Lorin Crenshaw - Vice President of Investor Relations and Treasurer Luther C. Kissam - Chief Executive Officer, President and Director Scott A. Tozier - Chief Financial Officer, Chief Risk Officer and Senior Vice President D. Michael Wilson - Senior Vice President and President of Catalyst Solutions Matthew K.

Juneau - Senior Vice President and President of Performance Chemicals.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division Matthew Andrejkovics - Morgan Stanley, Research Division Robert A. Koort - Goldman Sachs Group Inc., Research Division Laurence Alexander - Jefferies LLC, Research Division James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division David L.

Begleiter - Deutsche Bank AG, Research Division Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division Dmitry Silversteyn - Longbow Research LLC Christopher Kapsch - Topeka Capital Markets Inc., Research Division Steven Schwartz - First Analysis Securities Corporation, Research Division.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Albermarle Corporation Earnings Conference Call. My name is Frances, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the conference over to your host for today, to Mr.

Lorin Crenshaw, Vice President, Treasurer and Investor Relations. You may proceed..

Thank you, Frances, and welcome, everyone, to Albemarle's Second Quarter 2014 Earnings Conference Call. Our earnings released after the close of the market yesterday, and you'll find our press release, earnings presentation and non-GAAP reconciliations posted on our website under the Investor Relations section at albemarle.com.

Joining me on the call today are Luke Kissam, Chief Executive Officer; Scott Tozier, Chief Financial Officer; Matt Juneau, President, Performance Chemicals; and Michael Wilson, President, Catalyst Solutions.

As an initial matter, we would like to note that our discussion today will include statements regarding the proposed merger between Albemarle Corporation and Rockwood Holdings.

Certain statements regarding this transaction as well as certain statements related to Albemarle's plans, strategy and expectations regarding the future performance of the company may constitute forward-looking statements within the meaning of federal securities laws.

Please note the cautionary language about our forward-looking statements contained in our press release posted on our website this morning as well as in our filings with the SEC related to the transaction. That same language applies to this call.

Please note that our comments today regarding our financial results exclude discontinued operations, special and nonoperating items. Reconciliations related to any non-GAAP financial measures discussed may be found in our press release or earnings presentation, which are posted on our website.

You should also know that this communication does not constitute an offer to sell or solicitation of an offer to buy any securities or solicitation of any vote or approval.

In connection with the proposed transaction with Rockwood Holdings, we will file with the SEC a registration statement on Form S-4 that will include a preliminary joint proxy statement prospectus regarding the proposed transaction.

After the registration statement has been declared effective by the SEC, the definitive joint proxy statement prospectus will be mailed to Albemarle shareholders and Rockwood shareholders. You should review these and other materials filed with SEC carefully as they will include important information regarding the proposed transaction.

Stockholders and investors will be able to obtain a free copy of the registration statement and joint proxy statement and prospectus, as well as other filings containing information about Albermarle and Rockwood without charge at the SEC's website, sec.gov, by calling our Investor Relations Department at 225-388-7322 or from other sources, which we identify on our website and in our filings with the SEC.

Albermarle, Rockwood, their respective directors, executive officers and certain other persons may be deemed to be participants in the solicitation of proxies and favor for the proposed transaction. Information regarding Albemarle's directors and executive officers is available in the proxy statement filed with the SEC on March 28, 2014.

And additional information will be contained in the joint proxy statement and prospectus, and other relevant materials to be filed with the SEC when they become available. These documents can be obtained free of charge from the sources previously mentioned. With that, I'll turn the call over to Luke..

Growth that is more consistent and predictable than either company enjoys on its own; growth that will deliver outstanding cash generation and create long-term shareholder value.

The deal will create a premier specialty chemical company with #1 or #2 global positions across 4 attractive growth businesses in lithium, bromine, catalyst and surface treatment. Each segment has attractive growth prospects, excellent margins and solid market dynamics.

The transaction will bring together 2 groups of employees with a proven track record of delivering market-leading technology, product innovation and customized performance-based solutions for their respective customers. The shareholder value which we expect to be created in this transaction comes from 4 main areas.

First, Albemarle's revenue and earnings growth will be faster, more sustainable, predictable and consistent. The end markets, geographies and applications served by the combined entity are more diverse than either company enjoys today, which will make results less susceptible to a business cycle in any one area.

Second, the $100 million in annual cost synergies we will obtain within 2 years. Third, the transaction will be accretive to cash earnings in the first year and accretive to adjusted EPS in the second year. Longer term, the profitability of the combined company will exceed what either company is forecast to deliver on a stand-alone basis.

Finally, the combined company will generate stronger free cash flow, enabling us to rapidly reduce our leverage, fund organic growth and return more capital to shareholders in the form of dividend increases and share buybacks. This transaction creates a much larger company.

And while there are benefits to larger scale, such as purchasing leverage, SG&A leverage, enhanced credit ratings and others, this transaction is about much more than just being bigger. This transaction is about creating greater value for our stakeholders.

This transaction accelerates growth; diversifies the portfolio; enables predictable, consistent and sustainable growth; and generates the free cash flow necessary to rapidly deleverage and continue returning capital to shareholders, all of which lead to higher shareholder value.

We are confident in our ability to deliver the $100 million in annualized synergies. About half of that total will come from the elimination of duplicate costs that both companies are incurring today. For example, we don't need 2 CEOs or 2 CFOs or 2 general counsels.

The remainder will come from a more streamlined organizational structure with fewer layers of management, asset and site consolidations, implementing the best practices of both companies across the whole and leveraging our increased scale to realize improved raw material sourcing.

One example of a synergy that would fall in this latter category is the fact that in Jordan, we self-produce chlorine that we use in the production of bromine. KOH is a by-product of that chlorine production, and KOH is one of the key raw materials purchased by Rockwood's surface treatment business.

We believe we can supply JBC KOH to the surface treatment business and improve our overall profitability. We will follow a 2-in-the-box integration process with employees from Albermarle and Rockwood fully dedicated to the integration team.

We have also engaged an experienced third-party in Deloitte Consulting to assist with our integration activities. I am confident our team will not only reach its goal, but it will -- that it will find other areas of cost savings once they become more engaged in the process.

Also, we have not included any revenue synergies in our $100 million target, but I am equally confident that there will be those types of opportunities as well. The final point I would make is that if one looks at prior specialty chemicals deals over the past decade, realized synergies have averaged around 8% of the acquired company's sales.

Our $100 million target amounts to just under 7% of Rockwood's projected 2014 sales. That makes our target slightly below the historical average, which makes sense given that these 4 businesses don't have tremendous overlap, and the premise of the deal is growth, not cost savings.

From a capital structure standpoint, we will initially focus on rapidly paying down debt and reducing leverage. Our optimal leverage will likely be in the range of 2x to 2.5x net debt to EBITDA. Our free cash flow forecast calls for us to be well within these levels around 2017, assuming the deal closes in the first quarter of 2015.

As you can tell from our public documents related to the transaction, our debt paydown in 2015 is lower than in either 2016 or 2017. While we expect to generate over $500 million in free cash flow in 2015, a significant portion of that cash flow will be necessary to pay taxes due as a result of the structure of the deal.

The structure, however, should allow us to repatriate around $4 billion from outside the U.S., both at closing and going forward. This upfront tax payment allows us to efficiently repatriate the cash necessary to close the transaction, deleverage and ultimately return additional capital to shareholders.

This transaction creates a premier specialty chemicals company with leading market positions and attractive end markets and a combined history of providing industry-leading returns to shareholders.

Both companies share a culture of strong innovation and a passion for delivering customized performance-based solutions to meet the ever-increasing demands of our customers. I am very excited about what the future holds for the combined company and for all our stakeholders.

And with that, I'll turn the call back over to Scott to discuss this quarter's results in greater detail..

Thanks, Luke. I'm going to begin by reviewing the financial performance of our 2 business segments and then turn to the details on our P&L and cash flow.

Overall, net sales rose 5% year-over-year to $605 million, and segment income came in at $141 million or 23% of sales, up 12% year-over-year, as strong Catalyst Solutions financial performance offset weaker Performance Chemicals results.

Our year-to-date free cash flow was $253 million, triple the performance from 2013 on better working capital results. From a P&L standpoint, this quarter marks the first time reporting with our antioxidants, propofol and ibuprofen businesses classified as discontinued operations.

As previously announced, we have agreed to divest these assets in a transaction that is on track to close this quarter. During Q2, we took a $60 million after tax or $0.76 per share charge to reduce the carrying value of these assets. And in the coming weeks, we will file an 8-K to recast our 2013 Form 10-K for discontinued operations.

Just to be clear on the quarter, for your models, the revenue and segment income related to discontinued operations are $59 million and $5 million in Q2 2014 and $57 million and $4 million in Q2 of 2013.

We also excluded $3.1 million after-tax or $0.04 per share in acquisition-related costs and a $2.1 million after-tax or $0.03 per share charge related to the write-off of certain cost related to the expansion of a custom services production facility.

Finally, we had a $0.01 per share benefit during the period related to nonoperating pension and OPEB items. These 3 items plus the impact of discontinued operations net to $0.82 per share, which added to the reported EPS of $0.28, gets you to our adjusted EPS of $1.10 for the period. Turning to the details now.

Catalyst reported second quarter net sales of $271 million, up 16% year-over-year and segment income of $68 million, up 56% year-over-year. Segment margins were 25%, up more than 600 basis points versus the second quarter of 2013.

Refinery Catalyst Solutions performed well with double-digit sales growth year-over-year and exceptional profit growth due to substantial margin expansion. Heavy Oil Upgrading results benefited from higher sales, primarily mix driven, and higher production rates ahead of the upcoming August expansion turnaround of our Bayport facility.

Clean Fuels Technologies also had a great quarter with profits up double digits driven by strong volumes and favorable mix. Performance Catalyst Solutions also reported solid results with double-digit volume growth across finished catalysts and polyolefin catalysts, reflecting an improved tone to the metallocene polyolefin market.

Overall, Catalyst Solutions experienced higher pricing year-over-year with refinery catalyst pricing improvement somewhat offset by lower pricing in Performance Catalyst Solutions.

Performance Chemicals reported second quarter net sales of $334 million, down 3% from year-ago levels; and segment income of $73 million, down 12% year-on-year on segment margins of 22%. Profitability in both Specialty Chemicals and Fire Safety Solutions was down, while Fine Chemistry Services results were improved from 2013.

The lower Specialty Chemicals results were entirely related to customer-specific inventory management on clear brine fluids in the Middle East that resulted in lower-than-expected sales in the quarter. Excluding this impact, we saw no evidence of weakness across any geography.

And from our vantage point, underlying deepwater fundamentals remain favorable. Fire Safety Solutions profit was down mid-single digits year-over-year, largely reflecting weaker pricing and demand associated with HBCD, a flame retardant primarily used in insulation foam, which we are transitioning to an alternative polymeric product, GreenCrest.

Across the rest of our brominated flame-retardant portfolio, we continue to see evidence of stabilization year-over-year from both a pricing and volume perspective and order book trends supportive of our view that servers, automotive electronics and other growing digital applications having begun offsetting, though slower, PC and TV enclosure end markets.

Fine Chemistry Services reported solid profit growth year-over-year, driven by double-digit volume growth. The primary driver of favorability in this business related to strong electronic materials driven demand, reflecting broadening acceptance of select consumer electronics in this marketplace.

Results also benefited from a onetime payment from a customer as a result of a meet or release presented by that customer. Note that while the second quarter impact was positive, the impact on the balance of the year will reduce custom service profits. Moving on to a few P&L items.

SG&A expenses were $67 million during the quarter, up 9% year-over-year, driven by higher incentive compensation costs and commissions as we continue to accrue for annual incentive based on compensation versus an extremely low payout in 2013. R&D expense ended the quarter at $22 million, up slightly at 2%.

R&D expenses around 3.6% of sales and within our realignment goals to redeploy resources to growth areas. Free cash flow defined as cash flow from operations, adding back pension contributions and subtracting capital expenditures, was $125 million for the quarter and has risen sharply year-to-date.

Through the first half of 2014, free cash flow totaled $253 million, up from $80 million in the year-ago period, driven by a $63 million reduction in working capital versus a use of cash last year and $56 million lower CapEx.

As previously announced, our goal is to permanently reduce working capital by at least $100 million by 2015 as part of our broader supply-chain transformation initiative.

I'm happy with the progress made to date with our net working capital rate as a percentage of sales at 23.5%, down over 130 basis points from year-end, nearly halfway to the $100 million goal. However, we do need to show that we can sustain the gains made and continue to make progress in the rest of 2014.

CapEx was only $23 million for the second quarter and totaled $47 million for the first half of 2014, down over 50% year-over-year. With major CapEx expenditures behind us, we expect CapEx to continue tracking toward our prior guidance of $100 million to $125 million for the full year.

From a total shareholder return perspective, we returned approximately $122 million to shareholders this quarter, of which $22 million reflected dividends and $100 million related to executing an accelerated share repurchase program.

With the announcement of the Rockwood acquisition, we have suspended our repurchase program, reflecting a shift toward cash accumulation between now and the closing of the deal and toward rapid deleveraging thereafter.

Overall, our balance sheet remains a source of strength and flexibility with strong liquidity of $515 million in cash reserves, net debt of $541 million, excluding nonguaranteed JV debt, and net debt-to-EBITDA of roughly 1.0x.

Our effective tax rate excluding special items nonoperating pension and OPEB items for the quarter was 22.6%, up 230 basis points year-over-year. At this time, with the same exclusions, we expect our full year rate to be 23.1%, driven by the level and geographic mix of income and benefits from a favorable mix of income in lower tax jurisdictions.

With that, I will turn the call back over to Luke to discuss our outlook..

Thanks, Scott. Six months into the year, I would characterize Catalyst Solutions results being in line with our expectations and Performance Chemicals results as being below the expectations we had at the beginning of the year. In catalyst, we continue to expect double-digit segment income growth for the year.

We continue to believe that Refinery Catalyst Solutions will be the largest contributor to earnings growth.

Specifically, Heavy Oil Upgrading will benefit from continued strong demand globally for FCC catalysts designed to handle heavy resid-based feedstocks, maximize propylene yield and address the metal contaminants found in North America shale oil.

With the capacity expansion in our Bayport facility, which those of you who attended Investor Day had the opportunity to tour, we have sufficient capacity to meet our growth objectives through 2016. The project is on track for completion in August.

Similarly, we continue to expect improved earnings from Clean Fuels Technologies in 2014, driven by similar volumes to 2013 but with a better product mix. Higher prices will also meaningfully impact refinery catalyst results year-over-year. Catalyst segment income is up over 30% year-to-date.

Our outlook for the second half catalyst results calls for the third quarter segment income in line with the first quarter levels and fourth quarter results more in line with second quarter levels, which would result in double-digit earnings growth for the full year, in line with our expectations.

Third quarter results in catalyst will be down sequentially due to a couple of factors. First, we expect lower FCC production rates in the third compared to the second quarter.

Our Bayport plant will be off-line for a few weeks in August to bring the debottlenecking capacity online, reversing the benefits of the inventory build from the second quarter.

Second, we anticipate that Performance Catalyst Solutions performance will be down sequentially due to weaker volume and mix versus a strong 2Q, despite an improving market outlook. Third, segment margins will be impacted by our first-ever shipment of AlkyClean, currently scheduled for the end of the third quarter.

This product is a new solid acid alkylation technology developed by Albermarle, Neste and Lummus. It's the first of its kind in the world. AlkyClean delivers higher octane without using the corrosive, hazardous hydrofluoric or sulfuric acid used in existing alkylation processes.

Several oil refiners have interest in AlkyClean, but are waiting to see the product perform in commercial operations. This initial sale is significant from a revenue standpoint, but margins are well below the segment average.

We are excited about the growth potential of this new product given the size of the addressable market and expect future sales to be at margins more consistent with the segment average. It will, however, take some time to develop new sales. Finally, we continue to monitor the dynamics around the potential EU and U.S. sanctions on Russia.

At this time, it's too early to tell whether there will be sanctions that restrict us from shipping product for our existing orders. We'll obviously comply with all laws and regulations, but there is a possibility that any such sanctions could negatively impact second half catalyst results.

As we entered the year, our outlook for Performance Chemicals called for modest year-over-year segment growth primarily driven by clear completion fluids and curatives performance within specialty chemicals, stabilized brominated flame retardant pricing and mineral flame retardant growth within fire safety solutions, and a robust electronic materials and former pipeline, allowing custom services to effectively manage the expiration of several large contracts.

In custom services, as Scott mentioned, we have been presented with a meet-or-release price by one of our large customers, which makes future sales economically unattractive.

We have elected to release rather than meet, which will result in a lower expected volumes for the remainder of the year and a loss of approximately $15 million in forecasted segment income from that contract in the second half.

As a result, rather than this GBU delivering modest segment income growth in 2014, we now expect segment income to come in below 2013 levels.

With respect to brominated flame retardants in particular, our assessment of the market and our order book trends leads us to continue to assume, as we have all year, that while pricing trends continue to stabilize in most applications, we don't expect meaningful year-over-year growth in earnings or volumes.

As we roll up all of the various factors by business and factor in the impact of discontinued operations, we still expect overall company annual earnings growth toward the bottom of the 2% to 7% guidance that we provided back in January.

We expect earnings in the third quarter to be in between the levels we delivered in the first and second quarters of this year, and fourth quarter results to be close to what we delivered in the second quarter. With that, at this time, I'll turn the call back over to Lorin for questions and answers..

Operator, we're ready to open the lines for Q&A. [Operator Instructions] Please proceed, operator..

[Operator Instructions] And our first question will come from the line of Mike Sison from KeyBanc..

Luke, in terms of -- when you think about your portfolio businesses going forward, assuming you get Rockwood, what in your mind is sort of the growth profile of a company -- or business that you want to keep in the portfolio? And maybe just maybe describe some of the characteristics that you want to have in each of the businesses going forward..

Yes, okay, Mike. I think if you look at the profiles for what we want, we want to be able to -- where we make money and where Rockwood makes money is when we provide customized solutions. We have products, but we're really selling solutions to the customers.

And if you look across the catalyst, the bromine, the lithium surface treatment, that's clearly what's going on. They're also, if you look at most of those, it's a very small part of the cost of the overall solution for the product that's being delivered.

But it is, in all events, very key to the qualities in that end product that make it do what it's supposed to do. In all events, they're technology driven. You have to -- you're not selling a commodity, you're selling a derivative product that provides value to that end user.

So in essence, those are the quantities that we're looking for when we look at the products that we want to have in this portfolio. Because I think that at its core, that's what these businesses that Rockwood excels at, at its core, and that's what we do in our core businesses as well..

Okay. Great. And one quick follow-up. When you think about where you want the return on capital of the business in total combined going forward, can you maybe talk about what level you think you can get the business to? And maybe some of the timing there..

I mean, what -- I'll turn it over to Scott. He can talk a little bit about the return on capital. I mean, when you're looking at organic growth and funding organic growth, we traditionally want to be at twice our cost of capital. And that's the bar that we use.

I don't really see that changing from where they are because the projects that I've reviewed with Rockwood in the past that -- they're consistent now.

Sometimes in the past, and if you look at Albermarle, and if you look at some of the steps Rockwood's taken, we've expanded recently in advance of demand so that we're there to meet the customers' demand. And it's caused some pain for Albermarle, as you're well aware, Mike, over the last couple of years.

I certainly -- we want to learn from that, but we also want to make sure the demand's there to meet the growth, particularly in lithium, as you look toward the announcement about the gigafactory with Tesla and the Panasonic announcement. So we want to make sure that we're able to meet that demand as the market leader..

Yes, Mike, I'll just add to that. Mike, if I can just add to that. The businesses have substantially invested the capital required to drive the earnings growth that we have projected with the exception of the lithium plant that Luke just talked about.

And as a result of that, plus the deleveraging that we're forecasting, we're expecting very good return accretion over the forecasted period over next 4 or 5 years, so we're very excited about that..

Your next question will come from the line of Vin Andrews from Morgan Stanley..

It's actually Matt calling for Vincent. Just on the Heavy Oil Upgrading, it looks like from your slide deck that the volumes were kind of starting to inflect downward.

Could you just give us a little bit of color on that in contrast to some of the comments you made in the opening remarks?.

Sure, I'll let Michael handle that..

Sure, Matt, this is Michael Wilson. It's true that for FCC volumes in the second quarter, they were up fairly marginally versus the prior year quarter. But I would discourage you from looking too closely at a single quarter.

I mean, if you look at volumes in FCC for the first half of the year versus the first half of last year, we're up double-digit rates. And if you look -- our expectation is that for the full year, 2014 over 2013, we will see FCC volumes that are up double digits versus the prior year..

Got it. And then just you saw a fair amount of pick up in margin on the volume that you had this quarter.

Is there any color you can give us as to how we should think about the margin rate for the balance of the year? And how that might flow to the quarters?.

Is that -- you're asking about catalyst or....

Catalyst. Sorry, for catalyst, yes..

Yes. I think in the second quarter, we had particularly strong margins. It was really driven by couple of things. And first of all, we had good volumes. We talked about the fact that we had high production rates as we did build them in before, ahead of the outage that we have planned in August for our Bayport facility.

But addition to that, we had strong customer mix. And to be honest with you, the customer mix drove more of the margin improvement than did the inventory build. And that's really because we're seeing that -- this continued trend of refiners processing heavy -- heavier, dirtier feeds, which are causing higher catalyst addition rates.

And that happens to be occurring at that account. So customers are very profitable for us. Now I would expect as we go forward in the year, those trends are going to continue. I think the sort of segment margin that we had in the second quarter is a bit of an outlier.

But overall, I mean, I think we see margins in the business improving from where they were at the 2013 level as we go forward..

Got it. And then just quickly on the pricing in Performance Chemicals.

Can you just give any color as to what you're seeing that's driving some of the stability in pricing?.

So when you say Performance Chemicals, I'm assuming you're talking about bromine price stability.

Is that right?.

Bromine. yes..

Okay, we'll turn it over to Matt..

Okay. Matt. I guess in our area, what I'd say is we've seen kind of this ongoing stabilization that really started late in 2013. It's held up through the first half of 2014. As always, there are pockets, some areas are a little better, some areas are a little worse.

But we've talked about the issue of demand, while PCs and TVs continue to be soft, we are seeing growth from the other areas, and that's helping to stabilize overall demand. In clear brines, while we did have this onetime second quarter event, overall demand has continued to remain strong.

And that's also helped demand for the bromine chain, if you will, and helped to create a more stable pricing outlook..

Your next question will come from the line of Robert Koort from Goldman Sachs..

Luke, I was wondering, I was looking at some of the stuff you guys had in terms of pro forma profile for Newco, and I noticed between now and 2018, you expected to generate something around 50% incremental EBITDA margins. I know you talked about the synergy number around $100 million.

Is the reason for the rest of that pretty sensational uplift the take-off in lithium? Or is it the base Albermarle businesses? Can you sort of give us a sense of where you see that extra $450 million, $500 million of EBITDA coming from?.

Yes. Well, I think, for one thing, you got to remember that in May -- and it's not in any of the numbers. But if you look in the end of May, Rockwood closed on the acquisition of Talison. So that will be a joint venture that will come in on that.

From an EBITDA perspective, it won't increase -- it won't -- it's not consolidated, so it won't hit the revenue line, but it will hit the EBITDA and [indiscernible] line. So that's a big jump, Bob. And that business, that Talison joint venture, is projected to grow over and above what the lithium business is expected to grow overall.

So that's a big piece of it. And then otherwise, when we look at those numbers, it's consistent from Investor Relations day, that midpoint case that we talked about at our Investor Day in Houston..

Got it. Okay. And then you mentioned KOH as an example of a raw material synergy. And I guess I would think that they're selling at market prices and you're buying it market prices.

So is it a function of you're buying it from somewhere farther away and now it's closer? How do you actually get synergy if you're both operating sort of at arms length in the market? Where do you pick up any benefit?.

Yes, so we aren't -- we don't buy KOH. We produce it. So we're selling it and they buy it. But KOH is a byproduct for bromine, and we're not -- we don't make enough KOH to be a real player in that KOH market. So we are moving it however we can move it because it gets in the way of our producing bromine.

Some years, we make some money on it, some years we don't. It really all depends what the KCl price is that we get when we make -- to use to make the bromine. So I think there is more than a couple of million dollars sitting there for us to go capture by being able, from a logistic standpoint, to take that and ship it.

And it really cuts down on what -- whatever profit somebody's making by selling them the KOH should inure to the benefit of the combined company, if that makes [indiscernible]..

Your next question will come from the line of Laurence Alexander from Jefferies..

If you combine the potential hit from Russia and the meter release in the Fine Chemistry, what is the potential headwind that you face in 2015? And secondly, if you look at performance of the polymers business or the bromine chain, I guess, do you have the right cost structure? Or is that something that could be dealt with in conjunction with integration? Or will that wait until that after the integration?.

Okay, let me take the first one second -- let me take the first one first. I'm sorry, Lawrence. First of all on the headwind, Laurence, that contract that we lost, that's a headwind for 2014 in the second half, that approximate $15 million profit that I've talked about.

The second, for the full year, it would be in a range of $20 million or so or something like that because it's back-end loaded kind of contract. So that's kind of the range of headwind. And the team's working really hard to replace that. They've got some contracts.

They're not going to be able to replace it in 2014, but they'll work very hard in the rest of this year, and they've already got some leads. And I'm hopeful we're going to cut that down, that deficit down. And I expect they'll be able to fill that for 2015. But there's work to be done for that.

From a standpoint on the sanctions, it's not quite as big, but for this -- for the second half of the year, it could be somewhere in the range of, Michael?.

Well, I think from the catalyst standpoint, you're talking about mid-single digit millions in terms of standard gross profit. So it's not all that great..

Yes. And it would be -- I'm not sure that we would have an order schedule in 2015 if hadn't one for 2014. So it shouldn't be a meaningful impact in '15. And as regard to the structure of Performance Chemicals, we just went through a restructuring, looked at that hard.

I think that we will obviously, when we -- during the integration, we're certainly going to look across all organizations to be sure we're being as efficiently -- as efficient as we possibly can. And it'll be part of the integration. I wouldn't say it will be part of anything that will follow, Lawrence..

Your next question will come from the line of James Sheehan from SunTrust..

Question on HBCD. You mentioned GreenCrest is being adopted there.

What percentage of your volumes now are represented by the new product versus HBCD?.

So for us, James, it's very small because we are really going to be entering the market in a big way in 2015. So it's -- the big reason for us it's having an impact in profitability now is because as we're seeing this transition, we're seeing reduced sales of HBCD before we're able to deliver GreenCrest to the market.

But we will be in the market as that full conversion happens in 2015..

When you do convert, what will be the pricing benefit to you? Or I should say, how much are prices higher for the Green product versus the old product?.

Chemtura has commented on that in their earnings call. I'm probably not going to comment beyond what they said. Those kind of numbers are in the right range of delta in price. I think the watch out on that though is there's clearly new capital involved, there's investment involved. So I wouldn't take that delta in price straight to the bottom line..

Guys, can you also, real quick on FCC pricing.

What were pricing trends like?.

Michael?.

Yes, I think in the quarter and also for the year-to-date, we've seen some modestly higher prices in FCC. And as I look at the full year forecast, I think across the refinery catalyst business, both FCC and CFT, we're going to see higher prices, and they're going to be contribute meaningfully to our year-over-year profit improvement..

Your next question will come from the line of David Begleiter from Deutsche Bank..

Luke, just on catalysts, really more on your Q4 guidance. If it is similar Q2, I think that would imply it's down versus Q4 a year ago.

I might be wrong, but could you just talk about the year-over-year trends in Q4 in catalyst, as well as sequential? And also, what's the impact for TAKREER in the back of this year?.

Okay. Let me -- we will be down year over -- the fourth quarter for catalyst will be down year-over-year. If you remember, we had a huge quarter last year. It was -- that was a record quarter. So we will be down, but still, I think -- we're looking still for a good fourth quarter here. It's not going to be significantly down.

But it will be down for the quarter. TAKREER, all the public announcements are still on track for a fourth quarter start up. We are shifting some of the catalyst, the schedules for the end of this quarter at E-cat. And then we'll have, we believe, either 1 or 2, we don't know.

Probably 1 of the FCC catalysts for the initial load going in the fourth quarter. So that is kind of an October, November kind of start up. And that's the expectations from the engineering firm, from TAKREER and from the order pattern that we're seeing. So that will be a little bit of an uptick in the fourth quarter, which is in our forecast.

But next year, it will be a meaningful impact to our FCC demand..

And just on this $15 million hit from this release of the contract.

Was that more of a Q4 impact or Q3? Or can you help us with that?.

It's spread across. It's almost half and half..

And this last for me for Scott.

Scott, the other -- corporate other line, should we -- what's a good run rate for the back of the year?.

So really where we're head is around that $20 million to $21 million per quarter..

And your next question will come from the line of Mike Ritzenthaler from Piper Jaffray..

Outside of Talison.

This is a bit of a follow-up to a previous question, but outside of Talison and the lithium ramp, can you give us a list of the things that have to sort of converge in order for that 2015 to 2018 EBITDA CAGR to come to fruition on the Albermarle side? It's -- just looking at the past 4 or 5 years for Albermarle has been pretty much flat EBITDA growth.

Just -- what has to happen on the Albermarle side for that -- for all that to come true?.

Yes. If you look at it on the Albermarle side for that kind of segment income growth to come through, if you go back to what we said in Investor Day, it really comes down to -- from a catalyst standpoint, our portfolio management.

So exiting the antioxidant business that we've divested, some manufacturing help, some improvements in manufacturing, and from the additional volume that be run into those plants, at the cost that we have that's right. We had a little bit of price built in. And then we had some capacity utilization improvement.

You'll know what, remember in PCS in the last quarter, we talked about exiting a PCS facility because the organic pricing, there's just too much capacity out there. So we are exiting that unit, bringing it back to a low-cost area at Pasadena and filling our SABIC center.

And then -- but that was generally the ramp up that you would get from a catalyst perspective. If you look at the segment income margins at the level of Performance Chemicals, again, we talked about the portfolio management. So it was the ibuprofen, the propofol divestiture will increase our margins there.

Improvement, focus improvement on our mineral flame retardant margins, a way to -- some projects to reduce cost there. And also watching our customer base to be sure we're getting the best mix of products that we can there. And then it became pricing that was built into that as well as increase utilization rates for bromine.

You'll remember it in Houston, we talked about, on a run-rate basis, that we have today in 2014. With that allocation of bromine to the derivative products that we do. On average, every additional met ton of bromine results in $3,000 of profit, over and above what we're making today.

So tremendous leverage as the growth for bromine and we utilize those assets better. So what we need to do from the Albermarle legacy business to deliver that kind of EBIT margin spread and growth that's in there isn't any different than the middle case that we talked about at our Investor Day presentation in Houston..

Okay. That's helpful. On -- let's switch a little bit to completion fluids. Have completion fluids normalized into 3Q? And I'm curious whether the impact in 2Q was just the Gulf.

Or was there sort of softer component internationally as well?.

So, Mike, I'll take that. No, specifically as I think Scott noted that our issues in the second quarter were related to the Middle East. And it really just a matter of customer inventory management. The trends that we see overall for us are unchanged. The Middle East right now, as you know, has gone through Ramadan and now the Eid holiday.

So now we're probably going to see what happens as we head into early August and they really go back to work. Gulf of Mexico for us was okay in the first half of the year. Southeast Asia was a little soft in the first half, has now picked up as we start the second half of the year..

Your next question will come from the line of Dmitry Silversteyn from Longbow Research..

A couple of questions, mostly with a follow-up nature, if I may. You talked about -- or your slide presentation as well as your prepared remarks, you talked about the polymerization catalyst market, the performance catalyst market, conditions improving, but you're looking for a down quarter in the third quarter versus second quarter in that business.

Is that seasonality? Is it timing of orders? Is there something going on that we should keep in mind as we look towards second half of the year?.

Yes, Dmitry, this is Michael Wilson. I think overall, the fundamentals in that business are improving. But I think the second quarter was a bit exceptional in terms of the product mix we had and the volume. Sequentially, we saying that we will be down third quarter versus second.

But overall, I'm encouraged about the demand outlook that we're seeing, particularly in the finished catalyst portion of the business and the component side of the business. Now we've talked about the organometallics, or basically the sort of precursors to those finished catalysts.

And there's no question that there's overcapacity in that market, and there's price pressure in that market. And that's the reason that we took the actions that Luke talked about around our contract manufacturing earlier in the year.

So pricing on the organometallic side is going to remain under pressure for some time, but the fundamentals of the volume improvement, as well as the components and finished catalysts business are encouraging, So I expect to see continued improvement over a longer time period as we go forward..

Okay. And then the second question on the strong volume growth that you're seeing in FCC catalyst. I think you talked about double-digit growth expectations for 2014 versus 2013 if I heard you correctly. Some of that obviously is mixed with the heavy resid and some of this other products that the market is demanding right now.

But I mean, I think you will have to agree the double-digit growth is very uncharacteristic for FCC business.

So how long can you keep it up? And sort of what do we see on the other side of it come 2015, 2016?.

Well, I think of first of all, we get to look -- that is -- it is hard to keep up, Dmitry. I agree with that. So I don't -- you might not have a view we're going to grow volume in FCC catalysts 10% every year. I'd love to be able to do that, but that's hard. Next year, what we'll have coming on line is TAKREER. And that will be a big volume.

So I think next year in 2015, I expect to grow our catalyst volumes again in '15 with a full year at TAKREER. Now we've got a -- here's what we got to do though. We've got to keep that business.

And the way you keep business in FCC is you meet -- you help those refineries make more money by providing that customized solution, which means our technology has to be cutting edge, and it has to be the best. So we're investing R&D, we're working with our technical sales organization to ensure we do that.

But we don't take any of this volume for granted. We don't take any existing volume we have for granted because there are obviously competitors out there who are working on that technology for our sweet spot just the way we are. So we've got to keep that expertise and that technological edge. But if we do that, I'm confident in that '15 will grow.

And then we'll see about '16 down the road..

Your next question will come from the line of Chris Kapsch from Topeka Capital Markets..

Luke, I appreciate your enthusiasm for the impending Rockwood transaction.

How about -- with your stated of objective of generating strong cash flow and rapidly delevering once that deal closes, I'm just wondering if you anticipate or am contemplating any sort of change in behavior either strategically or tactically in your existing business to help enhance the profitability of those businesses or cash generation there to -- with the eye towards delevering?.

Yes, I -- so from a strategic standpoint, we're not going to run our core businesses any different than way we run them today. I mean, catalyst, we're going to continue to sell for value, as well with bromine. I think the important thing is most of the capital that we need to fund the growth for those businesses, we spent in 2011, 2012.

And so I don't see a whole lot of capital coming. We'll continue to work our working capital, we'll free up cash as we -- well, we've started that already. So I don't see any strategic change in our -- in the way we operate our core businesses..

Okay. And then I think in your prepared remarks, you talked about getting inside your targeted 2 to 2.5 turns of leverage ratio by 2017. And I'm just -- obviously, to reduce that leverage ratio, you don't necessarily have to reduce the numerator, you can also increase the denominator, of course.

And then if you'll -- there's slide in your SEC filings where you have a 5-year projected Newco EBITDA bridge. In 2017, it looks like you're sort of projecting $1.4 billion in EBITDA for the combined company.

So basically, if you grow EBITDA to that level, it looks as though you would be within your targeted leverage ratio without really paying down any debt. In other words, you just grow into a more favorable leverage ratio.

So I'm wondering over that time frame, between now and 2017, if you're generating at least $1 billion in cumulative excess free cash flow, what would be the intention of that $1 billion above and beyond just paying down debt? Because it looks like you don't even necessarily have to pay down debt to get some more coverage -- leverage ratio..

That's right. Now, look, that's a forecast, and there's upsides and downsides to every forecast, okay? And everybody that lived through 2008, 2009, knows that bad things that can happen. And so what we're going to do is we -- we're not say we're going to deleverage, I also said we're going to pay down debt.

So our initial focus is going to be we're going to pay that debt down. And if we're generating that kind of EBITDA, we'll be able to pay it down fast, we'll get to that leverage quicker. And then what we're going to do is we're going to do what we always do. We're going to drive shareholder value. We going to look at organic growth opportunities.

We're going to at stock buybacks. And we'll certainly look at increasing the dividend. So our total focus on this is going to be on driving shareholder value and quality returns for our stakeholders..

Your next question will come from the line of Steve Schwartz from First Analysis..

First, a nuts and bolts question. Luke, you mentioned lower end of the earnings growth range, 2% to 7%.

Is that baseline for 2013 being adjusted with the product line sales? And can you give us that number?.

Yes, it'll need to -- if you need to take that into account.

And Scott?.

About $0.05 adjustment on last year, so..

Yes, about $0.05 adjustment..

Okay. And then just as a follow up, another bromine producer mentioned this week that they were having some difficulties in Israel because of the local strife.

Is that an opportunity for you? Or is it impacting Jordan? Can you give us some color there?.

So Jordan is not being impacted yet, Steve. We haven't seen any impacts on our ability to ship or move bromine. There's only one port out of Jordan, that port in Agaba is still moving product okay. We have not yet seen significant impact related to the issues in Israel impacting shipments..

This is all the time we have for questions. At this time, I'd like to turn the call back over to Mr. Lorin Crenshaw for your closing remarks..

Well, just want to say thank you for your time and your attention. If you have additional questions, give me a call. And have a good day..

Ladies and gentlemen, this concludes your presentation, and you may now disconnect. Enjoy your day..