Albemarle Corporation (ALB)

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Albemarle Corp. (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.

Presentation

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.

Read the rest of this transcript for free on seekingalpha.com