Chemtura Corp. (CHMT) CEO Craig Rogerson on Q2 2016 Results - Earnings Call Transcript

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Chemtura Corp. (NYSE:CHMT) Q2 2016 Earnings Conference Call July 29, 2016 11:00 AM ET

Executives

Matthew Sokol - Director of Investor Relations and Corporate Development

Craig Rogerson - Chairman, President and Chief Executive Officer

Stephen Forsyth - Executive Vice President and Chief Financial Officer

Analysts

Ivan Marcuse - KeyBanc Capital Markets

Rosemarie Morbelli - Gabelli & Co

Michael Harrison - Seaport Global Securities

James Sheehan - SunTrust

Dmitry Silversteyn - Longbow Research

Operator

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

Matthew Sokol, Director of Investor Relations and Corporate Development, please go ahead, sir.

Matthew Sokol

Thank you, Sean, and good morning, everyone. Thanks for joining today. With me are Craig Rogerson, Chemtura's Chairman, President and Chief Executive Officer; and Stephen Forsyth, Executive Vice President and Chief Financial Officer. This morning, we will review summary highlights of our second quarter 2016 operating results. We will also provide our outlook for the second half of 2016.

Last night, we issued our earnings press release providing our second quarter 2016 results and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. As a reminder, some of the statements about our future performance of the company may constitute forward-looking statements within the meaning of the federal securities laws.

Please note the cautionary language about our forward-looking statements presented in our 10-Q that same language applies to this call. Reconciliations related to any non-GAAP financial measures discussed on this call may be found in our previous filings and press releases which are posted on our website. I note that this call is being broadcast and recorded and will be available for replay on our website. Your attendance on this conference call constitutes your consent to the recording and broadcast of this call.

Before I hand the call over to Craig I want to highlight some changes in our terminology in our public disclosures this quarter. Like many companies Chemtura has developed financial metrics and measures to help us manage our company better. We use these measures to make resource allocations, evaluate decisions, evaluate underlying performance, compare performance to peer companies, identify operating trends, determine performance-based compensation and predict future performance. These measures are not necessarily prepared in accordance with GAAP. Our practice has been to present these measures to investors alongside our GAAP results. In the past we have referred to these measures as our managed basis results.

In light of recent updated guidance from the Securities and Exchange Commission to all public companies we will no longer use the term managed basis. To the extent we present financial measures in our disclosures that are not prepared in accordance with GAAP we will refer to these items simply as non-GAAP financial measures. For more information about our non-GAAP financial measures please refer to last night's press release in which we include definitions of such measures and a discussion of why we use them.

I will now turn the call over to Craig Rogerson. Craig?

Craig Rogerson

Thanks, Matt. Good morning, everyone and thank you for joining us. Let me start by saying that we posted another solid quarter. We continue to improve our business performance and profitability even in less than ideal business conditions, proved that our specialty chemical portfolio has ability to deliver consistent results.

As that reflect in our performance over the last 18 months, I note the sizable and sustained improvements we've made in our profitability. IEP and IPP delivered significant improvements in 2015 over 2014. And we are now continuing this trend in 2016.

Let's look at the improvement in the first half of 2016 versus the first half of 2015. If we exclude the after tax impact of the non-cash pension settlement charge in the first quarter 2016 of $129 million, net earnings increased by about 72%, and basic ESP by about 82%. These comparisons are influenced by different GAAP tax rates these periods among other things. So let's look at the operating results.

Our operating margins and profits have steadily risen over this period. Compared to the first six months of 2015, operating income for the first six months of this year has increased 59% and our operating income margin has improved by 550 basis points, again, excluding the pension settlement charge.

Over the same period adjusted EBIDTA increased by 29% and adjusted EBIDTA margins improved by 460 basis points. Our segment operating income margins have improved significantly as well.

Operating profit margins in our IPP and IEP segment for the first six months of this year were 19% and 12% respectively. Adjusted EBIDTA margins for IPP and IPP -- IEP over the same period were 22% and 18% respectively.

We're proud of these improvements and we are confident in our ability to maintain the gains we've made and to expand on them. As investors are aware these improvements have made against weak demand, conditions in many of the markets we serve.

We do believe that demand for our key applications will eventually recover and when it does we are in an excellent position and have great leverage to capture value and deliver even better results for our shareholders. In the interim we are driving both an improvement in value by managing what we can control.

Now let's talk more specifically about our performance in the second quarter. In the second quarter we generated net earnings of $34 million verse $18 million in the second quarter of last year and $33 million in the first quarter of this year again after adjusting for the after tax pension settlement charge of $129 million that we took in the first quarter of the year.

Based on these net earnings adjusted EBIDTA in the second quarter was $70 million, up $9 million or 15% from the same period last year and down 5 million sequentially.

Our performance in the second quarter is about the same as the first quarter when you consider two facts. First, we benefited from a $2 million license fee in the first quarter that did not reoccur in the second occur. Secondly, in the second quarter we took a $2 million charge arising from resolution of multiyear excise tax matter which I'll explain in more detail in a moment.

We – add this two issues, our first results – our results in the first and second quarter of this year are virtually the same. As we predicted our cash flow improved in the second quarter compared to the first quarter of the year. Net cash flows provided by operating activities in the second quarter were $76 million putting us back on track after the weaker first quarter cash generation.

Now let me turn to the performance of each of our operating segments. IEP had another solid quarter. Operating profit in the second quarter grew 67% versus last year and adjusted EBITDA was up 29%. Revenue was down slightly versus a year ago due in large part to the loss of sales under contracts associated with former divestitures which ended in mid2015.

IEP's year-over-year improvement was different by better bromine pricing, strong sales of Emerald Innovation 3000, lower manufacturing in SG&A costs, lower raw material costs and favorable foreign currency translation. As we predicted IEP improved earnings over its first quarter performance as well.

Operating income grew 39% over the first quarter and adjusted EBIDTA grew 24%, revenue improved 11% sequentially. Operating profit margins for IEP were 13% in the second quarter and adjusted EBIDTA margins were 19%.

Sequential performance improvements were driven by better overall sales volumes and improved manufacturing cost absorption partially offset by higher raw material costs. Pricing for bromine and bromine derivatives continues to hold the gains made last year, better bromine pricing in the second quarter was one of the main reasons IEP improved year-over-year.

Pricing improved modestly from the first quarter of 2016 as well. We saw some softening in elemental bromine pricing towards the end of the quarter especially in Asia but that's not unusual as we approach summer months.

Overall, we expect bromine pricing remains steady in the second half of the year. Emerald Innovation 3000 sales was another bright spot in the quarter, continued to improve production rates at our plant and demand remained strong.

Pricing is improved year-over-year as we have now implemented the pricing increases that we announced at the end of 2015. We are also starting to see growth in customer sales outside of our key European markets which will continue to expand the success of this product.

Clear brine sales are once down year-over-year but they did rebound below volumes that we saw in the first quarter this year. Despite some indications that oil E&P may start to improve later this year. Our view is clear brine fluids sales remain challenge for the balance of 2016. I'll talk about that more in a minute.

In our Organometallics specialties business improved sales volumes versus a year ago were offset by unfavorable product mix and lower pricing, sequentially revenue and profit contribution improved in both cases mainly due to improve sales volume.

Now let's turn to our IPP segment. IPP continues to perform well despite year-over-year and sequential declines in some performance measures. Operating income margins for IPP in the second quarter were 16%, adjusted EBIDTA margins were 20%. The team continues to make excellent progress in developing and growing our key additive product lines within petroleum additives and our commercial excellence initiatives have allowed us to maintain consistent performance even in difficult markets.

Year-over-year IPP's performance was down slightly, sales were down 6% while operating profits were down 8% and adjusted EBIDTA fell 4%. As I mentioned earlier, we've resolved a multi-year exercise tax dispute in second quarter which required us to take a charge of approximately $2 million. Attached to that issue related to products made at two IPP facilities in New Jersey, the charge impacted IPP's results alone.

The $2 million resolved several years of past tax liabilities and although there is an ongoing cost for this particular excise tax, it's significantly smaller than $2 million on an annual basis. IPP's year-over-year results were also impacted by continued weak demand for urethane products used in mining, oil and gas applications.

Demand for certain of our synthetic based products in petroleum additives business were also down, it was offset by better year-over-year sales for certain key addictive products with ads, sales prices fell versus a year ago as we passed along lower raw material costs driven by the lower costs of oil compared to the second quarter of 2015.

Our raw material costs fell as well. Generally, more than our prices decreased making our price over raw materials measure a net positive compared to the second quarter of last year. Sequentially, sales were flat and operating income was down $11 million, however $4 million of the $11 million decrease can be explained by the exercise tax issue that I noted above by the fact that we benefited from a $2 million license fee in the first quarter of 2016, that didn't repeat in the second quarter.

Similar to the year-over-year comparison lower volumes for certain synthetic based products in our petroleum additives business and overall unfavorable products and customer mix were key reasons for the decline in performance versus the first quarter, volume for some of our key additive products increased sequentially but were offset by other volume reductions in unfavorable product mix.

I'll now discuss the outlook for the third quarter in the second half of the year. In IEP, we believe bromine and bromine derivative pricing will remain stable for the remainder of the year. Demand for electronics over the next six months appears steady and there are some signs of improving demand for certain applications. Those could positively impact retardant sales into electronic applications.

As I mentioned earlier we project clear brine sales in the second half of 2016 to continue reflect a decline versus the prior year. We previously noted that clear brine sales for 2016 would be down approximately 20% compared to 2015. Given the performance in the first half of this year and our outlook for the second half there's a potential for clear brine sales to be down by an even greater amount.

However, as we mentioned in the past our horizon engaged market demand is somewhat limited so this view could change. As you can see from our first half 2016 results we have weathered this decline and still improve profitability. Our second half outlook factors -- factors in these demand assumptions. As a reminder for us clear brine fluids is only around 10%.

Finally for IEP we anticipate better performance for our Organometallics specialty products in the second half of the year driven by improved manufacturing costs and overall higher sales volumes for key products. In IPP we expect our key additive product lines will continue their strong performance in the second half of the year.

We also expect that sales versus synthetic based products will improve compared to where we ended second quarter. For European product lines we expect that the mining and oil gas industries will remain challenged for the rest of the year. However, we feel that our commercial excellence initiatives and angled to serve small in each applications will help top start fill the gap.

With respect to oil prices we project that prices will rise modestly over the next six months or well within our anticipated range. Although rising oil price will ultimately impact our raw material costs. We believe we have the ability to manage product pricing to litigate most of not all of these headwinds. For the total company we expect to deliver higher sequential revenues, operating income and adjusted EBIDTA in the third quarter compared to the second quarter.

As for the second half of the year consistent with our comments in our first quarter call we anticipate delivering results in the second half of 2016 that are in line with our first half operating income performance and to continue our trend of producing year-over-year improvement in profitability. We anticipate that that total operating income the second half of this year will be comparable to our results in the first half of 2016 excluding the pre-tax pension settlement charge of $162 million.

Cash flows from operations in the first half of this year were $79 million excluding a cash contribution of $35 million to our U.S. qualified pension plan in the first quarter of 2016 related to our pension annuity purchase transaction. We expect to repeat this number in the second half of 2016, generating full year cash flows from operating activities comparable to or better than the $159 million we generated in the full year 2015.

Overall we projected our performance in the second half of the year will be at least even in the first half of the year, and there is potential that we will exceed our first half results depending on customer order patterns and activity around year end. In sum, we believe we are on track to achieve our profitability improvement goals for the full year that we described at our Inventor Day last December.

Before I hand the call over to Stephen, let me address our share buyback activity and our strategic portfolio initiatives. In the second quarter, we repurchased 800,000 shares of our common stock at a cost of about $21 million. At the end of the second quarter, we had approximately $61 million remaining under our board authorized share repurchase program.

Finally, we continue to work hard on finding the next transformational step for Chemtura. We are very active in this work, and we continue to believe and our ability to identify and execute on a transaction that will deliver shareholder value. Our focus is on finding a transaction that fits our strategic criteria and that is actionable in the near-term.

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

Stephen Forsyth

Thank you, Craig. Welcome, everyone. This morning I'm going to focus my comments around a discussion of our performance trends, the obvious comment around Brexit, taxes and cash flows.

But before I start, let me just briefly add to Matt's note at the start of our call that in light of the guidance published by the SEC on May 17, 2016, all public companies this quarter have to review their non-GAAP disclosures. You will have seen from your review of our press release that we have provided additional disclosure and revised the format of the exhibits we attached to the press release to comply with this guidance. We trust that you will find that we still provide the information you need to analyze our results. As always, we appreciate any feedback from investors on the revised earnings press release format.

So Craig started his prepared comments by comparing performance in the first half of 2016 to the first half of 2015. Let me provide some additional perspectives on our performance improvement trend.

As you can see from the last exhibits in our earnings press release, on a GAAP basis, net earnings for the last 12 months as of June 30, 2016, was 35 million. If we adjust for the after tax value of that pension settlement charge of $129 million, last 12 months net earnings were $164 million. This compares to net earnings of $136 million for the full year of 2015, about a 21% improvement resulting from the best performance in the first half of 2016.

With our shared repurchase activity, EPS percentage growth is even higher. While net earnings are the ultimate measure, there is a noise in those numbers in 2015 from the benefit of those tax credits we discussed last year, as well as the release of cumulative transition adjustments and the cost facility closures as well as the small loss on the sale of a business. Therefore, let me discuss the adjusted EBIDTA comparison focuses on operating performance.

Last 12 months adjusted EBIDTA as of June 30, 2016, was 270 million compared to the 237 million for the full year of 2015. That is about a 14% improvement, again, resulting from the improved performance in the first half of 2016. Now if we annualize adjusted EBIDTA for the first six months of 2016, which was 145 million, we are at a 290 million annualized run rate, which represent a 22% increase over the 2015 adjusted EBIDTA.

These metrics support that we are on track to meet our profitability improvement goals for 2016 that we described on our investor day last December. We anticipate that we will deliver comparable profitability in the second half of 2016 to back in the first half, again, excluding that pension settlement charge which, again, is consistent with our stated goals for 2016.

Next let me turn to brexit and answer the inevitable question of what is the initial impact of brexit on Chemtura. First as is evident from our income statement, we did not incur any material FX losses as a result of the fall in the value of the U.K. pound at the outcome of the referendum became known. The weaker U.K. pound in fact should provide us with a net benefit.

While we manage factored products in the U.K. we sell a significant portion of those products in euros and in U.S. dollars, so we have more cost denominated in U.K. pounds and revenues which should result in a net benefit. Like all multinational companies, we will have to wait and see how we have to adjust our operations and like many changes that come out of the exit negotiations over the next few years.

Let me talk about taxes as well. Now, I'm pleased to say this quarter our tax accounting is relatively simple and actually needs little comment. A welcome relief. On both the GAAP and non-backup basis our tax rate was around 28% for the quarter. The second quarter 2016 cash income tax payments, net refunds were around 7 million and stand at 9 million year-to-date.

Lastly let me take a deeper dive into cash flows, and as Craig noted net cash provided by operating activities this quarter was 76 million that places us back on track after operating activities used 32 million of cash in the first quarter of 2016.

So the first reason for that change and investors will recall that in the first quarter of 2016, our cash flows included 49 million in cash contributions to our pension and post retirement plans. These contributions include a 35 million cash payment we made to our US-qualified pension plan to return its percentage funding to approximately same level that's existed prior to the purchase of the pension annuity contract. It also included certain annual cash contributions to certain of our foreign pension plans.

As we indicated at the time, the cash contributions to pension and post retirement plans will be at a lower rate for the remaining three quarters of 2016, and as you can see the second quarter cash contributions were just $4 million.

So to understand the other changes that drove the improvement in cash flows from operating activities, we should first exclude pension and post retirement plan contributions. On this basis, net cash provided by operating activities in the second quarter was 80 million compared to 17 million in the first quarter of 2016.

A significant part of the improvement came from net working capital. Now we define net working capital as the sum of accounts receivable in inventory less accounts payable. In the first quarter net working capital grew by 34 million, led by an increase in accounts receivable, as net sales increased during the quarter compared to the levels we ended the year at in December of 2015.

In the second quarter net working capital actually reduced by 15 million, led by reductions in inventory and higher accounts payable offset by a modest 4 million increase in accounts receivable.

In addition to these inflows, the cash movements associated with other assets and liabilities in our balance sheets changed from an outflow in the first quarter of 31 million to an inflow this quarter of $60 million. The movements are reported under the other line item in our statement of cash flows and improved cash associated in changes with such accounts as crude liability and current assets among other items.

There were many changes from the first and second quarter relating to the differences in the net loss, due of course to that pension settlement charge between the first quarters as adjusted for net cash items in our statement of cash flows.

As part of the adjustments this quarter to our non-GAAP reporting, we have also redefined the term free cash flow to now simply be the net cash provided by operating activities less capital expenditures as stated in our GAAP statement of cash flows for any given measurement period.

This quarter, capital expenditures were $23 million, so free cash flow was $53 million, which compares to $34 million in the second quarter of 2015. Our year-to-date free cash flow as of June 30, 2016, was $6 million, which is net of that $35 million cash contribution to our U.S. qualified pension plan made in the first quarter. If we exclude this contribution, year-to-date free cash flow is $41 million compared to the $37 million for the first six months of 2015. We are therefore clearly tracking with our prior year performance.

Now, as Craig noted, our goal remains that 2016 free cash flow excluding the first quarter contribution of $35 million to that U.S. qualified pension plan should meet or exceed our 2015 full year performance.

Completing the cash story, let me just talk through our cash balance. Our cash balance declined by $8 million in the quarter and was $186 million as of June 30, 2016, still above what we need to fund our normal day-to-day operations. This reduction reflects a $21 million spent to repurchase around 800,000 common shares of our common stock during the quarter and $38 million in debt repayments net of debt drawings.

These payments were mostly offset by the free cash flow generated in the first six months of the year and hence the cash balance only declined by $8 million. As of June 30, we have repurchased 4.3 million shares of our common stock year-to-date, being approximately 6.4% of the shares outstanding as of December 31, 2015, at a net cost of $110 million.

The debt reduction was driven by a repayment of our senior term loan that was due in August of this year. You will note that we refinanced $1 million of that term loan for the period of a year and the purpose of that refinancing was to leave our facility in place to simplify our ability to put a new term facility in place should there be financing requirements for such a facility.

The net results baked in our balance sheet remains extremely strong. Our total leverage ratio being the ratio of total debt for the last 12 months adjusted EBIDTA is now below 1.8 times. Below our long-term leverage target of two times adjusted EBIDTA.

Net debt being total debtless cash and cash equivalence are little greater than one times last 12 months adjusted EBIDTA.

Operator that completes our prepared comments for this morning. I'll now hand the call back to you so that you may assemble the roster of questions and commence the Q&A portion of this call.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Ivan Marcuse from KeyBanc Capital Markets. Your line is now open.

Ivan Marcuse

Hi. Thanks for taking my questions. Just real quick. You may have said this and I missed it. I apologize if I did. On the sequential decline in volume and mix within IPP, was that pretty much all you're urethanes or, you know, how would you describe the urethane decline in that versus the historical IPP business and where – how do you expect that mix to change as we go out the next couple of quarters?

Craig Rogerson

Hi, Ivan. In IPP the revenue was down sequentially as you note. It was primarily due to lower prices. The past through some contractual pass through with the lower raw material costs, but I would say, if you look at it from an overall perspective, from an ongoing perspective, the urethanes was the bigger component. Clearly, we're – we remain challenged as I mentioned in mining and oil and gas where we sell traditionally a significant part of our cashable less for products that continues to be challenged and even more so if you look at year-over-year but even sequentially.

Now as you look forward and we expect to see some continued improvements, and as I noted in IPP we expect the third quarter to be better than the second quarter for a couple of reasons. We continue to see strength in some of our additives product lines and we continue to expect that to continue to strengthen as the year goes on. We've been challenged in some of our synthetic areas and I've talked about that at the end of the first quarter. Some of it was relative to the length of time it took us to find the alternative raw material, the dusting that we had talked about and customers don't wait forever and so we saw by the time we got that resolved some had moved to a different direction and we're doing a good job, I think of backfilling that and in some cases at higher margins but it takes time. And so we saw an effect of that in second quarter.

We expect to see some improvement in that as the quarter goes on. And in the urethanes area specifically -- and I did mention some niche applications, again, it's hard to find applications the size of mining and oil and gas to offset that decline in kind, so what we're ending up doing is, through innovation and some application development, finding applications that are smaller applications but in Agro can be meaningful and they will build over time. So they will be better in the third quarter than they were in the second, I would expect better in the fourth than the third. So we are seeing some uptick there, but it's been a challenge to offset that, you know, that erosion of the significant base that was mining and oil and gas in urethane specifically.

Ivan Marcuse

All right. And then just moving over to that IEP, in terms of, you know, a lot of people focus on the pricing of bromine in China and I was just curious if you can sort of quantify it. Like what is pricing up and down in that region? What does that mean to you and how does that impact your results? Is it a direct impact or is it just more, I guess, if we can get some color around sort of the China price improvement and how that impacts your bromine business specifically if at all?

Craig Rogerson

Well, it does affect it and we sell elemental bromine. So there is some affect and we saw, as I mentioned, some softening. Again, from a very good base, and so it's still good numbers but some softening towards the end of the second quarter, and in fact, it moves, so we've seen some improvement in July. So it moves up and down but, again, around a relatively good level compared to where we were in 2013 and 2014 and even early 2015.

Now that does relate to flame retardants but not directly, not immediately. So you tend to see some effect of that but it's not immediate. So, you know, the [indiscernible] bromine pricing for instance has held relatively strongly through this period where you see some fluctuation in pricing in bromine. The major effect of that decline in bromine prices or the movement on bromine prices is on our margin, on elemental bromine, which for us is not insignificant. But, again, around a relatively strong base, so we feel good about where bromine pricing is and so the bromine derivative pricing as we enter the second half of the year.

Ivan Marcuse

Quick follow-up and I'll jump back in the queue, Organometallics business, I know this is a smaller business for you and gotten smaller over the years, but I guess this looks like it's the third quarter where sales have improved and it looks like it's gaining a little bit of steam. Is this business -- I don't know whether it's tracking right now, $150 million or so in sales, does this get back to that $200 million level? Or how would you sort of gage what's going on in Organometallics because that looks like it's actually probably an improving story it sort of.

Craig Rogerson

Yeah, it is. It is an improving story and it needs to be. I would say that the volume is improving more at a higher rate than the revenue because there's still pricing issues with the Chinese in some of the larger volume organometallics.

But, yeah and I don't know that it will be 200 million. It's more than 150, so it's in between those numbers, but it is moving in the right direction. The plant because we're making more volume has better absorption numbers and so we expect a relatively significant improvement in the second half bottom line results in the second half versus the first half of the year. And that will be a significant contributor to the second half performance of IEP.

Operator

And your next question comes from the line of Rosemarie Morbelli from Gabelli & Co. Your line is now open.

Rosemarie Morbelli

Thank you. Good morning, everyone.

Craig Rogerson

Good morning.

Stephen Forsyth

Good morning.

Rosemarie Morbelli

I was wondering regarding the transaction, the transformational transaction or sale of the company, have you moved 100% towards the transactional -- transaction as opposed to selling the company? Has that particular project been abandoned?

Stephen Forsyth

No. I would say that the -- the buy-sell-merge options remain on the plate and we are evaluating alternatives and I guess that's all I can say at this point.

Rosemarie Morbelli

All right.

Craig Rogerson

Rosemarie, we're further along than we've ever been, whatever that means. Again, we -- until if something happens it didn't happen and we continue to have discussions and we compare those and the board compares those to what we think the value of our plan is as we look out and determine whether or not we think there's sufficient value creation and if there is we pursue it. If there's not we look at other alternatives. So we still are in the process of doing that evaluation.

Rosemarie Morbelli

Okay. Thanks. That is helpful. Looking at Emerald 3000, you're running at trend – at nameplate in the first quarter volume is still increase, I understand you're operating that plant more efficiently, but you also said that you're looking for applications outside of Europe, so would that translate into the need of building another facility?

Stephen Forsyth

Yeah, the -- outside of – you're saying the application outside of Europe, but it's just growing outside of that region. So, you know, still in the insulation foam applications. We believe we have opportunities to further debottleneck the current facility, but at some point we're going to need to make the decision on the next line. And depending on how successful we are and the extent we can debottleneck going to determines when that timing has to be. But, yeah we're very optimistic that this will be a significant part of the growth story as we go into 2017 and beyond. And it's been a very good success and a key part of the improvement year over year that we've seen so far in 2016.

Rosemarie Morbelli

Just following up on that, can you talk about which region is actually thinking of -- or making the same transition from one product line to Emerald 3000? Is it China? Is it the U.S.? And what do you see in terms of the competition they have started their plant as well. Could you talk about that?

Craig Rogerson

Yeah. I think that, you know, we've seen some growth outside of Europe like Japan, for instance, but I think the next significant market is the U.S., China would be down the road, would be our expectation, though there's some worry that timing could have been five years out may be more like three years out now. And so, that's the substitution for HBCD even in China, which would accelerate the need for more capacity in the marketplace.

Relative to the competition, again, we had spoken early on that it was important that ICL start that line up because you needed more than one supplier to get implementation. Even in Europe there was always concerns about having one supplier. So I think that's a very good thing.

And with the market growth as expected, clearly, there's a need for both of the lines, both of the facilities that we're running and ICL is running. And again, the expectation that there will be the requirement for additional capacity come on, even if we're both successful in debottlenecking in the relative near term. When that is, it just depends on how successful each of us are in this debottlenecking effort.

Rosemarie Morbelli

And everyone is disciplined in terms of pricing?

Craig Rogerson

The pricing -- the pricing that we had announced in 2015 that really affected the second quarter and the second half, appears to be sticking. So the value pricing model seems to be holding, yes.

Rosemarie Morbelli

Thank you.

Operator

And your next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.

Michael Harrison

Hi, good morning.

Craig Rogerson

Good morning.

Stephen Forsyth

Good morning, Mike.

Michael Harrison

Craig, can you talk a little bit about what kind of visibility you have on volume growth across your four segments or four pieces of business as you go into the second half? How much visibility do you have relative to what you think of as normal or preferred level of visibility?

Craig Rogerson

I think it's -- it's different across the markets. In Organometallics I think that we have some visibility there. The issue is, you know, us being able to produce at those higher rates to be able to supply the product. I think we've got from a commercial side that part kind of locked down. In Great Lakes it depends by market. Again, we feel pretty good about where electronics is going clear brine fluid is something we don't have great visibility into. It comes in blocks and so our expectations are things will be kind of like they were in the first half.

So first quarter was bad but there was some – you know some inventory adjustment and timing there. Saw some improvement in the second quarter but kind of back to our expectations. Still well-off from last year, the blend of those two quarters is what we're kind of putting into our expectations for the second half of the year. We don't know, again, you know, the orders come but they can be delayed and so it's hard to tell but our expectation is that's relatively flat.

In urethanes, you know, in some of the specific markets we feel like we've got a pretty good insight into where some of the code applications are. I think that we have a pretty solid view on where mining, gas and oil are too and it's not good, right? So, we built in continued anemic sales into those marketplaces. IPP on the pet ads side is relatively steady. As I mentioned, we took some hits, due to our inability to get some of the raw material, some of the synthetic loops size, but we've had some success in backfilling that. It's just taking some time and that will grow so I think we feel fairly confident that we'll see improvements in pet ads business in the second half versus the first half.

From a pricing perspective, I think that volumes from pricing perspective things look relatively stable at this point. If oil stays in the range of kind of where we're talking about and our range is let's say sub 60 bucks. We think we're kind of in that sweet spot that we had put in our projections.

Michael Harrison

All right. Maybe just to get a little more detail on the petroleum additives business, the synthetic lubricants market seems to be growing seems to have continued uptake in terms of consumer use of synthetic lubricants but you guys continue to seem to be lagging here. So the supply issues are resolved. Can you just help us kind of understand, you know, how this process goes of trying to get these customers to come back or get them set-up so that we can see better growth going forward?

Craig Rogerson

Yeah. There's two considerations. First of all, a significant amount of our synthetic lubricants go in industrial applications, so if you look at across the all pet ads it's about 50% industrial and 50% transportation. And if you look at the synthetic side, it's similar to that kind of a split. The challenge we have was, when we were very tight on – use PAO as an example because of the shortage we had of the key raw material and we were looking for alternatives, some of our large customers stuck with it and some of them looked at alternatives because there was a question whether we are going to be successful.

We ultimately were but in the meantime, they made some commitments and so have – developed a whole and what could be our usage. We're not down significantly year-over-year, the issue is of course our expectations we're not able to fully utilize the assets as we expected just because we had more raw material and more product to sell.

There were a lot of regional customers, kind of the intermediate size customers, we couldn't sell because of the restriction we had on our production capability. Those are the customers we are now going back to we have been since the early part of the year and qualifying our product at it, takes some time to qualify. We're having some successes but it doesn't have an immediately and that's why we're confident we'll see this continue to improve into the third quarter and the fourth quarter.

Again, a lot of little customers, intermediate sized customers to replace a loss at a significant big customer. And that's why the time. On the positive side, when we're successful in filling that gap, we should have better overall margin because the margin of the smaller customers tends to be better than the big contract customers.

So that's kind of how it plays out but to your point it's not only the market and it's certainly not only transportation segment, which should be good because miles driven are up it's because we have industrial applications that are not necessarily growing at that same rate and because of an old internal issue we have of basically disappointing customers and we couldn't supply all their needs because we had this raw material problem and now trying to gain that back not only at that customer but at some substitute customers that are going to take a little bit of time because of the qualification process.

Michael Harrison

All right. Thanks for the color, Craig.

Operator

Your next question comes from Jim Sheehan with SunTrust. Your line is now open.

James Sheehan

Good morning. Could you comment on what you expect for fourth quarter in terms of possible inventory destocking by your customers?

Craig Rogerson

Yeah. Yeah, last year we were having a very strong fourth quarter through October, November. We had talked in the call in October that we didn't expect to see the typical reduction or we hoped we wouldn't see the typical reduction from some of the AdCos that we had seen in pet ads specifically, because they hadn't ramped up inventory in the first quarter, and that held to be true.

What we did see, though, from our big oil customers, the oil companies that are significant for pet ads, we did see some inventory reduction just because of their overall basis. And so that's what – that uncertainty is what I'm kind of referring to.

If things hold through the quarter, we could have a better second half than the first half, but if what happened last December happens again, I'm just hedging my bet a little bit is what I'm trying to say, I guess.

James Sheehan

Great. And could you describe the FX benefit you had in the quarter. Which segment -- you know, could you break it out by segment where you saw most of that benefit. Was it more so in IPP I assume?

Craig Rogerson

Jim, are you referring to Stephen's comment on the Brexit or just overall FX.

James Sheehan

Overall, FX.

Craig Rogerson

It was relatively flat impact from FX, overall. If you look in the bridges, in our press release, the tables show I think, you know, some, some segments a benefit of 1 million and some a drag of 1 million, but that net effect of that second quarter on the Industrial segment performance was pretty neutral.

James Sheehan

If you look at -- relative to comments on Brexit and the weaker Pound versus the Dollar, that's more of an IPP benefit, is that right, Stephen?

Stephen Forsyth

Right, that will show in IPP with the passage of time. But in terms of when you're looking at big changes in FX in terms of our balance sheet that come through the P&L, you see that in the other income expense line, you'll see it's pretty neutral this quarter.

Craig Rogerson

Yeah. We saw less than a $1 million.

Stephen Forsyth

And just picking up on Matt's comments. So across the entire company from a revenue perspective, FX is only a $1 million year-on-year and was a positive and it was $2 million positive sequentially. So it's not really material to our results.

James Sheehan

Terrific. And in terms of your price overrides in the second quarter, somewhat of a benefit there. What is your outlook for the third quarter and how you're managing the pass-throughs and should price overrides be another positive in the third quarter or do you see that reversing?

Craig Rogerson

I think the answer is we don't see it going either dramatically up or dramatically down. I think as we see raw material pricing is probably going to increase a bit over the second half of the year, but we think overall we'll capture the vast majority of that with pricing ability. So you really shouldn't see a material move either way versus where we were in the first half.

Stephen Forsyth

The assumptions relative that we'll have a second half that looks similar to the first half, you know, with potential upside, depending on the fourth quarter. The assumption is it's neutral, right? There's kind of hold the gains in margin we've seen due to the benefit of price over raws over the last, what, year or so and -- but not a continued expansion of that based on what we see right now in the projections at least.

James Sheehan

All right. Thanks a lot.

Operator

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

Dmitry Silversteyn

Good morning.

Craig Rogerson

Good morning, Dmitry.

Dmitry Silversteyn

Wanted to follow up on a couple of things. Just want to make sure I understand that the price declines in the performance product segment that's primarily urethanes related, correct?

Craig Rogerson

No. No. The price – if you look at overall, it's just – it's a continued effect of the lower raw material prices, again, our prices haven't fallen as much. So we've been able to hold the margins. But there is some lag in that. So while oil prices have stabilized in the last quarter, they continue to fall off earlier in the year and so that's kind of a pass-through of that effect.

Dmitry Silversteyn

Okay.

Craig Rogerson

Urethane is similarly impacted. We don't have as much contractual pass-through. There they tend to be smaller customers. But because of the overall issues in the market especially mining and oil and gas, we've been – the organization has been looking at volume versus price and trying to optimize bottom line profitability. In some case what's that means is they've actually cut price to maintain volume, to keep some of the volume that they have. And so you've seen some of the effective pricing in urethanes as well, but it's more tied to commercial issues than it is raw material costs.

Dmitry Silversteyn

Okay. I got it. So if you along at petroleum additives and sort of the pricing expectations for that business, we should be seeing this belt on year-over-year start shrinking significantly in the second half of the year in terms of price downs?

Craig Rogerson

Yeah. Yeah, that's correct.

Stephen Forsyth

Yeah. Second half of – I think should look a lot like – second half 2016 should look a lot like second half 2015.

Craig Rogerson

Correct.

Dmitry Silversteyn

Very good. And then switching to engineered products, you had a first positive comp in volumes, you know, going back to about middle of 2014 or something, and that came despite a tough drilling environment, drilling fluid environment. So what – was it all Emerald 3000? Did you see an improvement in electronic demand for flame retardants? Is it mercury abatement gaining traction? Can you talk a little bit about what's driving the volume improvement that you're seeing in brominated products and how sustainable that is in the second half of the year?

Craig Rogerson

Yeah, I think if you look directly to quarter-over-quarter this year we're selling a lot more bromine because we'll have the ICL strike impact this year that we had last year starting in the second quarter. Fumigant sales were strong in the second quarter, so that's an issue versus the first quarter – is the sequential benefit of – it's just the seasonality of that but that wouldn't affect year-over-year.

Certainly 3000 is better and we didn't have the HBCD, so it wasn't just a replacement for us. It is volume that we didn't have when HBCD, moved away. We kind of phased that out before everybody else so that's part of it. That's much more important, if you along at overall mix in margin improvement than it is on absolute volume, but there is volume improvement there as well. Clear brine fluid is down as we noted versus second quarter last year.

GeoBrom the mercury abatement is relatively flat. So we didn't see a tick up. And that's the one area that I would say is different than our expectations. As we put the plan together for this year and I mentioned that even in the first quarter. We expected to see an uptick ahead of the April 1 implementation of the standards and haven't seen that.

Now in looking at why that is, it's some of the things that probably are pretty obvious to you, with gas prices staying low and demand being relatively flat in the power markets, coal fire utilities are -- continue under pressure and there are fewer and fewer of them running. So the actual market that this product is going into is declining. There is continued efficiency gains especially in the non-regulated areas where they can't pass these costs through in rates and so people are getting more efficient.

And even some -- some start to some signs of substitution. So other technologies being used other than just bromine. Bromine is still by far the dominant one, but there are like iodine is being looked at. We're looking at ways to differentiate our offering that maybe allows us to get a little more value and provide more value to the customer, but that's still onto come. But that's the one that's relatively flat year-over-year and we haven't seen the uptick, again, not a direct answer to your question on why volume is up. It's not because of that.

Dmitry Silversteyn

Okay. That's actually very helpful. And that sort of branches me into my next question regarding the mercury abatement market developing outside of the U.S. we are recently certainly in 2016 have seen the Chinese government start paying a lot more attention to environment and emissions and things like that. It's always been thought that the Chinese implementing something similar to the U.S. in terms of emissions of mercury would need to occur for this market to really take off. Are we any closer to that Holy Grail? Are you having any discussions with the Chinese utilities about implementing that, either ahead of regulations or maybe regulations are coming some?

Craig Rogerson

There have been -- this consortium that talks to relative to the advocacy groups that we are involved with that talk to the Chinese government and all the things you say are true. There are indications that they should be trying to accelerate the application of the mercury abatement but there certainly is nothing solid that would cause us to change our time horizon, which as seems to be always just outside of our planning period when that could happen, right? So if we do a three year plan or we can do a five year plan, it's always the fourth or sixth year that maybe something in China is going to happen. I don't think and its really changed relative to that. We've got nothing strong – no indication strong enough that they're serious enough that we would put in any kind of, a plan relative to increases in capacity.

Dmitry Silversteyn

Got it.

Craig Rogerson

You're right. The numbers are significant if in fact, it would happen.

Dmitry Silversteyn

Got it. And last question, on Emerald 3000, you talk about moving outside of Europe. Is this a product that can be leveraged into other markets outside of rigid building insulation? Are you looking at expanding the addressable market, not just the addressable geography for this product?

Craig Rogerson

I don't know if it's specifically Emerald innovation 3000 that would be used for other applications but generally that type of larger molecule technology, the poly metric technology is being looked at for other applications. So I doubt it would be exactly Emerald innovation 3000 but it would be, you know, some kind of a product line that is quote unquote greener that we continue to pursue. You know, the – specifically in Emerald innovation 3000 and in that application they refer to so the rigid foams, really the opportunity is to grow beyond the European region and as I mentioned outside of Japan the U.S. seems ton to be the one that's the closest

Dmitry Silversteyn

Got it. Okay, thank you very much, Craig.

Craig Rogerson

Thank you.

Operator

And your last question comes from Rosmarie Morbelli from Gabelli & Company. Your line is now open.

Rosmarie Morbelli

Thank you. Just a follow-up on your comment, Craig, regarding the pickup in some electronic applications. Could you give us a better feel as to which electronic applications are growing? Because this is not necessarily, what we hear from others.

Craig Rogerson

As we've spoken before, I think it's very hard for us to tell specifically, where these are going. You know, we sell into markets that go into printed wiring board or into connectors or cables or whatever and where it ends up specifically it's hard for us to tell. We just see this generally improving. Again, it's marginal. It's not like we used to see these big cycles, right, back in the day but marginally improving as we go quarter-over-quarter.

And, again, surmising that's driven by the things that we've talked about in the past, increased use of electronics in computers, in automotive or in the Internet of Things or the big cloud computing, so the server farms. Those are the things that seem to be -- what we see as increasing demand in those markets consistent with this improving demand that we're seeing in electronics. But, again, I don't want to make it -- this is not like the improvement that we see in volume growth in Emerald Innovation 3000. It's just marginal. But what we've been talking about flat or no growth for as many years as we've been talking about this slight uptick is noticeable.

Rosmarie Morbelli

Okay. Thanks. And then on the both the urethane and the petroleum additives you have mentioned going after niche application or smaller customers. The products you are selling into those, are they higher margins than the business that you have either lost or that is just not going anywhere or declining in the case of urethane?

Craig Rogerson

Yes, yeah. The applications whether in some kind of personal care application, some specific parts application, discreet parts, are typically higher margin than when we sell into big customers in oil and gas or mining.

Rosmarie Morbelli

Okay. Thanks.

Operator

There are no further questions at this time. I turn the conference back to Mr. Sokol for closing remarks.

Matthew Sokol

Thank you, Sean. I'd like to thank everybody for joining us this morning, and we look forward to talking to you all on our third quarter 2016 earnings conference call in late October. Thank you and have a great day.

Operator

And this concludes today's conference. You may now disconnect.

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