many of you there.

As a reminder, some of the matters discussed during this conference call and webcast 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’ll find reconciliations in our press release which is posted on our website at albemarle.com.

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

Luke Kissam

Thank you Lorin and good morning everyone. We appreciate the opportunity to share our first quarter financial results with you today. And I will begin by commenting on the company's quarterly results and sharing updates related to certain strategic initiatives we have commenced. John Steitz will then walk you through the business segment performance before Scott Tozier reviews today's financial highlights. As usual at the end of our prepared remarks, we will open it up for your questions. I'm pleased to report first quarter results that reflect an excellent start to 2012 across each of our segments. First-quarter net income of $108 million or $1.20 per share was up 4% year-over-year and net sales of $712 million was up 2% year over year.

This marks the 10th consecutive quarter of year-over-year growth in our earnings. In addition, we continue to generate a healthy amount of cash with $124 million of cash generation for the first quarter, up 28% versus the prior-year period excluding the $50 million pension contribution we made in the first quarter of last year. Collectively our businesses generated $176 million in EBITDA and achieved segment margins of 24%.

Year-over-year earnings growth in Catalyst and Fine Chemistry reflected continued positive trends in those businesses while Polymer Solutions saw an increase in demand from the fourth quarter and a continuing strengthening of demand with each successive month in the quarter. Great results and a very good start to 2012.

The quarter also included two special items that I want to highlight. We had a gain of $8.1 million, $5.1 million after-tax or $0.06 per share from proceeds we received as a result of the settlement of the litigation matter net of related legal fees. We used these cash to make an $8 million charitable contribution to the Albermarle foundation to begin the process of creating an endowment for the foundation. That contribution was a $5.1 million after-tax or $0.06 per share expense which basically offset the special gain of the litigation settlement. The Albermarle foundation is a non-profit organization dedicated to making a positive difference in the communities in which we operate and to the non-profit organizations in which our employees are involved.

Since the Albermarle foundation was established in 2007, its contributions to more than 100 partner agencies have steadily increased and I would expect that trend to continue. It's important that Albermarle does its part in trying to make our communities better places to live, work and raise a family and we are delighted to be able to start this endowment to ensure that the Albermarle foundation's impact can continue to grow in both the good and challenged economic times that the future will surely bring.

On the strategic front, we mentioned back in January that we've commenced a comprehensive portfolio review aimed at identifying opportunities to address underperforming assets. That process remains ongoing, but I would expect to be in a position to provide specific details in the second quarter. Our major capital projects are proceeding well.

I was recently in Saudi Arabia and Jordan and was able to see firsthand the progress being made on the construction of those two sites. It's always good to see concrete being poured, steel being erected and projects beginning to take shape. With regards to performance in Catalyst Solutions projects we expect mechanical completion by the end of 2012, for both the 6000 met/ton TEA plant that we are building in Saudi Arabia with our partner SABIC and for our wholly-owned Greenfield Polymer Catalyst Center in Yeosu City Korea. That would mean start-ups for both sites in late fourth quarter of this year or early first quarter of next year.

In some instances we are already sending samples to customers and getting good feedback. In addition, we continue to invest in specialty organometallics capacity expansions as select domestic facilities to satisfy the growing market demand for these products. These expansions will be executed in stages and will be complete by the end of the year allowing us to maintain our global leadership position in organometallics.

Turning to our bromine expansion in Jordan. The first base should be ready this summer when we expect mechanical completion for the additional bromine capacity. We expect the additional capacity for clear completion fluids to be completed in the October-November timeframe.

The last phase, additional tetrabromide capacity should be operational next year in late second or early third quarter. Each of these stages roughly doubles the existing capacity and we plan to bring this additional capacity on in stages as market demands dictate. This capacity remains necessary to meet the needs of our customers and positions us well to capitalize on what remains an extremely attractive global demand outlook for bromine and bromine derivatives.

We don't expect any meaningful overruns on any of these projects at this time. One of the new uses for bromine that we have highlighted in the past is control of mercury emissions. In March the US Trade Development Agency sponsored a China Reverse Trade Mission on mercury control hosting representatives from the Chinese Ministry of Environmental Protection and top Chinese power companies. The purpose of the mission was to showcase the most advanced US technologies used in controlling mercury emissions from coal-fired power plants.

It also provided an opportunity for the Chinese Ministry of Environmental Protection to collaborate with the US TDA and US EPA on policy and rulemaking in the area of mercury emission control. We were pleased to take part in the mission and be among the US companies the delegation chose to visit directly to review our emission abatement technology. As environmental protection continues to rise higher on the agendas of governments around the world, Albermarle is well situated to assist the global power and cement industries in particular in reducing pollutants throughout our diverse portfolio of products and services.

Finally, as you know, Albemarle has a long history of supporting our customers and evolving our technology in ways that anticipate their desire for the most sustainable solution. In that way, we were excited to announce last week a new addition to our existing platform of polymeric flame retardant solutions.

This new technology, licensed from a subsidiary of Dow Chemical Company, will be commercialized in 2014, as expected to become the preferred choice for flame retarding, both extruded and expanded polystyrene using foam insulation applications.

As we consider the outlook for the balance of the year, uncertainties clearly persists regarding the durability of the current global economic recovery. Though similar regarding the European debt crisis seems to have improved, concerns remain regarding the magnitude of the impact of austerity measures being implemented throughout that region.

Nevertheless, the full-year outlook for Catalysts and Fine chemistry remains favorable, supported by several positive industry trends, and healthy new business opportunities. In addition, our interpretation of the end-market patterns were currently seen is that they remain supportive of a continued acceleration of Polymer Solutions’ business trends into the second quarter and through the second half of 2012.

In closing, our businesses remain healthy and we expect to perform well in 2012. Our best guess remains that our businesses will generate earnings in the first half of 2012, resembling levels achieved during the second half of 2011. Assuming that a second half recovery occurs, we continue to expect to grow our business for the full-year and make further progress toward the goals we outlined in Vision 2015. This would set us up nicely for 2013 when this impact of the major investments I discussed earlier should become positive contributors in our financial results.

With that, I will turn the call over to John to discuss our operational performance for the quarter.

John Steitz

Hey, thanks Luke and good morning everyone. I will start with Polymer Solutions, which reported first quarter net sales of 228 million, down 12% year-over-year but up 9% sequentially, and segment income of $54 million, down 23% year-over-year but 46% higher sequentially, and volumes that were up 20% quarter-on-quarter.

Of course, year-over-year comparisons for the first half of 2012 will not show gains given the strength of the first half of last year. I would like to point out that the distinct improvement in Polymer’s performance versus the fourth quarter was very encouraging. From our advantage point, it represents returning the cycle but only time will tell the ultimate extent of its strength and duration.

In terms of intra-quarter color, demand began rising in late January following changed new year, and accelerated throughout the quarter, with revenues and volumes rising with each successive month. The increase in demand, combined with great cost management and execution to plan on the manufacturing side, resulted in a 600 basis points sequential improvement in segment margins to 23.5%.

Specifically, brominated flame retardant volumes and operating profits were down 19% and 12% year-over-year respectively, but up 4% and 15% sequentially, while mineral flame retardant volumes and operating profit showed some more strength versus the prior quarter, up 34% and 77% respectively.

Improvement was wide spread with the enclosure, connector, print and wiring board and wire and cabling markets all picking up nicely, while the construction and automotive end-markets also showed better trends.

Stabilizers and curatives also delivered strong sequential performance, with volumes up 30% and operating profit equally strong. The main drivers included an improved tone in North American infrastructure spending, which benefited curatives, fuel and lubricant, antioxidants, trends and great execution from the manufacturing perspective in meeting the increased demand.

Looking forward, among the many indicators we monitor, the IPC Book-to-Bill report picked up to 1.04 in February, while global connector confidence file 8 [00:00:48], as published by the Bishop report, has shown four straight months of upward trends, with March rising to 65.4 from 60.8 in February and up substantially versus 50.5 in December.

Overall, I’ll reassert the tone our fire safety end-markets has improved, and seems likely to strengthen further in coming months.

Moving on to Catalysts, which reported another great quarter, a stronger refinery catalysts volume growth and higher pricing growth of net sales of $294 million, up 13% year-over-year, segment income of $82 million, up 13% year-over-year, and segment margins of 28%, up 20 basis point versus prior year.

Operating results were strong in both divisions, with refinery catalysts sales now offering profits of 13% and 5% year-over-year on a respective basis. And Performance Catalyst Solutions sales rising 10% and operating profits 29% higher on a year-over-year basis.

It’s worth noting that the earnings presentation indicates that the year-over-year catalyst revenue increased attributable-to-volumes flat. However, excluding a large alternative fuels order from last year, volumes contributed a mid-single digit percentage to the year-over-year sales increase.

Within refinery catalysts, HPC results were outstanding, with operating profits of 20% year-over-year, establishing a new all-time record on strong volumes and favorable mix.

SEC performance was also strong with volumes and earnings achieving double-digit growth. The high volume gains were attributable to a combination of improved operating rates amongst certain large customers in the United States versus a year ago period, and higher year-over-year growth in emerging markets while we are benefiting from the start up, also of its sizable new unit running on our technology.

The PCS division’s financial results were principally driven by core polymer catalyst group. Sales and operating profits within Polymer Catalysts rose 21% and 58%, year-over-year, thanks to a solid organometallics volume growth, reflecting, encouraging global trends.

Looking forward, second quarter HPC volumes will be lower sequentially in year-over-year. But that is attributable to expected order patterns and changed thoughts of our customers as opposed to any reduced demand. However, for the full-year, we continue to expect a nice HPC volume growth.

Regarding SEC, while anecdotally certain refiners are challenged depending on the their geographic locale, access to heavier crude and conversion flexibility, the overall tone of our business is solid with growth expected from a combination of new units coming on using our technology and continued growth in developing markets.

Fine Chemistry delivered net sales of $190 million, up 7% year-over-year and segment income of $39 million, up 31% year-over-year. Segment income levels were the second highest of all time, while segment margins of 20% remain at historically high levels and were up an impressive 340 basis points from last year.

Both divisions reported excellent financial results with Performance Chemicals sales and operating profits up 4% and 5% year-over-year respectively while Fine Chemistry Services sales and operating profits rose 21% and 121% respectively versus the prior year period.

Performance Chemicals drivers included higher pricing across the portfolio, historically high clear brine fluids volumes and excellent results across a diverse range of intermediates into a variety of industrial and consumer end-markets.

The full year outlook for clear brine fluids remains favorable with global drilling rates expected to amass the outstanding 2011 levels driven by continued strength in developing markets and the eventual tailwind provided by rejuvenated Gulf of Mexico; though the impact from that region will likely be somewhat second half weighted.

The year-over-year doubling in our Fine Chemistry Services profits reflected that business beginning to reap the benefits of a diversified line of opportunities across the agricultural, lubricant, renewable chemistry and specialty pharma sectors we have targeted for growth. The impact of evolving our portfolio towards complex, higher margin, longer duration opportunities was evident during the quarter as operating margins rose impressively.

Drivers included continued healthy growth in Ag intermediates, positive trends within our pharmaceuticals portfolio and a growing contribution from several recent renewable chemistry business wins.

Notably, we believe that current Fine Chemistry profitability levels are at a new base reflecting the collective impact of a number of structural and strategic initiatives including a transformation of the product portfolio through asset sales and selective pairing and growing impact of several new bromine applications and ongoing make shift within the Fine Chemistry Services towards increasingly complex, longer duration, higher margin businesses.

An excellent example of direction this business is moving toward was a recent contract we were rewarded to complete the Naval Air Warfare Center Weapons Divisions. First biojet fuel production run based on bio and butanol provided by Cobalt Technologies. Overall, Fine Chemistry is well positioned to continue delivering outstanding results this year.

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

Scott Tozier

Thank you John and good morning everyone. Albemarle’s first quarter financial results were excellent on several measures including earnings, cash generation and overall profitability levels. Specifically, the business generated EBITDA of $176 million, up 3% year-over-year and achieved EBITDA margins of 24.8%, 20 basis points higher year-over-year and up by 180 basis points on the fourth quarter [troughs].

Our balance sheet remains in superb shape with excellent cash generation driving net debt down $55 million during the quarter or 20% versus year-end levels to just $216 million, excluding $22 million in non-guaranteed debt from our JBC joint venture.

As a result, leverage as measured by net debt to EBITDA is at 0.3 times and our net debt to capital ratio was 11% at a quarter end. Our cash and leverage position continues to give us options and flexibility as we work to our Vision 2015.

Turning to some P&L details; SG&A expense rose 10% year-over-year principally driven by a combination of higher selling commissions, personnel costs and pension related expenses. As a percentage of sales, this line item is up around 80 basis points to 11.3% versus 10.5% during the same period a year ago.

In total, pension expense rose $3.5 million year-over-year to $10 million, due to a decline in the discount rate used to measure our pension obligations and lower than forecasted asset performance in 2011. As we noted in January, we expect pension expenses to rise roughly $20 million on an annualized basis this year.

However, our funded status remains quite strong nearly 100% and we do not expect the need to make any meaningful cash contributions to our plans until 2014 at the earliest.

R&D expense; it is up 8% year-over-year, as we continue investing in organic growth opportunities including the strategic adjacency initiatives we outlined as part of Vision 2015. R&D cost as a percent of revenue are up 20 basis points to 2.7% versus 2.5% for the comparable period in 2011.

Our effective tax rate for the quarter was 25.5%, up 130 basis points versus the first quarter of 2011 rate of 24.2% driven primarily by increased profitability in the higher tax rate countries and changes in tax regulations most notably in the US and Europe. At this time, we expect our full year rate to be around 25%.

Now on the cash flow trends; free cash flow defined as cash flow from operations, add the pension and post retirement contributions and subtract capital expenditures was $71 million for the period, up 7% year-over-year. Cash from operations was up 28% year-over-year to a $124 million and that’s excluding the $15 million pension contribution we made in the first quarter of 2011. This was driven by good profitability and lower working capital requirements.

CapEx during the quarter was $55 million reflecting continued investment in the major strategic projects we’ve commenced in South Korea, Jordan and selectively here in the US as earlier updated by Luke. We expect CapEx for the quarter to rise for the balance of the year and approach approximately $300 million for 2012 with roughly $100 million of that attributable to our Jordanian expansion which will be fully funded from operating cash flow of that joint venture.

Net working capital was up $39 million from December 2011 or 8% mainly due to receivables from higher quarter-end business activity and as we dealt inventory levels modestly to meet future market demand. Overall, net working capital as a percent of revenue was a healthy 19%, down 311 basis points year-over-year and up 126 basis points from year-end.

Finally, we made $16 million in dividend payments during the quarter, up 19% year-over-year and announced a 14% increase in our dividend to $0.20 from $0.175. The increase reflects our confidence in the cash generating capacity of our businesses and represents the 18th consecutive year that we have raised the dividend.

With that, I’ll hand it back over to Lorin for Q&A.

Question-and-Answer Session

Lorin Crenshaw

Thanks Scott. Operator at this time we would like to open the call for questions.

Operator

(Operator Instructions). And your first question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

David Begleiter - Deutsche Bank

And Luke on bromine forward price you mentioned in the slide, it is holding firm, any sign of any weakness anywhere in that chain in potential as the year improves for some price increases in brominated flame retardants.

John Steitz

David let me just give you little more detail around that. If you look at the whole brominated flame retardant business, prices year-over-year were up about 7% to 8% and even sequentially were up a couple of points. If you take out the mix effects like if I pull out tetrabromide for example, brominated flame retardants are up 20% year-over-year on a pure price basis. So right now I would say there is a growing concern about some of the raw materials, benzene, phenol there is an issue in Europe related to the CDT. So we are continuing to study that but I think as supply and demand balances out with an improved volume scenario we are keeping a strong eye out towards those kind of opportunities. So we will stay around on top of that but overall it's been very encouraging, especially through the volume declines over the last half of 2011 and everything appears to be lining up pretty well.

David Begleiter - Deutsche Bank

And John same question on catalysts, any more color on the pricing gain in that segment to just mix and what's happening specifically on FCC pricing?

John Steitz

Yeah, David FCC pricing you know the big driver of course has been rare earth and the year-over-year pricing is up pretty significantly and that’s mostly a rare earth impact. Sequentially prices were down, the order magnitude about 10% and once again that’s all rare earth. So the way we look at it is over the course of the year our rare earth situation will balance out for us. I think we’ve done a really good job with our catalyst business of managing volatility around those kind of metals.

Now with that said, I think we’re having some success of driving technology, driving some of the low rare earth alternatives and driving the heavier resid and higher propylene yielding FCC catalysts which is resulting so far this year in between a $100 and $200 improvement in base prices. So we’re hopeful that we can continue to drive that kind of the value especially with some of the global improvement in volume sourcing.

David Begleiter - Deutsche Bank

And just last, Luke is there update on lithium you can provide?

Luke Kissam

Yeah, I can give you update, we continue to work on the technology in perfecting that technology. You know David every time you learn a little bit more in dealing with chemists, they got another question and they learned a little bit more and they want to ask a little more questions. So that process is still, we’re working well, we’re producing lithium carbonate, we’ve got our pilot plant at Magnolia, run and own the hot broad and we’re in the design phase right now. I think that’s more of a 2014-2015 time of commercial launch than a 2013 because we got to perfect it and design it and build it. So but it is still the strides, still looking forward to get into that market.

Operator

Your next question comes from the line of P J. Juvekar with Citi.

P J. Juvekar - Citi

You know volumes of polymer solutions have declined in the sixth quarter in year over year?

Luke Kissam

Hey P.J. this is Luke. I am sorry, we are having a very hard time hearing you, could you speak up please.

P J. Juvekar - Citigroup

What’s going on sort of longer term, did all decline something from mineral flame retardants that are showing the declines?

Luke Kissam

P.J., I couldn’t quite hear you. I think it has to do with volume issues around polymer solutions especially in flame retardants, if that is the case let me just kind of talk about volumes in general. In brominated flame retardants in the first half of last year volumes were extraordinarily strong, were sold out most of our units. Probably looking back now was an over-correction from volume declines in 2010.

After that we saw all the US political issues related to debt ceiling and a lot of the European issues related to Italy and Greece and Spain and we saw a pretty significant volume drop in the second half of last year. What we are seeing now is an improvement sequentially in volumes broadly and we have seen that in the first quarter. We believe, we will see that in the second quarter. It will be still less than the first and second quarters year-over-year, but we believe that all the trends are positive.

In mineral flame retardant, volumes were extraordinarily strong in the first half of last year as well. We saw them drop off precipitously in the fourth quarter, but they have returned in a very robust fashion in the first quarter of this year and the second quarter also looks like improving volume trends. So hopefully that gives you a little bit of color, longer term we feel really good about of our safety in general and we can talk about that in greater detail at the Investor Conference in May.

Unidentified Analyst

And just quickly what are the utilization rates currently at JBC and in Arkansas?

Luke Kissam

You know they have improved from the back half of last year and we are probably running in the range of 80% to 85% now.

Scott Tozier

And P.J. I would say that, that changes a little bit as you look to each one of those units, some of the units on some of our products are sold out and we're running just as hard as we can and others are running a little bit more slowly and we are in a position in some instances where we are allocating bromine to the highest value product. So you got to be careful and John’s answer on that was accurate but you got to be careful when you are looking at each specific unit operations and then how they might be running because some of the impact are sold out. So when we are looking at pricing, we are looking at how we manage our portfolio of bromine and we obviously, is specific on a product-by-product basis for the application and how that market is doing today, but overall that’s where we are.

P J. Juvekar - Citi

And just quickly John you mentioned about certain refineries challenges based on the geography. I am just wondering if you can talk about the impact of the closure in the northeast, when the refinery is setting down and what's the impact for you?

John Steitz

Basically, the Northeast is really hampered from a refining point of view, but the real growth in this business is outside the United States and Europe, P.J. We are seeing strong trends in Asia, excluding Japan and strong trends throughout the Middle East.

Operator

Your next question comes from the line of Bob Koort with Goldman Sachs. Please proceed.

Bob Koort - Goldman Sachs

Hey, John you had mentioned that the monthly trends in Polymer Solutions; was there anything atypical or is that sort of what you normally expect where February was better than January and March better than February?

John Steitz

Yeah, well, last year I would say it was real very unusual because everything from with the exception in January once we came out of the Chinese New Year in 2011, our business was just strong, I mean just really, really strong. And so while going into this year, we are hopeful that that would be the trend; you know its of course moderated from 2011, but its been a nice uptick and we are getting I think this quarter off to a good start too. And then all the underlying trends and indicators are positive too, so its just all gives us a lot more confidence than where we were six months ago.

Bob Koort - Goldman Sachs

And Luke, you guys got an awful lot of cash on the balance sheet, and I know in your Vision 2015 acquisitions are probably a third of the growth. Can you give us a sense are you getting close to there, I mean interest rates are low, you've got cash, but I also know that your definitions of what makes great companies are pretty limited in terms of the financial profile. So is there anything out there that's got you excited these days?

Luke Kissam

Yes, there are, we've looked at a number of things that have got us excited and we just had been able because I can’t Bob being in a position where we’re going to do a deal that limits our ability for these wonderful organic opportunities we have. But I would expect over the next 12 to 18 months Bob you will see us do a deal. We are kicking a lot of tires and we are taking some steps to develop some relationships that would allow someone to be more comfortable in doing a transaction with us over that time for us, I mean it takes a little while to get people comfortable doing that. But we’re out there talking, we’re out there kicking tires and we’re active in the M&A market.

Operator

Your next question comes from the line of Laurence Alexander with Jefferies. Please proceed.

Rob Walker - Jefferies

Good morning, this is Rob Walker on for Laurence. I guess first-off, can you comment a little bit on polyolefin volume trends in Q1 and kind of your outlook there?

John Steitz

Yeah, on polyolefin catalyst solutions business, volumes were up really and nicely sequentially year-over-year flat, but our organometallic volumes are strong and we saw some nice sequential improvements and overall that helped to bottom line for us. So it’s a great start to the year and we’re seeing -- our view for the year is doubled digit volume growth year-over-year in that business; it’s a much smaller volume base business, I need no ramp up, but everything is very encouraging now, so thank you.

Rob Walker - Jefferies

And then I guess just in terms the volumes in overall in Polymer Solutions; roughly what would you say the volumes were for mineral frame retardants year-over-year and I think you said brominated flame retardants were down 19% year-over-year and then also kind of, what about curatives and stabilizers, how much of those contribute?

John Steitz

Yeah, like we said, brominated flame retardant volumes year-over-year last year the time record profit start to record volumes which built into second quarter, all time record volumes at that point and all time record profits. So that’s a comparable period.

But you are right, the volumes year-over-year were down by about 15% to 20%. Mineral, which generally runs this quarter were pulling volumes to be at bars, but they were down about 10% year-over-year and stabilizers and curatives were down also year-over-year.

So that comparable relation year-over-year is very, very difficult. Now we are starting to work through that. It becomes a less impact in the second quarter and we start to see more favorable comparables in the back half of the year and we are gaining confidence that that will be a reality.

Rob Walker - Jefferies

And just lastly for Luke, you mentioned briefly looking at some restructuring options, I am guessing kind of what room do you have in Europe operations; is the outlook there remains sluggish?

Luke Kissam

Say that one more time?

Rob Walker - Jefferies

You had commented briefly about looking at some restructuring options I think in your prepared remarks?

Luke Kissam

Yeah.

Rob Walker - Jefferies

How much room do you have to restructure your European operation?

Luke Kissam

In 2009 kind of timeframe when we went back and look, when we did a restructuring, that was pretty heavy based in Europe. What we are really looking at now from a restructuring standpoint is assets. I mean, how our business performed and we have underperforming assets that we need to take action too. So there is enough of restructuring, anything we do from restructuring will be tied to what we would do with respect to any of these underperforming assets of businesses.

Operator

Your next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed.

Jeff Zekauskas - JPMorgan

I think that the last time you had a conference call you forecasted your CapEx to be $180 million to $200 million and now its $300 million; what changed?

Luke Kissam

I think what we have always done is we have tried to talk to it in terms of two ways; one exclusive of JBC capital and two inclusive of JBC; because JBC if you look, we consolidate JBC so we have to include the CapEx for JBC as a part of our overall when you report it from a GAAP standpoint that’s how we have to report it.

JBC this year will be roughly $100 million, we are not putting any additional cash into JBC; that’s all going to be funded from a standpoint of the JBC operations. So that’s $100 million of non-cash that we are putting there funded from JBC. Then if you look at our overall exclusive of JBC, we still believe we are going to try to spend that $180 million to $200 million in CapEx.

Jeff Zekauskas - JPMorgan

Second, there has been volatility in Rare Earths pricing and there were timing differences that sometimes positively affect you and sometimes negatively affect you. Can you talk about the year-over-year change from 2011 to 2012 in terms of the timing of Rare Earths price volatility and how that will effect your Catalysts operating income?

John Steitz

Just year-over-year in the first quarter Jeff, in FCC, the FCC business we had nice volume uptick mostly due to a number of, a couple of large US customers who really struggled to operate in the first quarter of last year. So if you look at the revenue improvement year-over-year I will just give you a little color on that, about two-thirds of sales increase was volume related and about another one-third was rare earth.

Okay so that hopefully frames that up for you. If you look at the sequential revenue decline, we've got a seasonal impact on FCC because when all these HPC issues or HPC turnarounds occurs they are not running the crackers and so the volume decline is on a similar basis, about two-thirds of that revenue decline was volume and about another one third was the rare earth decrease. So hopefully that will give you a little more color so you can frame it up. But over time I think we've done a good job of managing down inventories in FCC and where we can really manage this rare earth volatility much better.

You might remember a few years ago, we got caught with on the molybdenum issue with way too high finished goods inventories, too high molybdenum and it became quite a striking event for us to handle. So I think we learned from those experiences.

Jeff Zekauskas - JPMorgan

Okay and then lastly can you compare the pricing changes in HPC catalysts and FCC catalysts?

John Steitz

You know there's of course a big difference --

Jeff Zekauskas - JPMorgan

In mix issues, yeah.

John Steitz

Yeah I mean, prices in HPC tend to be between three and five times higher. So FCC pricing at 5000 a ton, HPC pricing would be you know 16,000 to 17,000 a ton. But we did see a little bit of sequential pricing improvement, but it was flat year over year.

Jeff Zekauskas - JPMorgan

It was flat year over year in which category and that’s in –

John Steitz

HPC was up year-over-year and FCC pricing was up year-over-year mostly due to the rare earth, its pricing was up you know 20% to 25% year-over-year Jeff.

Operator

Your next question comes from the line of Kevin McCarthy with Bank of America. Please proceed.

Kevin McCarthy - Bank of America

Yes, good morning. John on slide five of your deck in Fine Chemistry you indicate that demand for bromine derivates remains high with certain products and sold out positions, what products are sold out and why?

John Steitz

Yeah. We’ve had just a couple of real specialty bromine derivatives that have done really well. Dibromoethane is brominated organic obviously used in water treatment applications and [purple] bromine is a very high value brominated solvent used in cleaning precision equipment. And that, that product is very niche oriented, that when it's sold out, we’re pushing our units to produce as much as possible. The big volume driver in our Fine Chemistry business Kevin is clear brine fluids.

So let me just kind talk about that. What I thought was really striking in our Fine Chemical business in the first quarter was that, we were able to achieve this result with actually kind of mediocre results in our clear brine fluids business. And so while it was above average, if you look at the volumes over a multi-year period, it was above the average. It was probably down 50% from last year and 50%, 40% to 50% sequential and we had a really strong start in our clear brine’s business in January and February, almost record volumes, but it fell down in March almost to nothing.

Now we are, it's picking back up again, but I was really encouraged that we were able to do that without anything significant upside in clear brine volumes. So hopefully that gives you a little better understanding of those issues.

Kevin McCarthy - Bank of America

Yes, it does. That’s just not true, whether that comment related to some of the drilling fluids or something that was more niche to your specialties. I can switch gears to polymer additives, John it sounds like you saw some momentum as the quarter progressed.

If I think about that business in terms of product categories, may be brominated flame retardants, other FRs, curatives, antioxidants, stabilizers et cetera. Were you most encouraged on volume prospects and which product lines would you say remain most challenged volumetrically?

John Steitz

Well, just on a volume basis, we have been pretty delighted on the rebound and continuing improvement in our mineral flame retardant volumes, primarily in Europe. Our pricing has held firm which is good, minor year-over-year changes there due to the Euro but I have been, everything you read and hear about Europe, you will really think, things are really going to be destructive but the trends in our business are really encouraging there and it’s continued -- those volume sequentially is continuing to improve. So that’s good. The brominated flame retardant business Kevin overall, it’s not one particular area we’ve seen a lot of strength. They have all been sequentially just good momentum building products. But I’ll I tell you, I am encouraged by what we’re seeing in some of the indications for enclosures on televisions. It looks like those volumes are going to continue throughout the course of the year to improve. So that is, I would say, encouraging.

Kevin McCarthy - Bank of America

Okay, on the other side, what looks most challenged would you say?

John Steitz

The mixed read is on tetrabromide. So we just haven’t seen a significant uptick in tetrabromide volumes. And so I think our basic read on that is customers are really watching inventory levels because of just the general uncertainty in the economy.

Operator

Your next question comes from the line of Mike Sison with KeyBanc. Please proceed.

Mike Sison - KeyBanc

Like, when you sort of gave guidance for the first half, it would imply that second quarter EPS would be, you know, generally in line with the first quarter. So, can you sort of frame up? I mean, is it something that Polymer Solutions just continue to improve sequentially, and Fine Chemicals maybe improves and you noted HPC catalysts being weaker to few causing, so the flatness?

Luke Kissam

Yeah, I think that you summed it up pretty nicely, Mike. I mean that’s kind of how we look at it. If we felt a little bit better about tetrabromide volumes in second quarter, that uncertainly out there, kind of drives into that. So you could see a little bit of an upside one way or the other, but that pretty well lined it out the continued improvement over there, a little deterioration in catalysts and fine chemistry kind of rocking along. So that’s what it feels like.

Mike Sison - KeyBanc

Okay and then I just wanted to spend just a quick second on Polymer Solutions for the operating margin improvement sequentially, first versus fourth. I think you noted it was part volume, part costs and manufacturing execution. Could you, John, maybe give us a feel was it more volume? Was it more of the execution? Then maybe give us some idea what the execution was.

John Steitz

Yeah. Mike, I would say, you know, the volume increase and you know we came out of the fourth quarter really watching inventories, working capital, as you remember the cash generation was superb. So what we did as we saw volumes improve in polymers in January and February, I think we are able to supply seamlessly, you know, that increase in demand. And we did that, albeit, with a really, lets say, great management of spending. And so our supply chain really, I thought, adapted extraordinarily well to the increase in volume demand in a way that generated some really nice margins considering year-over-year, the lower volume level.

Mike Sison - KeyBanc

Okay, great. And last question. In FCC, you know, you rolled out a bunch of nice, slow rare earths, better margin products over the last year with rare earths coming down any push-to-go-back field technology. Is the adoption for the new stuff holding pretty well?

John Steitz

Yeah, you know, Mike, we have inherently a lower rare earths level and awfully high performing catalyst. I think, just generally, and this is just subjective. I think there's been less total push for rare earths, lower rare earths or zero rare earths catalysts, with an increasing emphasis on technology and what the products do. And I think that's overall really good for the catalysts industry in general.

Operator

And your next question comes from the line of Dimitry Silversteyn with Longbow Research. Please proceed.

Dimitry Silversteyn - Longbow Research

Couple of questions, and I think you’ve sort of talked about them a little bit. I am just trying to -- there is a lot of moving parts here. So I am just trying to wrap my brain around just simply as possible. In Polymer Solutions on a year-over-year basis, you had your sales up about $30 million it looks like, and your EBIT was up about $9 million. So, I mean, that’s a pretty strong contribution margin.

So, can you talk about, kind of, an year-over-year basis what the drivers of the strong performance were on the operating profit line given that volumes were down significantly? Is it just a combination of pricing continuing to flow through while rare earths pricing is coming down? I am sorry -- I am talking about Polymer Solutions. So is that -- I mean is this mineral retardants driving this improvement since they were kind of weak towards the second half of the year, or what’s going on there? Is it a mix issue?

Lorin Crenshaw

Dimitry are you talking year-over-year?

Dimitry Silversteyn - Longbow Research

I am talking year-over-year, yeah. If I am looking at your slides, your presentation slides, you got Polymer Solutions going up -- Polymer Solutions.

Luke Kissam

Yeah, Polymer Solutions is down.

Dimitry Silversteyn - Longbow Research

Sorry, I am talking about Fine Chemicals.

Luke Kissam

Okay.

John Steitz

Alright. That makes more sense.

Dimitry Silversteyn -Longbow Research

Yeah, I actually got $30 million change in revenue and about $9 million change in operating profit.

John Steitz

Okay. If I look at overall Fine Chemistry, you know, we had a big uptick in Performance Chemicals. When I look at Fine Chemistry, when you really look at the volume decline, it is clear brine fluids in Performance Chemicals business and we also had a little bit of an issue related to our Ag intermediates, where one of our Ag intermediates customer withhold an organic product for them and we didn’t have that availability of the product; that cost is a couple of million dollars.

Dimitry Silversteyn - Longbow Research

That’s in 2011 you are talking about?

John Steitz

Yeah, first quarter of ’12 compared to first quarter of ’11.

Dimitry Silversteyn - Longbow Research

So the issues with…

John Steitz

If you look at overall, our operating profit increased nicely year-over-year built on just really terrific performance in our Fine Chemistry Services business and I would say just average performance in Performance Chemicals.

Dimitry Silversteyn - Longbow Research

Okay. So it’s a mix issue. Now with the volume that you lost was a much lower profit volume than the volume that you gained?

John Steitz

Yes, absolutely.

Luke Kissam

That’s right Dimitry; and Dimitry I think one of the things, if you look at our Fine Chemistry Services, we talk about how that segment income doubled year-over-year and one of the reasons we label that, I think you got two effects. I think you’ve got a mix in both overall of that segment and you’ve also got a better mix within Fine Chemistry Services.

So as you have that churn that we’ve talked about so much in Fine Chemistry Services, what we are doing is we are seeing as we are trading up to higher value, higher margin products that we are able to extract more value and the customers happy with it. So it’s almost a double mix effect if you understand what I am saying to Dimitry.

Dimitry Silversteyn - Longbow Research

I got you that’s helpful, well thank you. Switching gears to the Catalyst business, again there is a lot of things going on there with Rare Earths and surcharges and volumes and pricing. But if you just look at the business overall you know it was operating at a run rate of 15% to 16% operating profit prior to 2009 and then we had a jump up in 2010 and turn them on into the mid-20s.

I am not as concern with the sustainability of that level, I think it is sustainable, I am just trying to understand, we know you are yet to build a bridge between 15% and 25% that 10 points of margin.

Can you break it down for us and how much of it is maturation or organometallics and in the polymer catalyst business; how much of it is the Rare Earth impact and the delta between them and the surcharges if we put in; how much of it is HPC volume growth. Can you give us an idea of sort of what -- I think it’s sustainable, but can you give me some confidence as to why it’s sustainable I guess is what I am asking?

Luke Kissam

Let me try that for second if you don’t mind, the answer to your question is yes to all of that. I think the way I break it down is this is in 2009 when we had the downturn, we took significant efforts to get our cost right first of all and we’ve really maintained a focus on being low cost provider across that portfolio in HPC, SCC and particularly the Polymer Catalyst, polyolefin catalyst section.

So one is cost, we’ve managed our cost. Two, we’ve gone in from an operating efficiency standpoint and really increased our productivity without adding capital and without adding people, so from a lean manufacturing standpoint, from the way we operate our facilities we are lot better than we were.

Secondly, while the Rare Earth has contributed some, if you go back before we had any Rare Earth issue, we were hitting 30% margins in our businesses. So I wouldn’t contribute it to the Rare Earth issue or lack of issue what there is, but I think that long-term what you are going to see is from prices standpoint, from an innovation standpoint that we are bringing new products to the market from expanding into these high value organometallics and electronic material businesses that you see from a catalyst standpoint, we firmly believe and we told you when we did Vision 2015 that we were going to bump around at high 20s and hopefully get up to 30%.

So we still think we've got some work to do there to drive up those 30% margins and we think we can maintain the way we've got the margins in the high 20% going forward over the course of Vision 2015.

Dimitry Silversteyn - Longbow Research

So the 31% you delivered in September of 2011, I guess you are talking about prior to the Rare Earth impact, given that you kind of got your 2015 level a quarter after you put out the 2015 level?

Luke Kissam

Dmitry, it was in 2010. If you go back and look in 2010 we were popping up even before we had the Rare Earths. We had a couple of quarters where we had the right mix with HPC, SCC and polyolefin catalysts and we had the right kind of mix with an HPC and we were able to pop-up around 30% before Rare Earths ever came in to being.

Dimitry Silversteyn - Longbow Research

And then one final question on the Nylon-12 issue that may be developing in Europe, I understand that some of it at least is being used for the flame retardant business. Are you expecting to see any impact as far as your ability to get the material and supply the market or is it not an impact for chemical for you?

John Steitz

Yeah, that is a raw material and a product called HPCD which goes into polyurethane construction foams Dmitry. And we feel pretty fortunate about our supply chain. But generally, I think its going to be really tight on the product, so we are continuing to evaluate that and how we react to that. But just generally it’s a company I mean we handle problems in challenges like this very well. So I think it could be a good opportunity for us too.

Operator

And I would now like to turn the conference back over to Mr. Lorin Crenshaw for closing remarks.

Lorin Crenshaw

Well, I just like to thank everyone for participating and if there any further questions contact me at the number on the press release and have a great day.

Operator

Ladies and gentlemen that does conclude today’s conference. Thank you for your participation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Albemarle's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts