Albemarle Corp. Q2 2008 Earnings Call Transcript

| About: Albemarle Corporation (ALB)

Albemarle Corp. (NYSE:ALB)

Q2 FY08 Earnings Call

July 21, 2008, 11:00 AM ET

Executives

Sandra Rodriguez - Director of IR

Mark C. Rohr - President and CEO

John M. Steitz - EVP and COO

Richard J Diemer, Jr. - Sr. VP and CFO

Analysts

P. J. Juvekar - Citigroup

Kevin W. McCarthy - Banc of America Securities

Jeffrey J. Zekauskas - JPMorgan

David Begleiter - Deutsche Bank North America

Laurence Alexander - Jefferies & Co

Steven Schwartz - First Analysis Securities Corp.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Chris Shaw - UBS (US)

Dimitry Silversteyn - Longbow Research

Robert Koort - Goldman Sachs

Todd Vencil - Davenport & Co. of Virginia, Inc.

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2008 Albemarle Corporation Earnings Conference Call. My name is Amity and I'll be your operator for today. At this time, all attendees are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. [Operator Instructions].

I would now like to turn the presentation over to your host for today's conference, Ms. Sandra Rodriguez. Please proceed.

Sandra Rodriguez - Director of Investor Relations

Thank you, Amity. Good morning, everyone, and thank you for joining us today for a review of Albemarle's second quarter results, which were released before the market opened today. Our press release contains preliminary results for the quarter, and this information is subject to further review by the company and our auditors, as part of our quarter-end review process. Please note that we have posted supplemental sales information as well as reconciliations for net debt and EBITDA on our website under the Investor Information section at www.albemarle.com.

I'd also like to caution that the remarks today contain forward-looking statements. Factors that could cause results to differ from expectations are listed in our Annual Report on Form 10-K.

Participating with me on the call this morning are Mark Rohr, President and CEO; John Steitz, Executive Vice President and Chief Operating Officer; and Rich Diemer, Senior Vice President and CFO.

Now, I'd like to turn the call over to Mark.

Mark C. Rohr - President and Chief Executive Officer

Thanks Sandra, and good morning to everyone. We are pleased to have the opportunity to share our second quarter results today. And we all look forward to answering your questions after a few remarks.

Before commenting on Albemarle's second quarter consolidated results, I would like to update you on some of our strategic initiatives. You may have seen our recent press release, announcing the June 30th completion of the acquisition of the remaining 25% of our Jinhai Albemarle joint ventures.

We are excited at both of these Chinese facilities as 100% holding on subsidiaries of Albemarle. The acquisition of the leading antioxidant supplier in China, strengthens our foot ground in one of the world's fastest growing markets.

Currently operating at nearly 100% capacity the Shanghai plant expansion which will double antioxidants capacity is expected to be completed in the summer of 2009.

Another strategic opportunity is a joint venture in China between Albemarle and Sinobrom. Pending file approval by the Chinese authorities, we expect to complete the transaction with 75% ownership, in the third quarter of this year. Sinobrom's solid position in the bromine derivatives industry in China, coupled with Albemarle's innovative leadership in a global bromine industry offers unique value to the Chinese bromine market, which will create a strong growth platform for us in this critical region.

In June, we also announced a merger between Albemarle and Sorbent Technologies. Pending Sorbent's shareholder approval, expected later this month we plan to close on the purchase by the end of this month.

Driven by the federal and state regulations to control mercury levels, submitted into the atmosphere, Sorbent's full-service mercury control solution is gaining traction with U.S. power plants, needing to comply with these regulations.

Albemarle's cost position in bromine, creates an excellent synergy with Sorbent's technology, and what we expect to be the leading mercury removal solution on the market. We look forward to the addition of another great technology platform in Albemarle's bromine portfolio.

Our laws with UOP, a division at Honeywell continues to be successful. We delivered on a number of growth opportunities through this venture as we have been awarded a high percentage of new HPC units around the world, particularly in the fast growing Middle East and India markets.

Recently, UOP announced PetroChina, the selection of UOP to supply technology, engineering and equipment to one of their new complexes in Chengdu. Albemarle will supply the HPC catalyst's new UOP designed unit for PetroChina. This is only one of the number of our HPC supply agreements with UOP. They will ramp up substantially as new refineries around the world are brought on stream.

While talking about strategic alliances, I mentioned a couple of other exciting opportunities that faces now.

First, in the pharmaceuticals business we recently signed an agreement with India based Dr. Reddy's Laboratory, whereby Albemarle will supply bulk ibuprofen to Dr. Reddy's for use in a generic ibuprofen tablets. And Dr. Reddy's will also market, sale and distribute Albemarle's ibuprofen to its global customer base, predominantly, in India, Europe, Russia and the U.S. This agreement demonstrates a growing appreciation for the value of the high quality pharmaceuticals, particularly in Russia and India. We expect ibuprofen volumes to pickup through 2009 and 2010 as this venture gets underway.

Another important opportunity before us lies in alternative fuels technology division. Worked with Neste Oil for the past several years to develop the catalysts in process for their next BTL renewable diesel has just resulted in much multiyear order from Neste to provide our innovative catalyst for Neste's new renewable diesel process.

We are extremely pleased to be an integral part of this alternative fuel technology and with the key role our catalysts development and lab to market [ph] capital display in this new business segment. We expect alternative fuel sales to grow dramatically as we enter the next decade.

Now let me shift gears and comment on what has been the single greatest challenge for Albemarle and for the industry as a whole, that is sharply rising raw material, energy and transportation cost. Our full year view on raw material and energy cost is now $220 million above 2007 cost. With a majority of this cost weighted towards the second half of the year.

Surging oil and natural gas prices continue to drive substantially higher prices on petroleum derivatives used in many of our products, and that's just part of the overall impact as these costs ripple through transportation and services.

As we look at the specifics, we've done a good job in Fine Chemicals through this quarter covering inflation. Polymer Additives is in most challenged business area with their exposure to petroleum derivatives and aluminum. Aside from metals we're seeing the largest single raw material cost increase in ATH, currently a $26 million year-over-year.

John will share more details with you but his passing through ATH cost represents a largest raw material challenge for Polymer Additives. Beyond ATH a few other price hikes are certainly outpacing our ability to recover in this segment. The catalyst as you know, while metals cost that continue to rise, we contractually pass through the metals inflation in HPC and FCC pricing. In FCC, in poly oil catalyst we clearly are covering the inflation curve. Throughout the second quarter, our pricing actions with more frequents, and in some cases more drastic than seen in the past, a common theme spanning the chemical space. And we remain focused on standing ahead of the curve through effective pricing actions, productivity gains and production overdrive [ph].

In a bit John will further comment on the impact of inflation on our businesses and how his team has and will continue to combat these headwinds.

Now moving to the company results. I'm pleased to announce second quarter net sales of $621 million and $62 million of net income for the quarter or $0.67 per share, that's a 14% improvement from the $0.55 per share in the second quarter of 2007. Attaining these good results was certainly no small task, disciplined execution at every level of organization is critical to improve operating profitability in such a tough economic climate. And I salute our team for stepping to this challenge to deliver these great results.

On strong pricing mix, a mix our catalyst segment closed the quarter with outstanding segment income margins to 21%, that's a 500 basis point improvement over the same period last year. Driven by improved demand of Albemarle flame retardants, polymer additives reported record quarterly sales revenue of $261 million that's a 16% improvement over 2007, topping first quarter's record sales by 6.5%. As noted raw material pass through impacted segment income margins.

Fine Chemicals delivered very solid results again this quarter. Record quarterly industrial sales of bromides contributed to Fine Chemicals segment margins of 16% for the quarter.

Looking forward we anticipate even higher levels of raw material and energy inflation hit us in the second half. Nonetheless I'm confident in our business portfolio and the strength of our business teams. Most of the markets we serve are robust and we expect our strategic positions in these markets to increase our revenue and earnings growth through the second half of the year.

As we head into the third quarter, we expect sequential top-line growth in all three segments, we will aggressively work our value equation to yield improved profitability, as we cover additional inflation. Year-over-year we remain on track to have strong performance growth and I remain confident we can do so.

One final comment before I close, I'd like to recognize our Bayport manufacturing site for receiving a distinguished service award naming them best in Texas for safety during 2007. It is a great honor to be recognized by the chemical manufacturing industry as a leader in demonstrating commitment to safe operations and exemplary safety. Congratulations to our Bayport team.

So now let me turn over to John Steitz who is going to comment on our operating results.

John M. Steitz - Executive Vice President and Chief Operating Officer

Thanks Mark. Good morning everyone. As I walk through the operating results today, I would like to point out that comparisons exclude the impact of the special item from the second quarter of '07. But together our business has delivered roughly 10% top-line revenue growth year-over-year on relatively flat volumes and improved pricing across most of our businesses.

Furthermore we are able to hold operating profits steady, while dealing with more than $45 million in our input cost over the same period of last year.

With that backdrop let's move on to the individual segment results. Starting with Polymer Additives. We are extremely pleased with Polymer Additives record quarterly sales revenues of $261 million. Overall we saw double-digit year-over-year revenue growth in our flame retardants portfolio and in stabilizers and curatives, which includes revenues from our Jinhai joint ventures.

Volumes were up year-over-year and sequentially in brominated flame retardants and strong electronics demand. We believe without any growth in overall supply chain inventory.

This is offset by decreased volumes in mineral flame retardants on weak auto sector volume. Polymer Additives segment income declined 25% year-over-year. The profit decline in Polymer Additives resulted from raw material and energy cost inflation. And our inability to cover significant amount of the cost of ATH, aluminum trihydrate used in our mineral flame retardant division, where competitive pricing environment in Europe has been extremely difficult and intense.

In addition, earnings were negatively impacted by inventory reductions we took in the quarter. Our highly oil dependant stabilizers and curatives business was also challenged for staying ahead of the raw material and energy environment. All this lead to a tough quarter on segment margins that were diluted by inflating revenues and relentless input costs that have been difficult to recover.

Going forward, we expect volumes and pricing in brominated flame retardants to remain strong, helping to offset cost increases across the segment.

One final comment on polymers. Polymer margins were negatively impacted primarily by a lack of improved pricing to cover the impact of $5 million in ATH inflation. Additionally, almost $3 million of delayed pass through and stabilizers and curatives occurred in second quarter. Not for these two significant impacts, margins in polymers would be in a range of 15%.

Moving to catalyst, where we reported net sales of $208 million. And increased segment income of roughly 33% over the same period of last year to $43 million. Outstanding results on what we expected would be a modest volume quarter. Within our Polymer catalyst division we had strong pricing and revenues in our organometallics.

As expected, our refinery catalysts volumes were down. However, HPC had excellent product mix in the quarter, as value for these higher margin activity catalyst is realized.

Our HPC joint ventures had a very good quarter as well. On lower volumes, our FCC portfolio also saw strong mix in higher margin products. As we look forward, we're encouraged by the increased signs of market tightness and comparative pricing we're seeing in FCC, which should continue to bolster our catalyst value equation.

We've just introduced a very exciting technology breakthrough in hydroprocessing catalyst. Our new KF-770 hydrodesulfurization catalyst [ph] built on our patented STARS technology. KF-770 can help improve the performance of a hydrodesulfurization process by up to 35%. Over the most active hydroprocessing catalyst on the market today. Enabling ultra low sulfur diesel refiners to substantially improve their operations at a time when diesel fuels are in increasing demand.

Turning now to Fine Chemicals. Net sales for the quarter were $152 million, 15% higher than the second quarter of '07 on a sales basis. Fine Chemicals segment income was a robust $24 million. This segment offset continuing pressure from escalating raw material, energy, and transportation costs.

While keeping a finger on the pulse, we've been able to stay ahead of the inflation curve here. Within Performance Chemicals strong clear brine fluids demand in Europe and the Middle East contributed to record quarterly sales in our industrial bromides division this quarter.

Mark commented earlier on some very exciting strategic opportunities ahead of us in Fine Chemicals. We look forward to building upon our solid bromine foundation, with the additions of the Sinobrom joint venture and the Sorbent acquisition.

Our Fine Chemistry services and intermediates portfolio had a great quarter despite normal second quarter seasonal downturns in our ag intermediates volumes.

Our ibuprofen business saw a significant volume increases this quarter, compared to the second quarter of '07 and we anticipate strong double-digit growth for the year. However, we must work hard on the value equation to gain traction over raw material inflation.

Strategic alliances with Dr. Reddy's and other international pharmaceutical producers, further solidifies Albermarle's position as the world's leading high quality ibuprofen producer.

Lastly, just to wrap up on our operational performance this quarter, we delivered solid second quarter results in the face of spiraling inflation and a very cautious economic environment.

Energy costs are impacting our entire supply chain from raw material purchases to manufacturing costs, to distribution and freight. A key factor behind our resilient earnings has been improved pricing efforts and continued cost management discipline. We are planning on a tough environment again in the third quarter, and we think we can execute in that construct. We have a set of really great businesses with some of our business models that are well positioned and well focused on the future.

With that, I'd like to turn over to Rich.

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Thanks John, and good morning to all. The items I will address on the call today are corporate expenses, income taxes, cash flow and our June 30th balance sheet and financial position.

Unallocated corporate expense was $12.9 million in the second quarter, up $2.1 million from last year, but comparable with our Q1 2008 expense level.

SG&A expense was up 14% year-over-year at 10.9% of revenues in the quarter. And for the year-to-date are at 10.2% of revenues versus 10.6% last year.

R&D expense in the quarter is up 18% over prior year levels. So, we continue to fund future growth opportunities.

Taxes; our effective tax rate for the quarter was 18%. Our current view of our full year effective tax rate is 20%. This is the same as the effective tax rate that we recorded for last year, and is lower than the rate we envisioned at the beginning of this year and after Q1. It is based on our current forecast of the level and mix of income in 2008, and the benefits from tax planning activities we have undertaken.

Our EBITDA this quarter is $110.5 million comparable to last year. We ended the quarter with cash and equivalents of $168 million. CapEx for the quarter was $20 million and we are retaining our full year CapEx estimate in the $90 million to $100 million range.

Deprecation and amortization was $27.5 million. We did not buyback any additional shares in Q2 after executing the buyback of $4.1 million shares in Q1.

At quarter end, we have consolidated debt of $891 million, including $57 million of debt from JBC, our Jordanian bromine venture. $390 million of our debt is fixed rate and $501 million is floating rate, up 44% to 56% split.

Our floating debt interest rate is 3.14% at quarter-end. The weighted average interest rate for Q2 was 4.12%. Net of $168 million cash on hand and excluding $32 million of non-guaranteed JBC debt, our net debt is $691 million, up $141 million from year-end and down $11 million from Q1 levels.

Our debt cap ratio is 39.6% and our net debt cap is 34.6%. Given our business outlook and expected cash flow for the reminder of the year, we are comfortable with our current leverage employee.

And, with that I will pass it back to Sandra.

Sandra Rodriguez - Director of Investor Relations

Thanks Rich. We'd like to open it up for your questions now.

Question And Answer

Operator

[Operator Instructions]. And your first question comes from the line of P.J. Juvekar with Albero [ph]. Please proceed.

P. J. Juvekar - Citigroup

Yes, hi. Good morning.

Mark C. Rohr - President and Chief Executive Officer

Good morning, P.J.

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Good morning, P.J.

P. J. Juvekar - Citigroup

Though,in Polymer Additives, most of your sales increase came from volumes with very little pricing. And you had announced several price increases throughout the first half. So my question is how much of this price increases that you have announced are actually sticking?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, P.J. This is John. When you look at the numbers, it's a big impact in Polymer Additives, because with the volume decline in mineral, we have actually had a pretty solid mix effect from the brominated flame retardant business. So overall, our negotiated returns on our announced price increases have been quite successful, but there is a big mix effect in polymer additives. So with that said, most of our work now is regaining. Mineral flame retardant, margin losses and the phosphorus flame retardant margin losses because of the dramatic influence in the future on phosphorus going forward.

P. J. Juvekar - Citigroup

So John, with 16% increases in sales, how much of that was pricing versus volume? Can you just break that down for us?

John M. Steitz - Executive Vice President and Chief Operating Officer

I'd say roughly about a third of it is pure pricing. The balance would be, maybe another half of that would be mix and then you have the overall volume impact.

P. J. Juvekar - Citigroup

Okay. And what were your operating rates in your bromine production facilities?

John M. Steitz - Executive Vice President and Chief Operating Officer

Bromine was pretty high P.J. I'd say in the... our bromine, bromine wells in 85% to 90% range yielding about the same. Our specialties in brominated flame retardants have been higher. The real volume downturn is occurring in our mineral business and those rates are probably in the low 70s.

P. J. Juvekar - Citigroup

Okay and then one last question on Fine Chemicals. You talked about raw material and energy costs. Now what is the mechanism in Fine Chemicals to pass through this cost? Is it a contract based pass through or do you have great prices on ibuprofen and other products?

John M. Steitz - Executive Vice President and Chief Operating Officer

No, we have to drive those price improvements in Fine Chemicals for sure. I mentioned that we've had some good solid gains in clear brine fluids, for example. The profit hasn't fully come down from those products because of the dramatic increases in transportation costs, for example. So, we just announced couple weeks ago an increase in calcium bromine pricing, for example to cover that. We announced about a month ago sodium bromide price increase. So, we are working hard to get that pass through, but we really have to drive that in Fine Chemicals.

P. J. Juvekar - Citigroup

Okay, thank you.

John M. Steitz - Executive Vice President and Chief Operating Officer

Thank you, P.J.

Operator

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

Kevin W. McCarthy - Banc of America Securities

Yes, good morning. John, if I look at Polymer Additives and focus on the brominated flame retardants, in that piece of the portfolio, what would the margin trends be there on a year-over-year basis. Are those margins, hanging in relatively stable, such that the bulk of the erosion is really on the mineral side?

John M. Steitz - Executive Vice President and Chief Operating Officer

You bet Kevin; it's actually... grew nicely on a sequential basis, our brominated flame retardants. So that's why the real focus is on our mineral. We've had $5 million sequentially of uncovered raw material increase, probably another $2 million related to sales volumes due to weakness in the automotive sector and some poaching going on in Europe. So in that environment, we are working to get these prices up in mineral.

We were somewhat pleased to see last week an announcement by European competitor announcing a mineral flame retardant price increase. So, obviously, we are going to work to support that as much as we can.

Kevin W. McCarthy - Banc of America Securities

Elsewhere in the chemical sector we've seen a few companies attempt to change pricing mechanisms to indexure [ph] or formulaic route. Have you thought about that all and as far as where you have to deal with ATH and phosphorous in these sorts of inputs. Might that be an option for you to avoid the lag affects associated with those pressures?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, I think what I think Kevin, we are looking at all of the above. We are looking at transportation surcharges, natural gas surcharges, things like that. But the key in specialty chemicals is really to price those products for the value they bring, more than anything. And I think in that context many of these products that have lost margin, really need to be priced for the value they bring and that would be significantly more in many cases than the raw material increases we are seeing. But we've got to take this one step at a time, just as you say, and look at everything possible.

Kevin W. McCarthy - Banc of America Securities

Okay. And then finally, just couple of quick financial questions. Number one, when might you expect to resume share repurchase activity and then Rich, can you give us an update on your working capital goals that you mentioned at Investor Day?

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Sure Kevin. We may get back into the market as soon as possible. I mean, we are always looking at that equation, so we have not precluded doing further buybacks. The rest of this year, we'll just have to see how things go.

We had a little bit of a step back in working capital from a day's point of view in our second quarter, but we still have visibility to driving the improvements that we have as a goal for the year. Our net working capital is pretty much flat in the second quarter, but we are still trying to get money out there and we'll be continuing to focus on that as the year proceeds.

Kevin W. McCarthy - Banc of America Securities

Okay. Thank you very much.

John M. Steitz - Executive Vice President and Chief Operating Officer

Thank you, Kevin.

Operator

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

Jeffrey J. Zekauskas - JPMorgan

Hi, good morning.

Mark C. Rohr - President and Chief Executive Officer

Good morning, Jeff.

John M. Steitz - Executive Vice President and Chief Operating Officer

Good morning.

Jeffrey J. Zekauskas - JPMorgan

In your... catalyst volumes were down, I think 11% in the quarter. So, which was down more, HPC or FCC?

John M. Steitz - Executive Vice President and Chief Operating Officer

Sequentially HPC and secondarily sequentially FCC, year-over-year, it was... the majority of the decrease was in FCC.

Jeffrey J. Zekauskas - JPMorgan

Majority of that. So, you brought on this large slug of HPC capacity? I take it that you feel that the... whatever volatility in the market has caused the sales volumes to ramp up slower than you expected and you said that the third quarter would also be slow is that right?

Mark C. Rohr - President and Chief Executive Officer

Yes, Jeff, I think we've been pretty crystal in our view that over the next two years we we'll fill that unit up.

Jeffrey J. Zekauskas - JPMorgan

Yes.

Mark C. Rohr - President and Chief Executive Officer

And we've also been very clear in communicating that volumes would be weak in the second and third quarters as part of that. So I don't think there is any inconsistency here. In that volume that the broad perspective I would just urge you and I think everybody to have on this businesses is if you plot the growth in these volumes, now that we don't give out publicly. What you'll see is the quarter-to-quarter volatility is just a myth and the month-to-month volatility is just a myth.

As a matter of fact, the month-to-month volatility is equal to the mini. So you can have pretty big swings depending on what the market is doing out there. So I... it may have been lower than some have predicated, but I think it was quiet consistent with our views that were given.

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, you bet.

Jeffrey J. Zekauskas - JPMorgan

So you still expect to sell at least on average half of your new HPC capacity this year, you haven't changed that view?

Mark C. Rohr - President and Chief Executive Officer

Will be sold out next year and what I'm not quiet prepared to say is, it will exactly half at the end of this year. The team is pretty confident. We are going to see those volumes come on strong as we end this year but it's all a function what those refineries do. Some refineries have in places reduced rates. We've not seen a near term impact of that but you always worry, and kind of paranoid gods [ph] all worried a bit about the impact of that. But in the scheme of things from over this two year cycle, I'm pretty confident will be full swing next year.

Jeffrey J. Zekauskas - JPMorgan

Just a couple of more quick questions in Polymer Additives, apparently brominated flame retardants are growing and mineral based flame retardants are contracting. Broadly speaking, why is that? Is it the difference between the electronics and the auto markets?

Mark C. Rohr - President and Chief Executive Officer

Well I think the auto market has in particular impacted the mineral flame retardant business and that's used as a PVC alternative and conduit for automobiles. So I think that's been the biggest impact there.

But I really don't see any kind of secular trend here, Jeff. I think it's really as we work through some inventories in the marketplace and frankly in Europe we've got a competitor who really hasn't been supporting the price increase effort and has been intent on trying to take market shares. So we've had to take steps to protect our market shares in Europe as well. So I think that is mostly a dynamic in our mineral flame retardants.

Jeffrey J. Zekauskas - JPMorgan

Of the 220 in raw materials costs that you have expect. How much of that is not pass through. Or to ask it in another way, how much of the raw materials of this 220 do you pass through contractually?

John M. Steitz - Executive Vice President and Chief Operating Officer

We get about half pass through in catalysts on lot of that to HPC related to molybdenum, cobalt, nickel.

Jeffrey J. Zekauskas - JPMorgan

Right.

John M. Steitz - Executive Vice President and Chief Operating Officer

The other... a big portion of the catalyst though is FCC related and that has to be pass through in the marketplace. The balance of that is spread evenly between half Fine Chemicals and half Polymers.

So, you can see from the net margins, there is thin in polymers there's about $8 million that we're not getting pas through today. Five of that mineral and about three in stabilized urgent curatives related to products like isobutylene, phenol, natural gas, and other energy costs.

Jeffrey J. Zekauskas - JPMorgan

I guess lastly for Rich Diemer, are there any prior period adjustments that have affected the tax rate this year either in the first two quarters or in the second two quarters?

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Absolutely not. If there were, we would obviously highlight that out for you, so you would see it. It will be transparent. I think the biggest change between... what we did last year Jeff, is we said all our incremental income on a worst case basis would be in high tax jurisdictions.

And what's happened, part of this actually planned, is we have seen the bulk of the incremental income in either low or no tax jurisdictions. So what you see is JBC actually had a record quarter, that's tax free money. It's almost like an arbitrage of our production assets. And with that... so you'll see a benefit on the tax line from that, but you'll also see a hurt on minority interest line to that.

So, we feel on a total sustainable basis, 20% is where we see the full year coming out right at this moment. Should we start making more money in the back half in higher tax jurisdictions we'll then adjust that accordingly. And we are hopeful that we are getting closer to a settlement with our back years with the IRS but while we've had conversations there, we have nothing yet to announce and when we do have that will account for that we'll make sure you know what that is.

Jeffrey J. Zekauskas - JPMorgan

Okay. Thank you very much.

John M. Steitz - Executive Vice President and Chief Operating Officer

Thanks, Jeff.

Operator

Your next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

David Begleiter - Deutsche Bank North America

Thank you, good morning.

Mark C. Rohr - President and Chief Executive Officer

Hi, David.

John M. Steitz - Executive Vice President and Chief Operating Officer

David, good morning.

David Begleiter - Deutsche Bank North America

John, you discussed FCC pricing, how the price increase is flowing through and are margins above, go above 10% in FCCs?

John M. Steitz - Executive Vice President and Chief Operating Officer

David, yes, we've had continuing success in selling the value equation in FCC and our average price was right around $3,100 a ton in the second quarter. So, I think, we've demonstrated consistently the ability to sell that value equation in our FCC catalysts.

Overall the margins are less today, than the overall margin of the entire catalyst business. So, we still have some work to do there as it's still being somewhat dilutive. But, there is an announcement last week on a price increase but, one of our competitors and again I think that's demonstrating the value these products bring. So, we're studying that right now.

David Begleiter - Deutsche Bank North America

And, John the lower volumes in FCC this quarter, were there any competitive situations you couldn't respond to or is it normal seasonality?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, some of it is seasonality. I think, probably about a half of it is seasonality or year-on-year there was a major one-off shipment made in FCC that occurred. But overall, yes, I would have to say that we have lost some market share in Europe due to some other competitors, not having the same view of the value that these products bring.

So, I'd view a miss if I didn't tell you that. But things are tightening up on a supply basis and that's good. Raw materials continue to escalate dramatically in this portfolio. rare earths, silicates, ATH, ATH we always talk about in terms of mineral flame retardants, but there is a big part ATH goes into FCC catalyst as well. So, I mean, those input costs are rising dramatically and we see going forward could have another $250 per ton impact in the second half. So, we have to got to work to get that pass through.

David Begleiter - Deutsche Bank North America

And John similar color on bromine FR pricing, how is that trending?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, we've had some good success over the last couple of months on continuing to get prices up. The mix is really the issue there, David, our tetrabrom volumes have rebounded from a year ago. And, so that is dilutive in terms of the mix of the overall business. But our specialties are doing quite well including our decabrom alternative and products like that. So, we're continuing to see a pretty resilient market out there for these products.

And we're somewhat pleased by that and hopeful that, that will continue into the third quarter. And, the third quarter comp will be a little easier in the sense of last year third quarter volumes were very, very weak in the overall brominated flame retardant portfolio. Hope that gives you a little color on it.

David Begleiter - Deutsche Bank North America

It does. And lastly for Rich next year's tax rate should we assume a slight increase versus this year?

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Hi, that would be the safe way to go. And we will give you a lot more color on that as we get closer to the end of year.

David Begleiter - Deutsche Bank North America

Thank you.

John M. Steitz - Executive Vice President and Chief Operating Officer

Thanks, David.

Operator

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

Laurence Alexander - Jefferies & Co

Good morning.

John M. Steitz - Executive Vice President and Chief Operating Officer

Hi, Laurence, good morning.

Laurence Alexander - Jefferies & Co

I guess the first question is in Polymer Additives. Can you give some details some more clarity on the inventory reduction? What the impact was this quarter if thinking behind it. And whether you feel you need to do another one in Q3?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, we try to, yes, Laurence this is John. We really try to manage our working capital and our inventories quite tightly especially with this volatile raw material environment. If there ever is a downturn, we certainly don't want to be situated holding on to very high cost raw materials. So, that is kind of the driving principle, but we just want to use our cash very well, as well.

So, if you look sequentially at our entire polymers portfolio. It is down; inventory is down about 12%. And I mean that did not have an insignificant impact on the profitability for the business. My guess is it's in as far a nickel a share right there. So that is good discipline around our working capital and our volumes in our Polymer Additives business did not help in terms of our margin contribution in that sector.

Laurence Alexander - Jefferies & Co

And do you see a similar reduction needed in Q3 or do you think you're done at this point?

John M. Steitz - Executive Vice President and Chief Operating Officer

No, all depends on primarily volumes in Europe around flame retardants. We're starting to see some times that we've rebonded out of it; the brominated flame retardant business looks pretty robust right now. And our antioxidants business in China where we have some concerns in the intermediates area. The end product seems to be, volume seem to be pretty healthy. So, overall, we're cautiously optimistic.

Laurence Alexander - Jefferies & Co

Okay. And then, on raw material terms, do you have about a $5 million to $8 million net lag currently depending on how you look at the... sort of headwinds in Polymer Additive -- ?

John M. Steitz - Executive Vice President and Chief Operating Officer

Right.

Laurence Alexander - Jefferies & Co

For the full year, where do you think you are going to end the year with the tier in $20 million increase in raw materials? How much of a lag do you think you'll need to catch up in 2009?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, I think if it were to stay at $220 million. We feel we can cover that.

Laurence Alexander - Jefferies & Co

By the end of the year?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes. My worry is really what happens in terms of the markets and the volatility around these products, I was reading at oil today is up another $2 a barrel. So it's a tough environment to understand it. We are just trying to really stay all over it. And we haven't had certainly any luck at all in the first half with this ramping raw material issue, but I think all those in our space are based with the same issue.

I think we intend to do a better job of really getting out in front of it and understanding its impact and trying to communicate that across to our business folks and to our customer base.

Mark C. Rohr - President and Chief Executive Officer

One of the tough thing. This is Mark, that John and company face is that there is a frame on a lag time. I'm not sure quite how to do that, the calculus on that. But even today if oil started dropping, I think inflation will continue to grow for a while. As this sort of works its way through all the sectors. And, so the 220 is an anticipation of a continuing work through. And I think that's a little bit independent of where oil ends up at the end of the year. I mean I think it's going to be there before oil drops $20 a barrel, my gut it is still about 220.

If it goes up another $20 a barrel, then you've got another round of inflation that rolls through in 2009 yet to yet to determined. So, it is an unsettling time from that point of view. And John's team I think has done really good job driving these prices and there's only that one or two areas that John has mentioned where because of other market situations, we are just not able to do so. That must be in Polymer Additives.

Laurence Alexander - Jefferies & Co

Then, lastly just quickly on the net fee multi year order that you mentioned, is that a material, or is that more just interesting a validation of the technology moving forward?

Mark C. Rohr - President and Chief Executive Officer

No. I think that's going to be quite material. We are talking 2000, for the most part 2009 and '10 for that. And Neste is...if you go to webpage and look, they are really promoting this technology or a number of new plants that are scheduled to be built. They will come on stream after we end this decade. So it could be a... it's a first step for us in alternative fuels, it could be a huge step, and I think there could be steps to follow.

Laurence Alexander - Jefferies & Co

Any rules of thumb to help us to gauge the impact next year?

Mark C. Rohr - President and Chief Executive Officer

We really not do that right now. But it's bigger than a bread basket.

Laurence Alexander - Jefferies & Co

Okay. Thank you.

John M. Steitz - Executive Vice President and Chief Operating Officer

Thanks, Laurence.

Operator

Your next question comes from the line of Steve Schwartz with First Analysis. Please proceed.

Steven Schwartz - First Analysis Securities Corp.

Good morning.

Mark C. Rohr - President and Chief Executive Officer

Hi, Steve.

Steven Schwartz - First Analysis Securities Corp.

John, I think in answering David's question, you touched on this. But, what the catalyst volume drop, FX also disappeared. Are those two connected to each other or this related to FCC in Europe?

John M. Steitz - Executive Vice President and Chief Operating Officer

With the catalyst volume drop was there an FX impact?

Steven Schwartz - First Analysis Securities Corp.

Well you can see that your ForEx impact to revenue in the quarter was zero in catalyst.

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes.

Steven Schwartz - First Analysis Securities Corp.

Whereas, in the previous quarter, it had been 3.5% or 4%. So, I am just... I am wondering if there is a regional mix component in what happened with the volume, and if that's tied to why FX was zero? So in other words --

Steven Schwartz - First Analysis Securities Corp.

Yes, I understand Steve. So well, we are kind of naturally hedged and the volume we sold in both FCC and HPC in catalyst is pretty naturally hedged by the production base there, if that helps to answer your question.

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Steve, this is Rich. On the usual break out we do for top-line growth, we have 3.5% impact positive on for catalyst. So I'm not... you maybe picking up a bad number here.

Steven Schwartz - First Analysis Securities Corp.

Okay. Okay, I'll check that.

John M. Steitz - Executive Vice President and Chief Operating Officer

Okay.

Steven Schwartz - First Analysis Securities Corp.

And then just from a longer perspective on catalyst, we are starting to see demand destruction in gasoline in the U.S. And, I know that U.S., from North American refineries are a big portion of your revenue there. How do you see that demand destruction impacting your business in the next six to 18 months?

Mark C. Rohr - President and Chief Executive Officer

Yes. Well, that's a challenging question. Because probably a lot of people have a lot different opinions on it. But you know at its heart, what our catalyst do and what our competitor's catalyst do bring tremendous value. They make processes more efficient, they help drive a better product mix, they help improve the environmental situation by pulling out non-wanted pollutants and contaminants. And overall, my belief is that the catalysts help refiners in that context.

Now, with that said, I think the refiners are going to do everything possible they can to extend reactor times before they go through a turnaround. And try to utilize catalysts on longer duration.

And things like anything they can do to try to beef up their margins, because obviously with the dramatic ramp up in oil costs a lot of the pure refining places are struggling in this environment. But we think overall, longer term; our catalysts really help out that situation and not hurt it.

Steven Schwartz - First Analysis Securities Corp.

Okay. So in other words, the technology should overcome any decline in consumption?

Mark C. Rohr - President and Chief Executive Officer

Absolutely. And if we don't, we're not doing our job to really drive value in their use.

Steven Schwartz - First Analysis Securities Corp.

Okay. And then just one last one on SG&A, it looks like if I look over the past couple of years on a quarterly basis, on the even years, your SG&A expenses typically lower in the first and third quarter and this year you certainly seemed to be following that pattern. So should we expect that SG&A could be flat in the third quarter, on a year-over-year dollar basis?

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

I think, we haven't done that sort of regression analysis Steve, so maybe you've figured out a pattern here but I would say we are going to be very mindful of SG&A expense in light of everything else we've talked about in the third quarter. So we're only going to spend what we need to spend.

Steven Schwartz - First Analysis Securities Corp.

Okay, got you. Thanks John thanks Rich.

John M. Steitz - Executive Vice President and Chief Operating Officer

Thank you, Steve.

Operator

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

Michael J. Sison - KeyBanc Capital Markets/McDonald

Hi guys.

Mark C. Rohr - President and Chief Executive Officer

Hi, Mike.

John M. Steitz - Executive Vice President and Chief Operating Officer

Hi, Michael.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Any update on HPC operating rates or you have been running that business sort of at a pretty good trajectory [ph] expansion anticipation of these of the better order, timing that you see in the second half to 2009?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, in the second quarter. We actually build a bit of inventory. We had couple of upside orders for us that originally were planned to go out at the end of the quarter and didn't go for a sundry reasons. But there were some pretty significant volume in that business.

So, we had the inventory there ready to go. So to conclude that, yes, we had been running at reasonably high rates to make the volumes for those two significant international HPC orders.

The other thing Mike I'd comment on is, the great thing about our catalyst business is the ways we can make money of this business. And one of those that wasn't insignificant in the quarter was the royalties we make of the regeneration process. And that yielded some significant profit for us. But it's just another great example of how the overall portfolio within catalyst is so strong, so balanced, so diverse and allows us many different opportunities to make money.

So, I'd kind of include that in the HPC kind of portfolio and that was equivalent to about 1,000 tons of HPC volume, just regeneration work that we did. So it's not insignificant.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Okay.

John M. Steitz - Executive Vice President and Chief Operating Officer

That also helped our... help drive the margins at record levels that you see.

Michael J. Sison - KeyBanc Capital Markets/McDonald

And Mark your confidence in filling up the plant by the end of '09 are you contracted out yet? Have you signed most of that capacity out?

Mark C. Rohr - President and Chief Executive Officer

We have some big orders in there that... between, that will come in at 2009. That helps me stake my confidence. I think second to that, there are number of units that are on the radar screen that we feel that we have a good chance to get that business and John also mentioned some of the, he had mentioned some of the advances we're making in catalyst technology.

Last thing I'll mention is UOP is going to start kicking in the bid in 2009. So, Mike, I think that we'll be full as we end next year, yes. What... I am little bit less clear on in just that question is we'll be half way there by the end of this year, I think a lots going to depend on the fourth quarter to make that happen, and we have seen a few order slip a little bit, So I'm a little anxious about, about whether will we'll actually do this linearly is going to be a bit back end and weighted.

Michael J. Sison - KeyBanc Capital Markets/McDonald

And the way to think about the third quarter based on FCC maybe some market share loss there, that you noted John, and maybe some push out for HPCs, the volumes there would probably still be down a little bit in catalyst as it was in the second and then you have a sort of big fourth quarter surround out the year.

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes but, Mike, this is John. Compared to the second quarter, I think we'll see some sequential gain in FCC and see some modest sequential gain in HPC.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Okay. So the year-over-year decline would be less than what you saw in the second quarter and the third directionally?

John M. Steitz - Executive Vice President and Chief Operating Officer

That's correct.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Okay then. I wanted to leave with a real quick Polymer Additives, the $8 million sort of squeeze in raw materials that you noted, do you have price increases to cover that right now correct?

John M. Steitz - Executive Vice President and Chief Operating Officer

On the mineral

Michael J. Sison - KeyBanc Capital Markets/McDonald

And phosphorus.

John M. Steitz - Executive Vice President and Chief Operating Officer

And phosphorus. We are working on phosphorus as we speak. We're having some success. The stabilizers and curatives, we believe we can get that. We are working on those increases across in antioxidant and intermediates portfolio, but, ATH we do not have yet. We are working through that right now.

Michael J. Sison - KeyBanc Capital Markets/McDonald

What's the delta in the third and fourth quarter? Does that $5 million in ATH get bigger in your assumptions based on what you know, now?

John M. Steitz - Executive Vice President and Chief Operating Officer

No, unless the euro changes dramatically. But --

Michael J. Sison - KeyBanc Capital Markets/McDonald

So, you sort of have a $5 million squeeze in the second, another $5 million in the third and another $5 million in the fourth to offset?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, we have got to work to get offset. That's correct.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Okay. So, there is sort of 15, a $10 million headwind in the second half for ATH. I am curious [ph] as it stabilizes, are you... that's the business you normally can get pricing for that, right?

John M. Steitz - Executive Vice President and Chief Operating Officer

You bet.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Okay. So, that $3 million you had in the third quarter, whatever the assumption is in the second half, you should be able to get that?

John M. Steitz - Executive Vice President and Chief Operating Officer

You bet and we are hoping for sequential increases in brominated flame retardants to help offset the... what we don't achieve on ATH.

Michael J. Sison - KeyBanc Capital Markets/McDonald

And there is no squeeze in the bromine flame retardant side. Everybody seems to be raising prices to offset and maybe get more pricing than raw materials?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, it seems to be a good disciplined environment out there Mike.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Okay. And, last question, minerals, I know it's a necessary business for you to be in longer term. What do you think needs to happen, do you need the right size of the business or is it just... do you need to help consolidate the industry a little bit to maybe help improve the stability?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, clearly there is some competition going on in Europe that just doesn't make any sense to me.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Right.

John M. Steitz - Executive Vice President and Chief Operating Officer

And the net results that are demonstrated by that, particular entity are not good and one of them just announced a price increase, just Thursday of last week. So, it's not enough to cover all this inflation we are seeing in ATH and energy.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Right.

John M. Steitz - Executive Vice President and Chief Operating Officer

But it's a start. So, we are going to pay close attention to that.

Michael J. Sison - KeyBanc Capital Markets/McDonald

Okay, thank you.

John M. Steitz - Executive Vice President and Chief Operating Officer

Thank you, Michael.

Mark C. Rohr - President and Chief Executive Officer

Bye, Mike.

Operator

Your next question comes from the line of Chris Shaw with UBS. Please proceed.

Chris Shaw - UBS (US)

Hi, good morning. How are you doing?

Mark C. Rohr - President and Chief Executive Officer

Good.

John M. Steitz - Executive Vice President and Chief Operating Officer

Hi, Chris.

Chris Shaw - UBS (US)

Hey, I might have missed it, but what was the... why were volumes down in Fine Chemicals? What was the main culprit there?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, the main thing, sequentially is our ag intermediates business, which is primarily a 4Q through 1Q campaign. So, sequentially, it was almost all that. I mean, that was probably 7% or 8% of the total volume.

Chris Shaw - UBS (US)

And year-over-year?

John M. Steitz - Executive Vice President and Chief Operating Officer

Year-over-year primarily. Well, year-over-year, our volume was up.

Chris Shaw - UBS (US)

It was?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, the volume, now there are some mix affects in there, but pure volume was up about 5% to 6%, Fine Chemicals.

Chris Shaw - UBS (US)

So the number you... the negative 1.6 that's in the release or in the --

John M. Steitz - Executive Vice President and Chief Operating Officer

That's the mix impact of revenue it plays a big part in that.

Chris Shaw - UBS (US)

Okay, okay, okay.

John M. Steitz - Executive Vice President and Chief Operating Officer

And we debate with that numbers what we kind of publish and we have gotten ourselves in a habit of always doing this on one methodology. But I think with the net, the volume impact year-over-year, volume in Fine Chemicals was actually up.

Chris Shaw - UBS (US)

Okay, and then, just curious, you mentioned that FCC is around $3,100. What were they in 1Q, did you give that or do you know?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes.

Chris Shaw - UBS (US)

They are not small increases. A pretty big impact?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, it was I mean it's up about 7% - 8% sequentially. And up about 25% year-over-year.

Chris Shaw - UBS (US)

All right and excuse, the... well the minority interest line for Polymer Additives, will that go away that you have bought out the JV in China?

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

For that JV yes, that part will, but there are some other smaller items that are also in there.

Chris Shaw - UBS (US)

Was that half of it or more, I mean approximately.

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

More than half will.

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, almost all of that.

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Most of it will go away.

Chris Shaw - UBS (US)

I guess I mean if refineries are struggling at margins and I mean you are operating a little less, does that, that doesn't encourage them to take a turnaround in price from HPCs, now?

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Not in my experience, they are just half or down and cut cost and if you look at it on the variable basis and you set aside oil, the other thing is the catalysts starts getting up there. They will do things to slow down rights and slow capacity.

Chris Shaw - UBS (US)

Okay. And one last one quickly. For ATH, what's actually driving the increase there, is it just aluminum prices?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, absolutely. And aluminum and the ATH market itself. I mean there are limited choices. There are lot of alternatives to achieve. So we are competing against much bigger volume absorbers. So we have to buy according to market.

Chris Shaw - UBS (US)

But some of that going to pigments is running well, I thought maybe like our coatings, or some I thought maybe that would actually have created less demand?

John M. Steitz - Executive Vice President and Chief Operating Officer

Some of the complementary uses?

Chris Shaw - UBS (US)

yes.

John M. Steitz - Executive Vice President and Chief Operating Officer

I am not sure, I say most of it in other aluminum based applications.

Chris Shaw - UBS (US)

Okay, great. Thanks a lot guys.

Operator

Your next comes from the line of Dimitry Silversteyn with Longbow Research. Please proceed.

Dimitry Silversteyn - Longbow Research

Good morning.

Mark C. Rohr - President and Chief Executive Officer

Hi, Dimitry.

John M. Steitz - Executive Vice President and Chief Operating Officer

Hi, Dimitry.

Dimitry Silversteyn - Longbow Research

I just want to follow-up on a couple of questions first, and then switch gears over to talk about Fine Chemicals. Did I understand you correctly, in response to Mike Sison's question that the $3 million in that you say you are lagging in the second quarter and price increases in stabilizers and lubricants you'll be able to get that in the third quarter?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, we hope so. We are working hard to get that through.

Dimitry Silversteyn - Longbow Research

Okay. So --

John M. Steitz - Executive Vice President and Chief Operating Officer

[Multiple Speakers] isobutylene, phenol related. We are going to work hard to achieve that.

Dimitry Silversteyn - Longbow Research

Okay, all right. Now the softness that you expect in this second and third quarters in the catalyst business? Did you expect it to come on the FCC side? Or did you expect it to come in the HPC side? And just have it to come on the FCC side?

John M. Steitz - Executive Vice President and Chief Operating Officer

No, we expected both because generally the first quarter is pretty high volume. We had lost some volume as I mentioned in Europe to a lesser extent in Europe, that's more market share related. And we've had couple of those customers come back to us, which is a good thing.

And so, we are continuing out there to try to sell based on our value equation Dimitry, and now it appears that the market is tightening, the raw materials continue to escalate. I think we've been kind of on track with that curve. But if it hadn't been for that dramatic increases that we saw in rare earth and silicates and ATH, our margins would have been even higher. But with what we're facing, we are pretty happy where we are.

Dimitry Silversteyn - Longbow Research

Now... so if I can kind of summarize what's going on in FCC business and why then the volumes there are negative, you are having a little bit less of a market if you will in the U.S. because of you know fuel miles driven, whatever. And then you have market share loss in Europe?

John M. Steitz - Executive Vice President and Chief Operating Officer

Correct.

Dimitry Silversteyn - Longbow Research

Okay. And then on the HPC side you talked about some orders that you were thinking of shipping this quarter that got pushed into the next quarter. Is that the way to understand your comments?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, they were originally planned for the third quarter and then the customer you know, tried to move them up. But there is some complications in it because these are fairly complex orders. So, they didn't end up going. Now, what we don't know is what's going to happen at the end of the third quarter. So, overall we are anticipating a sequential volume growth in HPC, but we are also aided by a very strong mix effect in the second quarter. So, if we could... I would anticipate that the net profit we make of a catalyst would decline in the third quarter, but that's kind of in our plan for the year.

Dimitry Silversteyn - Longbow Research

Versus the second quarter or versus third quarter of last year?

John M. Steitz - Executive Vice President and Chief Operating Officer

Versus second quarter.

Dimitry Silversteyn - Longbow Research

Okay.

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, versus second quarter.

Dimitry Silversteyn - Longbow Research

All right. And then, switching gears a little bit, talk about the Dr. Reddy agreement which I do believe was for your ibuprofen supply, was that agreement or dissipation of part of your comments during Investor Day that you were looking to get the ibuprofen plant to 90% utilization rate, I think by the end of next year?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, that's part of it Dimitry. That and we've got a number of other good volume opportunity. So, the business from volume perspective is doing pretty well. It's also faced with a lot of raw material inflation. So, to bring that down to bottom-line we've got to run our plants very well and we've got to continue to get pricing up because a lot of these organic drive raw material are involved in ibuprofen. Natural gas is used in making ibuprofen and other input costs like hydrochloric acid and things that are used in ibuprofen production. So, it's all going up, and to continue to drive the profit we've got the volume now, we've got to produce efficiently and get some improved pricing.

Dimitry Silversteyn - Longbow Research

So do you have price announcements or private price initiatives out there in the marketplace currently?

John M. Steitz - Executive Vice President and Chief Operating Officer

Not right now but it's been worked on.

Dimitry Silversteyn - Longbow Research

And is the Dr. Reddy contract have any kind of a price band on it or is it just market pricing or any kind of --

John M. Steitz - Executive Vice President and Chief Operating Officer

I wouldn't want to get into all of details around that but, yes there is some coverage there.

Dimitry Silversteyn - Longbow Research

Okay. All right thank you.

Mark C. Rohr - President and Chief Executive Officer

Thanks, Dimitry.

Operator

Your next question comes from the line of Robert Koort, Goldman Sachs. Please proceed.

Robert Koort - Goldman Sachs

Good morning.

John M. Steitz - Executive Vice President and Chief Operating Officer

Hi, Bob.

Mark C. Rohr - President and Chief Executive Officer

Hi, Bob.

Robert Koort - Goldman Sachs

Mark I need you to move down the bad news more quickly. So I can take advantages of the huge and bad moves connection speed maybe next time.

Mark C. Rohr - President and Chief Executive Officer

Its happening buddy. It's happening.

Robert Koort - Goldman Sachs

A couple of questions first on the ATH do you guys buy ATH or do you buy box.

Mark C. Rohr - President and Chief Executive Officer

We buy ATH, Bob.

Robert Koort - Goldman Sachs

And do or do you know your competitors buy it from Chinese sources because I guess they are really curtailing aluminum production over there. So that's going to create some supply constraints for somebody.

Mark C. Rohr - President and Chief Executive Officer

No they don't buy so much from Chinese sources.

Robert Koort - Goldman Sachs

You mentioned that maybe your competitors have a little different objective on pricing and profit margins in AT or mineral flame retardants and obviously you guys are still producing 10% margin, which I know you probably disappointed in but looks quite a way is out from others in the industry. So do you think this is just an issue where you have got much higher expectations and the rest of the industry is willing to accept lower returns or can we have some reason to hope that this is just a temporary issue?

Mark C. Rohr - President and Chief Executive Officer

Well, I think it is just temporary. When I look at the financial results you know delivered by the competition it is way below anything close to what we are doing. So you know their orders are magnitude. The question you asked is one of you know relativity but I think there is so far off the mark that they have got to do something. to get the --

Robert Koort - Goldman Sachs

To get to be more explosive, and I'm wondering, John, is do you have... are your margins sufficiently higher than your competitors that even if they raise price. That your create umbrella there, I mean what do you think your competitive margin structure looks like in that particular product line is there some reason to think that you are constrained in margins or not?

John M. Steitz - Executive Vice President and Chief Operating Officer

No, I don't think so. Because we know where ours are of course and actually the company I'm referring to is a public entity. So, we know, where there's are and they continue to kind of talk about buying expansion which in this environment we just don't understand. So, we've to take steps protect our market share. And, but, as I said there is just a recent announcement last week, and it's only an announcement but, it's first one of its kind. So, we will see how, the behavior, what the behavior is coming out of that, and pay attention to that closely.

Robert Koort - Goldman Sachs

And, John, I think you mentioned, mix effects partly resulting in the weakish looking price mix dynamic in additives. I guess when I look on an annualized basis given what raw materials have generally done; I wouldn't have expected that this year would be the slowest rate of increase especially given your comments about bromines still having some improvement over in Fine Chemicals you've got a lot of price obviously that's influenced in part by the bromine molecule. So, are we talking actual price declines in some of these products or what would cost such a modest price movement in '08 so far?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, the mineral product line is priced roughly half of that off the bromine. Might be target line just by its nature and cost structure. So, that's really the mix effect that I'm talking about. When we've seen just the base volume decline year-on-year in mineral its got a big volume impact because it is much bigger volume is twice the volume level flame retardants and then on a pricing level it's half.

So that's really what I was talking about was a big mix impact. So, the help is on the bromine flame retardants side we've continued to see profit improvement sequentially and we're helping for a good third quarter there as well, does that help you to understand a little better.

Robert Koort - Goldman Sachs

Yes and I will try one more it does although I am often and still confused with ATH if you are suffering on volume given its got the lowest product price point when that actually help your year-on-year realization from a mix stand point

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, it's right.

Robert Koort - Goldman Sachs

Okay so I guess my question is in the quarter you showed 1% price mix improvement in additives and given where benzene and phenol and bromine costs are down, our prices are down broadly I would have expected a much higher rate I guess.

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes if you look at our polymers business in total, the polymer volumes are actually up sequentially and up year-over-year if you actually look at volumes in polymers and exclude the mix effect.

Robert Koort - Goldman Sachs

Okay. I think I'll have to talk with you guys. Thanks John.

John M. Steitz - Executive Vice President and Chief Operating Officer

Talk with you later. Thank Bob.

Operator

Your next question comes from the line of Todd Vencil of Davenport. Please proceed.

Todd Vencil - Davenport & Co. of Virginia, Inc.

Hi guys, thanks.

Mark C. Rohr - President and Chief Executive Officer

Hi, Todd.

John M. Steitz - Executive Vice President and Chief Operating Officer

Hi, Todd.

Todd Vencil - Davenport & Co. of Virginia, Inc.

Quick question, most of my questions about the business have obviously been answered. You guys have done a good job. You have talked in the past about your feelings regarding the consensus estimate out there for fuels I think at this point it's 270, 61 weight on, weighing on how you feel about those right now?

Mark C. Rohr - President and Chief Executive Officer

Todd this is Mark. I think, we kind of start the year given that perspective then we said we felt okay, with consensus, yes we started the year-end and so far we have not changed that perspective.

Todd Vencil - Davenport & Co. of Virginia, Inc.

Okay, thanks a lot.

Mark C. Rohr - President and Chief Executive Officer

Thanks Todd.

Operator

Your next question comes from the line of Steve Sherman with Newburn & Associates [ph]. Please proceed.

Unidentified Analyst

Hi, good morning guys.

John M. Steitz - Executive Vice President and Chief Operating Officer

Hi, Steve.

Unidentified Analyst

On FCCs, there is only two parts of the businesses, so the base FCC catalysts and additives, can you go over how those two are doing to sort of sum up to the total in FCC business?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, additives business is a real small portion of our overall FCC business, but it is doing well, they tend to be SOx and NOx reduction additives, but it's, in terms of total volume of the overall business it is fairly amount of piece of that.

Unidentified Analyst

I guess some profitability however, I think you made comments that those are they add much more value than sort of your core catalyst. Our profitability side isn't much; you know is it punching above its way to fuel?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, on a relative basis it is... it's doing well. But still on terms of being a significant part of the FCC profitability. It's still much less than the majority, I mean you are talking in 10% or 20% of total.

Unidentified Analyst

And can you give us an update methyl bromide in any expectations in next couple of years, out side sort of your previous comments?

John M. Steitz - Executive Vice President and Chief Operating Officer

Well, methyl bromide year-on-year, is just stable, it's flat, it's under the critically used exemption process, we still don't see any change there. Pricing year-over-year has changed does the cost structure has obviously increased as well. And though we've been successful year-over-year in getting some reasonable price improvements. But for us year-over-year there is really much more significant change in the methyl bromide either way and we don't anticipate any changes going forward that's governed by the EPA critically use exemption process.

Unidentified Analyst

And, then finally on the Chinese antioxidants plants net of any if you will shut down or slow down in manufacturing other parts of the world and how materials that really going to be at the end of the day?

John M. Steitz - Executive Vice President and Chief Operating Officer

That business been a really nice business for us, now we are working continuing do to drive pricing improvement to cover the oil based input cost there. But that's been a good business for us, and I think is one of the other colors mentioned, the minority interest line will go away as we're now on 100%. But its overall margins are higher than the margins of the total Polymer Additives business. So, it's accretive to our margins and it's accretive to our earnings it's been a great deal for us, it has put us really on the map in terms of China and roughly about $5 million a month in sales. So it's good.

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Steve this is Rich just to clarify we do have JBC as minority interest in both the Fine Chemicals business and in the polymer business. So John's comment is that as it relates to anything Jinhai related that minority interest will go away, that will disappear.

Unidentified Analyst

All right, and then a clarification on couple of HPC orders that didn't go in the second quarter were those due to complications on the customer end or in your end? And then you mentioned that you will have to wait till the end of the third quarter to see if they was a way. I would imagine they would be pretty much right away if they run a cost for the quarter?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes, and although we think those are going to go in July. But what I was referring to was other orders that are on the fringe of the quarter, Mark mentioned how lumpy this business is and in the last week of a given quarter can make or break this business many times. So, the... but, to your specific questions, mostly delays due to at the customer side of things.

Unidentified Analyst

Great, thanks guys.

John M. Steitz - Executive Vice President and Chief Operating Officer

You bet.

Operator

And then, your next question is a follow-up question from the line of Jeff Zekauskas with JPMorgan. Please proceed.

Jeffrey J. Zekauskas - JPMorgan

Hi.

Mark C. Rohr - President and Chief Executive Officer

Hi, Jeff.

Jeffrey J. Zekauskas - JPMorgan

Couple of short things. The interest expense for the quarter was about $8.5 million, is that a good number to use for the next two quarters?

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

I'd use that might of the next quarter and hopefully by the end of the year you know it will be a combination of what if say anything we do in terms of potential additional buyback and where rates are. So, we should be very cash generative in the third and fourth quarter and you know, what we do with that cash influence there.

Jeffrey J. Zekauskas - JPMorgan

What was the operating cash flow in the quarter?

Richard J Diemer, Jr. - Senior Vice President and Chief Financial Officer

Operatingcash flow for the six months Jeff is about $94 million up 10% year-over-year.

Jeffrey J. Zekauskas - JPMorgan

That catalyst equity income went from $5 million to $7.5 million. How did you do that?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes. It was two factors. We mentioned good growth in the regeneration piece of that. And that's through one of our ventures. And also our Nippon Ketjen HPC venture in Japan did better.

Jeffrey J. Zekauskas - JPMorgan

Okay. I was little bit confused in that. There are some orders that will probably flop into the third quarter. And I think, one of the commentators said that you thought that all in your segment income and catalyst would be sequentially down. Are both of those true?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes.

Jeffrey J. Zekauskas - JPMorgan

Okay.

John M. Steitz - Executive Vice President and Chief Operating Officer

Now, there is... reiterated by a very strong mix in the second quarter, and particularly in HPC. Jeff, our Nebula very high activity self reduction catalyst did quite well, and is probably the highest margin product in the whole family, so strong this impact.

Jeffrey J. Zekauskas - JPMorgan

In terms of the whole raw material issue, sort of order of magnitude, your prices were up 10%. And last year you had, call it $560 million in sales. So, your prices looks like they are up about $56 million and your cost of goods sold is up, maybe about $45 million, all things being equal. So, I take it then in the aggregate, you're still ahead of your raw material price inflation. Is that right?

John M. Steitz - Executive Vice President and Chief Operating Officer

Yes. Now, you have to take into account, we reduced volumes in polymers year-over-year and sequentially. I think that had an absorption impact as we watched that working capital, my guess, is about $5 million. And then... so there is other impacts like that. But you really have to get into the weeds Jeff, and that's where when we look at polymers. And in its margin decline either year-over-year or sequentially, it really comes down to this mineral flame retardant. And our inability to get that ATH passed through in this European competitive environment.

Jeffrey J. Zekauskas - JPMorgan

Then lastly, for Mark, it just seems that marginally, you are just a slightest bit more conservative about your HPC volumes for the entire year. And there is all kinds of reasons why maybe volatile and quarter-to-quarter basis. But, are there fundamental reasons why you're a little bit more cautious for the year and what would those fundamental reasons be if there are any?

Mark C. Rohr - President and Chief Executive Officer

Well, every time I make a comment it's based on some fundamental perspective in the market Jeff.

Jeffrey J. Zekauskas - JPMorgan

Okay.

Mark C. Rohr - President and Chief Executive Officer

What we see in 2009 is a fair amount of clarity on new business, is booked. And so, that base goes in the year. And so the rest of the ambiguity deals will change our... change our schedules, whether we win or don't win an account.

As we as... I just got back from Asia and there were a couple of our accounts in Asia. This is... there is no impact on us to-date where refineries in Korea had actually slipped the turnaround by a year. So they sort of backing off a bit on sulfur. That's an example. It's a data point. And so I... until I get the orders book, and said that when John gets some books, he comes and reports to me. I'll start relaxing and then I haven't got that point to relax yet for this year.

So, we got work ahead of us to get to draw volume I think this year. I think we've got more tailwinds next year. I think we end up quite... I feel good we're going to end up there Jeff within next year. But this year, it's just too difficult to tell.

Jeffrey J. Zekauskas - JPMorgan

Okay. Thank you very much.

Mark C. Rohr - President and Chief Executive Officer

Thanks.

Operator

And you have no further questions at this time.

Sandra Rodriguez - Director of Investor Relations

Okay. Thank you everyone for participating on the call today. If you have any further questions, please contact me at the number indicated on the press release. Have a great day everyone.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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