Matthew K. Juneau - Albemarle Corp. Luke C. Kissam - Albemarle Corp. John Mitchell - Albemarle Corp. Raphael Crawford - Albemarle Corp. Silvio Ghyoot - Albemarle Corp..

David I. Begleiter - Deutsche Bank Securities, Inc. Ryan Berney - Goldman Sachs & Co. P.J. Juvekar - Citigroup Global Markets, Inc. (Broker) Jeffrey J. Zekauskas - JPMorgan Securities LLC Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management) Christopher J.

Kapsch - BB&T Capital Markets John Roberts - UBS Securities LLC Matt Andrejkovics - Morgan Stanley & Co. LLC Aleksey Yefremov - Nomura Securities International, Inc. Michael Joseph Harrison - Seaport Global Securities LLC Jim M. Sheehan - SunTrust Robinson Humphrey, Inc. Michael J. Sison - KeyBanc Capital Markets, Inc..

Good day, ladies and gentlemen, and welcome to the Quarter Four 2015 Albemarle Corporation Earnings Conference Call. My name is Emma, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

As a reminder, this call is being recorded for replay purposes. And now, I'd like to turn the call over to Mr. Matt Juneau. Please proceed, sir..

Thank you, and welcome to Albemarle's fourth quarter 2015 earnings conference call. Our earnings were 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 Investors section at www.albemarle.com.

Joining me on the call today are Luke Kissam, Chief Executive Officer; Raphael Crawford, President – Bromine Specialties; Silvio Ghyoot, President – Refining Solutions; Joris Merckx, President – Chemetall Surface Treatment; and John Mitchell, President – Lithium & Advanced Materials.

As a reminder, some of the statements made during this conference call about the future performance of the company may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release. That same language applies to this call.

Please also note that our comments today regarding our financial results exclude all non-operating or special 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.

Finally, all year-over-year financial comparisons are based on pro forma 2014 results as shown in the April 2015 8-K to facilitate a cleaner comparison. With that, I'll turn the call over to Luke to summarize 2015 performance..

integrate the Rockwood businesses; achieve $50 million of synergies; deliver adjusted EBITDA between $935 million and $1 billion; deliver adjusted free cash flow of $450 million to $550 million; and divest non-core assets. We delivered on all of these objectives and raised our dividend for the 21st consecutive year.

The Lithium and Chemetall Surface Treatment businesses we acquired exceeded our initial 2015 profitability expectations. In total, as forecasted, the company generated $959 million of adjusted EBITDA, and $506 million of free cash flow before one-time items.

Excluding negative currency exchange impacts, Lithium, Chemetall Surface Treatment, Heavy Oil Upgrading, and PCS each grew adjusted EBITDA by greater than 10% versus 2014. We completed the sale of the Metal Sulfides business in January and of our Minerals business at the beginning of February 2016. Neither of these businesses were core for us.

And the proceeds from those sales have already been applied against our debt, allowing us to retire a roughly $330 million in debt. As a result, our net debt has been reduced to about $3.3 billion, as of early-February, in line with our expectations.

This is an important step toward our goal of reaching our net debt-to-EBITDA target of 2.5 times by the end of 2017. In 2015, our focused efforts on integrations and synergies allowed us to reduce costs and become more efficient without negatively impacting our businesses in any way.

In total, our team achieved $60 million of synergies-related savings in 2015, 20% above our original commitment.

On a full year basis, synergies achieved in 2015 will deliver savings of roughly $88 million in 2016, putting us slightly ahead of schedule and leaving only $32 million needed in additional synergies to reach our goal of $120 million in savings in 2016 as compared to 2014.

We already have identified projects in place that give us confidence that we will achieve this goal. Finally, we strengthened our industry-leading Lithium business by reaching three critical milestones. First, we completed and started up our new 20,000 metric ton battery-grade lithium carbonate plant in La Negra, Chile.

Second, we received a new permit, which allows us to significantly increase brine pumped at the Salar de Atacama to speed our expansion plans for battery-grade lithium derivatives. Third, we announced a memorandum of understanding with Corfo which will extend the life and increase the volume of our lithium quota in Chile.

Once the definitive agreement on the quota is signed, which we expect in the next few months, we will have significantly increased our permitted annual production capacity of lithium carbonate from the Atacama brine source to more than 70,000 metric tons.

The definitive agreement will increase both the quantity of lithium that we can extract from the Salar de Atacama and the expected lifetime of our secured reserves in Chile to 27 years from the beginning of 2017 based on about 70,000 metric tons of annual production capacity of lithium carbonate.

The combination of the permit and the increased quota further cement our leadership position in lithium and better position us to meet our strategic goal to capture 50% of the incremental lithium growth. With that, I'll turn the call over to Matt..

Thanks, Luke. For the fourth quarter, we reported all-in diluted earnings per share of $1.55, or $1.03 per share, excluding special items. For the full year, we reported all-in diluted earnings per share of $3, or $3.94, excluding special items.

There were a number of one-time special gains and losses during the quarter and the year, including the release of a tax reserve, our normal fourth quarter mark-to-market adjustments for pensions, and matters related to the Rockwood acquisition and refinancing.

A full reconciliation of these items for both the quarter and the year can be found in both the earning release and in the earnings presentation posted on our website. Our 2015 effective tax rate, excluding special items, non-operating pension, and OPEB items, ended 2015 at just under 25%, 2 percentage points less than prior guidance.

In the fourth quarter, we took actions related to the repatriation of cash to the United States that resulted in a lower full year tax rate for book purposes. This resulted in a non-cash earnings per share benefit of about $0.10 in the fourth quarter.

Capital expenditures ended 2015 at $228 million, just over 6% of sales and in line with previous guidance. At year-end, operating working capital, including assets held for sale, was 26% of sales, unchanged from the end of the third quarter.

Similarly, operating working capital in our core businesses remained at 25% of sales at the end of the year, also unchanged from the end of the third quarter.

Combining all of these elements, we generated free cash flow, defined as cash flow from operations, adding back pension and post retirement contributions, and subtracting capital expenditures, of $506 million in 2015, excluding one-time synergy, acquisition and tax-related costs.

This number is well in line with our guidance of $475 million to $525 million at the end of the third quarter, as we again generated significant cash from our businesses in the fourth quarter. Free cash flow, including one-time costs, for the full year 2015 was $155 million.

At the end of the year, Albemarle's net debt-to-EBITDA ratio, as measured by our bank covenants, was 3.8 times, an improvement from our original fourth quarter projection of 3.9 times. Finally, as we've discussed all year, unfavorable currency exchange impacts had a notable negative effect on earnings throughout 2015.

For the full year, negative currency impacts related to our businesses reduced revenue by $240 million or 6%, and adjusted EBITDA by $55 million, also 6% compared to 2014. Now, let me turn to business unit performance for both the fourth quarter and the full year.

Refining Solutions reported fourth quarter net sales of $200 million and adjusted EBITDA of $53 million with adjusted EBITDA margins of 26%. Sequentially, from the third quarter 2015, sales were up 8% and adjusted EBITDA was down 3%.

Both the Clean Fuels Technologies or HPC catalysts, and Heavy Oil Upgrading or FCC catalysts performed in line with expectations. Results were negatively impacted by just over $5 million related to certain reserves taken in the quarter.

For the full year of 2015, adjusted EBITDA for Refining Solutions was down 19%, excluding unfavorable currency exchange impacts. All of the decline was in Clean Fuels Technologies. In contrast, excluding years where rare earth surcharges had a significant impact on our results, Heavy Oil Upgrading profits reached a new high in 2015.

Underscoring our confidence in the value that our catalysts delivered to our customers, we recently announced a 10% price increase in Heavy Oil Upgrading catalyst. Fourth quarter net sales in Performance Chemicals were $386 million, with adjusted EBITDA of $120 million, resulting in adjusted EBITDA margins of 31%.

Compared to fourth quarter 2014, net sales were down 1% and adjusted EBITDA was down 3%. For all of 2015, adjusted EBITDA for Performance Chemicals increased by 10% compared to 2014. Excluding negative currency exchange impacts, adjusted EBITDA growth was an even more impressive 14%, driven by strong earnings growth in Lithium and PCS.

Lithium continues to deliver strong results. Fourth quarter net sales were up almost 12% and adjusted EBITDA was up almost 15% compared to fourth quarter 2014. Adjusted EBITDA margins were 41%, the fourth straight quarter of greater than 40% margins.

Overall volume growth in the fourth quarter was 14% year-on-year with pricing improving by approximately 3%. Battery-grade price increases and volume growth were again significantly above these averages. For the full year, Lithium delivered adjusted EBITDA growth of almost 19% and adjusted EBITDA margins of 42%.

Adjusted EBITDA for our Bromine-based business was $42 million in the fourth quarter. Results were in line with expectations from the beginning of the quarter, as planned end-of-year inventory management had a significant negative impact on profitability.

For the full year, Bromine adjusted EBITDA was essentially flat on an as-reported basis and was up 5%, excluding negative currency exchange impacts with better-than-expected volumes in clear brine fluids and overall pricing improvement versus 2014.

Finally, PCS, our polyolefin catalyst and carriers business, delivered another strong quarter with both net sales and adjusted EBITDA similar to fourth quarter 2014. Fourth quarter results were above initial expectations due to stronger-than-forecasted sales, favorable raw materials and utilities costs, and the impact of synergies.

For the year, PCS delivered adjusted EBITDA growth of 22% driven by sales growth and product mix in our specialty single-site catalyst business and cost savings related to asset rationalization at the end of 2014.

Chemetall Surface Treatment net sales in the fourth quarter of 2015 were $208 million with adjusted EBITDA of $54 million, resulting in margins of almost 26%. Excluding unfavorable currency exchange impacts, sales and adjusted EBITDA were up 13% and 26% respectively compared to fourth quarter 2014.

For the full year, excluding negative currency exchange impacts, growth was impressive with net sales up by almost 12% and adjusted EBITDA by 14%. Growth was most significant in automotive, aerospace, aluminum finishing, and coil end markets.

Regionally, North America and Asia Pacific, where we are benefiting from 100% ownership of the former Shanghai JV, led the way. Western Europe also performed well, especially Germany, Spain and Scandinavia. Now I'll turn to 2016. First, I'll explain the balance sheet items and foreign exchange.

And then Luke will cover the business and overall company forecast. We currently expect our effective tax rate, excluding special items, non-operating pension and OPEB items, to be approximately 27% in 2016. Note that we do not expect the same rate benefits related to repatriation of cash to the United States in 2016 that we saw in 2015.

As a result, we expect our effective tax rate to return to the level originally expected for most of last year. Our capital spending remains firmly under control. And we plan to maintain 2016 spending at a level similar to 2015, or at $230 million to $240 million.

Note that this includes growth capital required for Lithium this year as well as maintenance and continuity capital for all of our businesses. Our plan does not foresee working capital improvement, but we do expect to maintain operating working capital in our core businesses at approximately 25% of sales.

However, working capital remains a potential source of additional cash for us and we'll continue programs to create incremental improvement over time.

Depreciation and amortization will be in the range of $280 million to $290 million, an increase from $260 million in 2015, driven primarily by the impact of our new battery-grade lithium carbonate plant in La Negra, Chile. Corporate costs are expected to be about $80 million, in line with 2015.

Finally, we do not expect foreign exchange to have the same negative impact on earnings as in 2015, but we do expect another $10 million to $20 million of headwind versus last year related to exchange rates versus the dollar. And that impact will be reflected in the guidance Luke will provide for each of the businesses. The key driver will be the U.S.

dollar-to-euro rate. And given the mix changes in our business since the acquisition of Rockwood, we expect every $0.01 move of the dollar against the euro to impact EBITDA by about $1.5 million to $2.5 million on a full-year basis. Now I'll turn the call back over to Luke..

2015 ended and 2016 has begun with continued economic uncertainty around the world. The impact of low oil prices on the global economy, worries about economic weakness in China and other emerging economies, questionable growth prospects in the U.S., Europe, and Japan, and currency fluctuations all underscore this uncertainty.

Despite this uncertainty, we still expect growth in most of our businesses in 2016. We expect 2016 net sales in the range of $3.2 billion to $3.4 billion; adjusted EBITDA of between $900 million and $950 million; and adjusted earnings per share to between $3.45 to $3.80.

Recognize that the timing of a potential sale of Fine Chemistry Services creates some additional uncertainty in these ranges.

We currently expect the cadence of earnings to be roughly equal between the first and second half of 2016, but note that normal fluctuation in our businesses, such as a large catalyst orders moving from one quarter to another, can have a significant impact on quarterly results.

As shown on page 16 of the earnings presentation posted on our website, excluding the impact of the $52 million non-cash foreign exchange gain from the first quarter of 2015 and the operations of the two divested businesses from 2015 adjusted EBITDA, our forecasted 2016 adjusted EBITDA range represents an increase of 3.5% to 9% (sic) [3% to 9%] versus 2015.

Overall, adjusted EBITDA margins are expected to be right around 28%, an increase from 26% in 2015, as we continue to improve the quality of our portfolio and the performance of our core businesses.

We were just over the midpoint of our 2015 adjusted free cash flow guidance of $475 million to $525 million, which positions us well to meet 2016 guidance that we first provided in September of last year. Specifically, we expect to generate $550 million to $650 million of free cash flow before one-time items related to the acquisition.

And $450 million to $550 million including those costs, or more than triple our 2015 actual free cash flow. Turning to each of our businesses. We expect a double-digit percentage increase in Lithium earnings. Volume growth in battery-grade applications continues to be strong.

Note that global sales of plug-in hybrids and battery electric vehicles in 2015 increased by 70% compared to 2014. We also expect favorable overall pricing versus 2015. And we continue to enjoy a favorable cost position, given the quality of our lithium reserves in Chile and the Talison joint venture.

These factors position us to maintain strong margins that we saw in 2015. PCS is expected to be relatively flat. After a 22% increase in adjusted EBITDA in 2015, we expect 2016 to be a year, where we consolidate and maintain this gain as opposed to seeing much additional growth in earnings.

Chemetall Surface Treatment is forecasted to grow adjusted EBITDA by mid-to-high single-digits on a percentage basis. The diversity of our business in various end markets and geographies, combined with the strength of our technologies and our commercial team, will allow this business to continue to grow even in a more uncertain economy.

Refining Solutions should return to earnings growth in 2016, with adjusted EBITDA expected to increase by high-single digits on a percentage basis.

Although we do have some customers with planned shutdowns that will dampen results in the first half of the year, the low price of oil should continue to drive strong global gasoline demand, benefiting Heavy Oil Upgrading or FCC catalysts.

Additional refinery turnarounds should improve Clean Fuels Technologies' results, although we expect continued mix challenges in the business given the operating environment for integrated refiners.

For example, certain national oil companies in South America have postponed all hydroprocessing catalyst purchasers, which was originally planned for 2016. In Bromine, as we have previously discussed, our methyl bromide supply agreement expired at the end of 2015 and was not replaced.

The loss of this business, combined with an expected decline for clear brine fluids in offshore drilling projects throughout 2016, puts downward pressure on year-over-year Bromine results. Despite this pressure on earnings, we expect this business to deliver free cash flow similar to levels in 2015.

We will continue to drive pricing in this business and will aggressively seek cost reduction opportunities to address margins and profitability.

With respect to synergies, as previously noted, projects already executed in 2015 would drive calendar year savings of $88 million in 2016 and we have additional identified projects that make us confident in achieving the $120 million in committed savings in 2016 versus 2014.

The net productivity number that will flow through the P&L versus 2015 is forecasted to be an additional $40 million to $50 million in 2016.

We are currently forecasting to invest in R&D, technology and increased sales coverage in Lithium, Refining Solutions and Chemetall Surface Treatment, given the attractive opportunities we see in those businesses. In closing, 2015 was a year, in which we delivered on our commitments and began the transformation of Albemarle.

In 2016, we will continue that momentum. Our focus is clear. We will continue to drive superior performance in our industry-leading businesses and use the cash generated from those businesses to deleverage, return cash to shareholders via dividends, and invest in the key growth opportunities we see before us..

Operator, we are ready to open the lines for Q&A. But before you do so, I would remind everyone to please limit your questions to two per person at one time, so that everyone has the chance to ask a question. Then feel free to get back in the queue for follow-ups, if time allows. Please proceed..

Okay. So the first question comes from David Begleiter of Deutsche Bank. Please proceed..

Thank you. Good morning, Luke and team..

Hey, David..

Hey, Luke.

Just on Lithium, what was pricing up in Q4? And what do you think it will be up in 2016?.

I will give that to John Mitchell here.

He asked – the question he has, John, was pricing, what was it up in the first quarter and what do we see for the full year?.

I'm sorry.

What was Lithium pricing up in Q4, Luke, and for 2016?.

Oh. I misunderstood. I'm sorry..

Q prices in – or prices in Q4 were more favorable than beginning of the year. So we're starting to see a pickup in prices that started, say, towards the end of Q3, beginning of Q4, and we'll see more favorable pricing going into 2016 than 2015..

Fair enough..

Hey, David. If you didn't get it, it was a little over, it was about the average, it was about 3% over Europe for the entire Lithium business. Battery-grade was higher than that. And look, we've always said, we got a good pricing environment, but I know we're going to get this question a lot, David. So, let me just address this up front.

We are going to price lithium, so that we get value today and so that we are ensuring that this market continues to grow. We are not going to price lithium in such a way that drives the demand out of the market.

It's very critical that we do this, because this is the best growth business in the specialty chemical industry and we're not going to get greedy early. We're going to get the value that we need to get.

And we're going to price it so that we can allow this industry to continue to grow and achieve the objectives that we had when we acquired the Rockwood business..

Very clear.

And, Luke, just on FCC, I know you announced a price increase recently, can you discuss the competitive dynamics right now in FCC in terms of some market share shifts that might be occurring and the confidence in achieving that FCC price increase?.

Yeah. I think from a competitive standpoint, this is a competitive market. And they're good competitors. We compete on technology. We compete on the value that we deliver to the customer. This is not a commodity that you look at and say, well, capacity is tight, so we can pass through a price increase. That's not how it works.

When you deliver a technology and you allow that customer to make more money, you can get a piece of that more money that they're making and drive your pricing. And I think that's how the entire industry views it.

So, you will see in my comments that we are investing in R&D to drive that technological advantage to give our customers the ability to make more money and then we'll get the price. Now, as we talked about the last time we raised prices, this is a three-year process, because that's how the contracts flow.

So, we've got contracts that fall off this year, some later in the year, some in 2017 and some in 2018. So, you will see a gradual increase in those pricing as long as we're able to deliver that technical superior service that allow them to make more money..

Thank you very much..

Yes..

Okay. The next question comes from the line of Bob Koort of Goldman Sachs. Please proceed..

Good morning. This is Ryan Berney on for Bob.

Luke, if you could comment or give us a little more detail on the Bromine business implied in your guidance here, can you give us a little more of a sense for what volume and price pieces are there for your 2016 guidance in that business? And then maybe also comment where you see that business in the cycle right now.

Are we kind of going to hit the bottom in 2016? Or do you see further downside from there?.

Yeah. I think if you really look at the Bromine, what I would say is, remember, we lost that methyl bromide contract. So, it was a profitable business for us and we framed that up last year on what the type of profitability was and we've lost that. So that was a big hurdle to overcome.

And then, from a volume standpoint, the big volume play that we're seeing is completion fluids. And what's going to happen to completion fluids during the year, you've got about 25% of the CapEx from the E&Ps are out of the market. They've already announced that. So eventually, that's going to slide out. So those are the two big volumes.

I think prices, we've seen – in some packets, you've seen price down a little bit, but overall, prices holding up pretty good and we're getting some price increases across. I think how long it's going to last, whether it's the bottom of the cycle or not, really depends upon completion fluids.

And it's a big tail on completion fluids that you need to remember. So, if they start – oil prices pop up and they start putting deepwater rigs back out and the capital budgets come up, completion fluids won't pop right back up for us in deepwater. You will see a lag. So, we're seeing – we're on the tail right now.

We're on the tail in 2016, we're still good. In 2017, I can't predict that because I don't know what oil is going to be then. But I think that our focus in Bromine will continue to be what it is in 2016. We are going to drive that business for cash to take that cash to allow us to deleverage to allow us to invest in other growth opportunities.

And our business position, our cost position and our technology will allow us to do that..

Great. Thanks.

And then secondarily, given that you now have this MoU with the Chilean government, do you see incremental CapEx in Lithium today as more favorable for spodumene-based material or for your Chilean production that you should be getting here soon?.

John?.

We see it more favorable for the Chilean projects, the brine-based. So we would prioritize those projects over spodumene..

Great. Thank you..

The next question comes from the line of P.J. Juvekar of Citi. Please proceed..

Yes. Hi. Good morning..

Hey, P.J..

Luke, I agree with you that I think lithium prices should be going up to allow demand growth. Having said that, I would imagine that your Lithium contracts are staggered throughout the year.

So how long does it take for your contracts to adjust given what's happening in the marketplace and what should we expect in terms of cadence of pricing?.

Yeah. If you look at our contracts, all those contracts historically had been annual contracts, so negotiated generally in the fourth quarter for the next year. One of the things that we are trying to do is longer-term contracts with some of our major customers to ensure security of supply in this time.

So, there is not a lot of spot market for lithium carbonate or lithium hydroxide that we do. So, if you look at the Asian metals pricing and use that as a crutch to figure out what pricing is and the – it's a bad one. You should not do that. You shouldn't look at that, because there's not enough spot lithium carbonate sold.

This is a contractual negotiation that we have in the fourth quarter and they last generally for the full year. We are trying to change that to a longer term and I think we'll have some success in that, but there's not the opportunity. Once they're set, they're pretty well set, P.J..

And then when you say longer-term contracts, would you have more price escalators along the way?.

Yeah....

And then, similarly on spodumene, if I just may ask that, how much of that is toll-converted in China and would you keep more of the benefit versus the tolling guys keeping the benefit?.

Yeah. P.J., I had a hard time understanding the question. I think what you said is what about spodumene pricing? How contractually is that done and then is most of the spodumene toll-converted in China – or converted in China. I'd say, John, the very bulk of the spodumene is converted in China today.

Is that correct?.

Correct..

And then, I'd also say that those contracts are generally annual contracts as well. But look, we're getting price year-over-year. We're getting good pricing movement.

And we're also working with our customers to ensure that we can get the value we need for the investments that we're going to make and the benefits that we're providing and also allow the cost of that lithium ion battery to work down that cost curve, because the lithium ion battery, I think, if you look at 2015, for the last 15 years, it's declined about 14% a year.

Lithium is really only about 2% of the cost of a battery, but it's critical into the applications that they have.

So, we're going to work to make sure that we're getting the value to justify the capital investments and the costs that we're going to have to bring these great reserves to the market to continue to be able to power this lithium revolution and grow that market..

Thank you. And I just want a clarification of what you just said. You said you're looking for longer-term contracts. Does that mean that you're looking for contracts more than one year and....

Yeah..

...price escalators along the way..

Right. But there will be price-ups, just like in other contracts. And they would be – that's what we're trying to do. We're trying to offer our customer in this tight market, our top customers, security of supply. That's what they want. They want the security of the supply, and they want the quality of the product.

So, we are trying to ensure that we can provide that to those, and to those who are entered into, are concerned about that as I would be, that we're seeing good receptiveness to that..

Thank you..

Yes..

Next question comes from the line of Jeff Zekauskas of JPMorgan..

Thanks very much. There is an outstanding litigation over the Rockwood transaction where I think there is 882,000 shares that want some kind of cash remuneration.

Is that an event that's likely to be resolved in 2016?.

It was resolved in early January..

It was resolved in early January.

And was there a cash payment that was made?.

Yes, there was..

How much was that?.

$82 million, right in line with our expectations..

$82 million. Okay. And then, secondly, in your waterfall forecast, I don't see any change for the All Other segment.

Is the All Other segment in 2016 likely to be similar or not similar in terms of EBITDA or operating profit?.

All right. So, we've got the divested businesses in there, so we divested those two businesses, around $40 million of EBITDA that we would see. So, really if you look at 2015 to 2016, if we had those businesses that we divested, we'd be pushing $1 billion on the high end of our range from an EBITDA standpoint. But those businesses are not in 2016..

Right. So, the EBIT was roughly, I don't know, $36 million this year. So, for modeling purposes, for next year the number should be negligible..

Jeff, this is Matt. Let me take that.

If you look at the way to think about that, the one business that remains in All Other is Fine Chemistry Services, right, as we start 2016?.

Yeah..

And if we were to guide you on that, we'd probably guide you to a number similar to the contribution in 2015, which is in that, let's say, in the $10 million to $15 million range. And you ought to think of that as more of front-end-loaded in the way the year is likely to progress.

And as Luke noted in the call – in the script, there is uncertainty in that depending on the timing of the divestiture on FCS..

So $10 million to $15 million is EBITDA or EBIT?.

That's EBITDA..

Okay. Good. Thank you so much..

Sorry, I misunderstood the question, Jeff. My bad..

All right. Not a problem. Thank you..

Next question comes from the line of Tyler Frank of Robert Baird. Please proceed..

Hi, guys. Thanks for taking the question..

Yes..

Can you comment on what you're seeing for demand for brominated flame retardants? In your expectations, overall pricing in the market, and potentially give a little more color on how you're being able to pass through price increases, and your thoughts about price increases going forward?.

I'll give that to Raphael Crawford..

Yeah. This is Raphael Crawford, Tyler. So, from an overall demand standpoint, of course, the electronics market, electronic connectors is a big piece that would drive brominated flame retardants. The outlook for that is relatively flat for 2016, and that's what we're hearing from industry sources as well as from our core customer base.

With regard to pricing, it is within our strategy to continue to look for opportunities to drive price when able. Right now, it's relatively flat on the BFR market. That's our outlook for 2016. But when able, we'll take the opportunity.

It's – as Luke had said on our strategy for Bromine, it's all about driving cash flow, and when market conditions allow, we'll look for price in that market..

Great. Thank you.

And then, just looking ahead to 2017, in terms of cash flow, do you expect the free cash flow to continue to step up in 2017? And are you on track for your long-term deleveraging targets?.

Yeah. Tyler, this is Luke. We're on track. And I would expect it to step up..

And just remember, Tyler, the last, the major one-times related to the acquisition will not be in 2017 numbers. So, you still got $100 million to $125 million of synergy costs, tax repatriation costs in our 2016 guidance for reported free cash. We expect that to really finish in 2016. So, you got a benefit naturally just from that..

Right. Okay. Thank you..

Next question is from Chris Kapsch of BBC Capital Markets (sic) [BB&T Capital Markets]..

Yeah. Chris Kapsch, BB&T Capital Markets. Just a follow-up on the waterfall on page 16. Looking at the bridge, if you look at the core business growth that you anticipate, I assume that includes synergy capture of $70 million to $100 million, not including that incremental spending on growth initiatives in your growth year businesses.

Could you just talk about what you see would maybe push that number to the high-end of that range? And conversely, what are the risks in your businesses that could result in something coming in towards the low end of that range?.

Yeah. So, we included the net amount. So, we took the synergies we were going to capture and netted it down from the spend and then included that. So, that's net synergies in there as well as – no, no. I'm sorry. We netted it out that increased business resources you see there.

So, on the high end, if completion fluids stay at 2016 levels, which I don't expect, you could see some increase on the Bromine side. From a Lithium standpoint, we're pretty well sold out. So, if we were to get some more incremental sales out of our La Negra plant in 2016 toward the end of the year, we can say a little bit of a benefit there.

There is a lot of – there are some of our customers that are looking at their businesses today and trying to understand whether they put all turnarounds or not. So, we always have in the oil, particularly in the integrated businesses, are they going to push out of the year, are they going to push out of the quarter.

So, catalyst is always at a time like this when oil is at this rate, what's going to happen to the capital and the turnaround for the integrated refinery. So, those would be the big numbers that I see pushing back and forth.

I think, Surface Treatment feel pretty good about where they are there and the ability for them to come in at the forecast but not a whole lot of upside or downside there, maybe a little bit, but not it's going move the big needle across for the corporate. But those were the top ones that I would say..

Okay. That's helpful.

And if I could follow up on your comments about the Lithium business, and so your objective to provide your customers security of supply and quality, just if you could comment on the strategy on the toll conversion over in Asia, how does that play into these objectives and does is it also – and if you could talk about the impact on either margin dollars or margin percentages? And does this strategy allow you to capture a disproportion amount of the growth? Thanks..

Yeah. I think the strategy has always been, today, we don't own a conversion facility that allows us to convert that spodumene to hydroxide and carbonate. So, the strategy that we're going to employ as we build up more carbonate, as we build up more hydroxide is use that as swing volume.

So, we will do that in a way to meet the market demand with that tolling, allow us to meet the current demand. And then at the appropriate level that we see the market has developed, we'll invest capital and bring that in-house. So, we're using that for swing volume strategy.

And I think it's the right strategy for us as we look to be conscious with the capital, the timing, and the amount of capital that we are spending in this business. It will have an impact on margins, obviously, because we are spending some of those – we're paying obviously a fee for the conversion.

But I still expect, as a pure Lithium stand-alone, we've been over 40% margins for six straight quarters, and I would expect we'd certainly be in that range for 2016 as well. Operator, I think next question..

Yes. The next question comes from John Roberts of UBS. Please proceed..

Good morning..

Hey..

Could you comment on the volume trends in the non-battery side of the Lithium business?.

Yeah. The volume trends, I have been consistent – I mean, many of those markets are growing at GDP rates. That's what we've previously communicated and we see no change in those other markets..

Okay.

And then, is the Lithium MoU conversion to affirm contract that you expect in 2016, is that a relatively routine process or is it more involved in that?.

We've got to negotiate a full agreement. So, I think anytime you go from an MoU to a full agreement, there are matters that weren't addressed in the MoU that need to be addressed. But we have the framework and we're confident we're going to get to that agreement..

Okay. Thank you..

Next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed..

Hi. Yes. Good morning. This is actually Matt Andrejkovics calling for Vincent. Thanks for taking the call. Just wanted to focus a little bit on catalysts. You talked about a high number of trials at customers on Heavy Oil Upgrading.

What specifically is driving that? Is that their customer turnaround cycle or maybe they've delayed and then you're just getting kind of like a buildup of trials this year or is it maybe specific performance that these customers are trying to seek out? And then also on Clean Fuels Technologies, what's driving the increase in change-out? Again, is that just customers delaying? And then just collectively, how far can customers delay effectively, if all customers keep delaying, eventually, you're going to get kind of a bottleneck within the industry.

I'm just wanted to see how that would work out as you look out the next year or so. Thanks..

Yeah. So, I'm going to let Silvio Ghyoot who runs our Refining Solutions to take that second question, and then I'll take the first..

Okay. Matt, this is Silvio. The change-out of the HPC units are, in essence, inherently related to the operations of the unit itself. So like we mentioned before, the business is pretty lumpy. However, if you still have activity on your unit, you could postpone that for a while or you could be processing different oils.

So, there is a bit of a stretch on that change-out. But in essence, it's a coincidence that so many units to go inside at a given moment or do not go inside at all..

Yeah. And from an FCC standpoint, I think one of the things is that in this time of oil being down, every refiner out there is trying to squeeze as much profit as they can out of every unit that they have.

And as a result, they're going to be testing to see if there's another catalyst out there that gives them an advantage over a catalyst they're using. I want to make sure you understand it.

If we have a three-year contract to supply an FCC catalyst to a unit, the catalyst that we're supplying at the end of that three-year period can be very different than a catalyst we're supplying at the beginning, because our people in there, with that unit, on a daily basis, making sure they understanding the change in this crude slide, the change in the operating rights, the change in the pressure drop, all of those things and tweaking and changing that FCC catalyst so that we're getting them the best, the best performance they could have so they can make more money.

So, it is – they are looking for that every time. And they bring in test catalysts from other people because they want to understand if they're really doing that. The only way they know to do it is to work it in that specific unit. So, we welcome that.

That's why we invest in technology, that's why it's a great business to be and if you've got a technological advantage and we're excited about it and we were looking forward to a great 2016. And the other thing on HPC, remember HPC was down in 2015 fairly significantly. So, we're planning a big uptake the but not in 2014 levels..

Thanks very much..

Yeah, man..

Next question comes from the line of Aleksey Yefremov of Nomura Securities. Please proceed..

Good morning. Thank you..

Hey..

Going back to your pending Lithium agreement.

Could you discuss how it might impact your production cost in Chile, including the fee that you'll be paying to the Chilean Government? And maybe, if you can talk about costs specifically, how should we think about your margins going forward? And maybe in 2017, should we expect a meaningful step-down in margin or should we expect some stability there?.

Yeah. What I would say is there'll be no impact in 2016. And we need to get the agreement finalized to make sure we understand all of those positions. And we'll give you an update on what to expect for 2017. You should not expect a meaningful downturn, not significant. This is still going to be a significantly high margin business.

And even with any royalty we will pay, we will still be the world's best cost position from a lithium standpoint. And as – and we will use that to continue our market leadership around the globe..

Thank you, Luke. And on FCC catalysts, the price hike, how much of that is in your guidance? I think your slides mentioned that you don't expect much of a price contribution this year.

Is there potentially upside, if you realize more than zero?.

Yeah. There is a little bit of an upside, if we were to realize it. Not much is baked in. There's a little bit baked in, a little bit year-over-year price improvement, but not a significant amount. So it possibly could be an upside. But the way the contracts roll, it's – we're trying to present what we think is a likely case.

And a likely case is we're not going to see much in 2016..

All right. Thank you very much..

Yeah, man..

Next question comes from the line of Mike Harrison of Seaport Global Securities. Please proceed..

Hi. Good morning..

Hey..

On the last call, Luke, you had noted some Bromine weakness related to inventory management. It sounds like that kind of played out during Q4. You also had a competitor in December that was talking about some tightening in Chinese supply and demand driven by increased regulatory pressure.

You maybe had some weather-related issues impacting some of the Chinese production of bromine.

Can you just help us kind of parse through these issues and get a little better sense of what you are seeing in supply and demand in China right now?.

Sure. Let me – I'm going to turn it over to Raphael Crawford to go through that and talk specifically about China. But remember, we did talk about the bromine destocking, if you will. We saw that from our customers as we always do in the fourth quarter.

And Albemarle, specifically, we operated our assets at a much slower rate that had a negative impact on our earnings to match that. But I'm going to let Raphael talk to you specifically about China..

weather-related, safety and environmental, some of that was the Tianjin explosion, as well as the military parade in Beijing, as well as the annual winter shutdown. So, up to 25% of the market – of the capacity was shut down in China at some point throughout 2015.

But on an annualized basis, according to the research that we commissioned, it really amounted to about 10% of total production. A big driver to this, and I think it's also been noted by others, is also the reduction year-over-year in imports in the end of 2015. So the inventory drawdown in China had an impact on price as well.

And that was up to a 30% year-over-year reduction in imports in the back half of 2015. And that has somewhat of a lag effect on pricing. It's our view that as the winter shutdown ends, end of February, beginning of March, we will start to see prices come back down.

So, post-winter shutdown, and as imports are resuming, we also think that that will put downward pressure on what's currently a high price for bromine in China. That being said, we are taking the opportunity where we can to capture price on derivatives in China.

We haven't seen much of an effect outside of China, but it is our strategy to have a position in China, and we are doing what we can currently to capture additional price opportunity in that market..

Right. And if I could ask a question on Surface Treatment, just curious, you've done the consolidation of the Shanghai business. What other opportunities are you seeing in terms of M&A to bolt on some businesses? I know that's a fairly fragmented market..

Yeah.

I think we wouldn't speak to any specific opportunity that we would see out there, but suffice it to say that – and Joris is on the line, but we've got a list of opportunities that are in various stages of review and discussion, because I think part of the small bolt-on acquisitions have been a key to the growth strategy over the years and we'll continue to do that and look at that.

Most of them have been small from a dollar standpoint and fairly rapidly accretive. So, we've got a list, there are opportunities out there. And we'll be wise and prudent with our ability to pursue those..

Thanks very much..

Next question comes from the line of Jim Sheehan of SunTrust. Please proceed..

Good morning.

Could you talk about the current price increase in the market for battery-grade lithium? Given your earlier comments on where you see pricing flowing during 2016, do you expect that entire price increase to be implemented or only a portion?.

Well, there's going to be a negotiation with each customer is what it's going to amount to. But I think we've seen good receptiveness, and we believe that pricing will be up year-over-year. And as we said, pricing for battery-grade is probably going to be higher than that overall price for – if you look at it for the entire Lithium business.

So again, it's a negotiation just like it always is with pricing, but the value that we're delivering there is strong. And we feel good about what we've got in our model to push it through..

What was the contribution in the fourth quarter from Talison?.

You want me to take it?.

Yeah. Go ahead, Matt..

Yeah. Jim, we never fully break it out, as you know. But if you look in our non-GAAP reconciliations, you can see the equity income contribution from Talison.

And it was in line, a little lower as expected in the first three quarters and left us, from an equity income point of view, with an adjusted contribution for the full year of a little under $35 million. We never break out the contribution that comes from our sales of technical-grade spodumene and the tolling.

That's within our normal EBITDA, the Albemarle earnings, if you will. Let's just say Talison was up very significantly year-on-year..

Thank you..

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

Hey, guys..

Hey, Mike..

Luke, you gave guidance for 2016 of EPS $3.45 to $3.80, still well below what Albemarle earned in 2011 and 2012.

And I just want to kind of – maybe help us understand what the earnings power you think the new Albemarle, given the portfolio is improved and higher quality, where can EPS go longer term?.

Well, I mean, I certainly think that if you look at it, from an EPS standpoint, we ought to be able to continue to grow. If you look at the businesses that we have, you've got Lithium that I think – and we've been pretty open about it.

We think Lithium, you ought to see high-single to double-digit growth, and our cost position in that will – we'll work ourselves down the cost chain as we're able to get more efficient and bring more capacity online, because we've already got the fixed cost.

So, if I look at catalyst, I think long-term catalyst is growth position where you're going to see growth – a lot of it depends upon all, but it really is tied to the demand for transportation fuels. That's what drives it.

And that's generally raising 1% to 3% a year, and that's why technology is so important in those businesses, so we can out-earn that. The third piece, if you look at Surface Treatment, they've grown about mid-to-high single digits on a regular basis and I'd expect that to continue.

So, when you roll all out that stuff together and we get these synergies baked in and rolled through and get more efficiencies, I don't see any reason we can't get up and see nice year-over-year earnings growth in that kind of range for mid-to-high single digits, which you can extrapolate that out and see what that number will be.

But I think the earning power – the other thing I'd say about 2011 and 2012, Mike, is when you look at those numbers, remember you've got still in the 2011, that false demand from a Bromine where we were allocating bromine on a daily basis because of the demand coming out of the 2009 recession.

And you've got a lot of pass-through in there related to that rare earth spike and the pass-throughs from that. So, just be a little mindful of the years you pick, but I would say is from where we are today, you should see continued growth in EPS that'll deliver nice shareholder return for our shareholders..

Got it. And then as quick follow-up, the bridge you gave a $70 million to $100 million in terms of synergies and core business growth, you gave a synergy of $60 million, so that's $10 million to $40 million in core business growth.

And that $10 million to $40 million seems a little bit underwhelming, given as you talked about the improved portfolio and so, why is that....

Yeah, you've got some gives and take, Mike. So, you got to look at it and look at the gives and takes. So, let's take a look at it. We said that Lithium business is going to be up high-single digits. We said PCS is going to be flat. So, we're not going to see any growth out of that. We said Surface Treatment is going to be up mid-to-single digits.

Refining Solutions is going to be up high-single digits, and you're going to see Bromine down. So, if you look at the core businesses, they're all growing mid-to-high single digits. And so, I think that in an economy like we have today, and with the uncertainty that we have today, that's pretty strong.

It's anywhere from 3.5% to 9% (sic) [3% to 9%] growth of our businesses on an EBITDA basis. So, we feel good about that and we think if you look at the cash, there's going to be drop into bottom line on that and the yield of our cash. This is a great investment for shareholders and create real value for the ones that are in there today..

Great. Thanks..

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