Good day ladies and gentlemen, and welcome to the third quarter 2011 Albemarle Corporation earnings conference call. My name is Feb [ph] and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero and we will be happy to assist you.
As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Lorin Crenshaw, Director of Investor Relations and Communications. Please proceed.
Lorin Crenshaw
Thanks Feb [ph], and welcome everyone to
Joining me on the call today, are Luke Kissan, President and Chief Executive Officer, John Steitz, Chief Operating Officer, and Scott Tozier, Chief Financial Officer. As a reminder, some of the matters discussed during the call may include forward looking statements as defined in the private securities litigations reformat of 1995.
Please not the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. Also, to the extent that we discuss any non-GAPP financial measures, you’ll find reconciliations in our press release we just posted on our website at Albemarle.com.
With that, I’ll turn the call over to Luke.
Luke Kissam
Thanks, Lorin, good morning everyone and thank you for joining us today as we report record earnings for the third consecutive quarter. I’ll begin today’s call by sharing some highlights from the quarter, John will then talk about specific drivers of our results, and Scott will cover the quarter’s financial highlights.
As always, at the end of our prepared remarks, we will open it up for your questions. Out third quarter financial performance was a success by any standard. We achieved record earnings for the third straight quarter, and recorded the second highest revenue level in company history.
Excellent pricing traction across each business and strong catalyst and fine chemistry volumes throughout net sales of $723 million up 24% year-over-year. These factors combined with effective raw material utilizations, favoral mix, and great execution drove segment income of 186 million up 30% year-over-year and operating margins of 26% of 118 basis points year over year.
Earning that appeared were an all time record of $116 million or $1.28 per share, up 25% year-over-year. Great results, ahead of our vision 2015 strategy to double the size of our business. In Catalysts, strong volumes, higher pricing, favorable currency, and effective recovery of raw material inflation drove record net sales of $300 million, up 39% year-over-year.
These factors combined with favorable mix and a solid performance from our JVs resulted in record segment income of $102 million, up 48% year-over-year. And segment margins of 34%, up 190 basis points year-over-year.
In Fine Chemistry, raw base pricing initiatives and volume gains drove Fine Chemistry net sales of $180 million, up 30% year-over-year. Segment income was $30 million, up 82% year-over-year. And segment margins were 16.7%, up 480 basis points year-over-year.
This business continues to demonstrate impressive operating leverage as pricing, volume, and manufacturing efficiencies continue to more than offset higher cost.
Polymer Solutions reported net sales of $244 million, up 5% year-over-year and segment income of $55 million down 7% year-over-year.
We indicated during the second quarter earnings call that we saw early signs of weaker demand within selected end markets in Polymers. How much of that would be stocking and how much of that was truly reduced demand remains to be seen.
In spite of this Polymer’s delivered the second best third quarter in its history and reported segment income over eight times higher than that of the fourth quarter 2008, the first down quarter in the last economic slow down.
While Catalysts results were truly outstanding this quarter, our year-to-date performance has been balanced and broad based. The year-to-date segment income of both Fine Chemistry and Polymer Solutions already sees their entire 2010 segment income levels.
The growth opportunities before us have never been more compelling. And I am pleased with the way our management team is balancing today’s execution with tomorrow’s adjacency opportunities.
The fundamental trends driving demand combined with our focus on cost, innovative customer solutions, cash generation, and operational excellence position us well to deliver on our short and long-term objectives.
Polymer Solutions has been a source of questions among investors in recent months. I would like to share with you why we are confident that this business will continue to perform much better in the current or future downturn than it did in the 2008-2009 slow down.
First, we’ve lowered our overall cost structure via our Plan C implementation and has been diligent in keeping cost from creeping back in. Secondly, we’re constantly upgrading our portfolio.
Approximately 25% to 30% of our annual revenue typically comes from new products that were not in our portfolio five years ago. We generally realized a margin pickup with these new products and that has certainly been the case in Polymer Solutions with the phase out of decabrom and transition to 8010 and the transition of our Martinal mineral flame retardant product from LE to high-performing LEO grades.
Thirdly, our pricing strategy has been successful. Brominated flame retardant pricing is up around 50% and mineral flame retardant pricing is up about 30% since 2009.
And finally, we don’t believe volume declines are likely to be as severe as they were in 2008 and 2009. Polymer’s inventory days are 50% lower this quarter than in the fourth quarter of 2008.
The Chemtura supply agreement provides us with higher bromine operating rates and a much softer landing in the slow down.
The electronics, automotive, and construction markets which amounts about 25% of our total company sales seem unlikely to suffer decline is steep since U.S. electronic sales are only up – only up 5% from the 2009 floor and the global construction market has not yet experienced a significant rebound.
Collectively, we estimate that the impacts of these actions equates to approximately $25 million to $30 million per quarter, an incremental Polymer Solutions profit of volumes similar to the 2008-2009 down turn.
In essence, we’ve reset the earning’s floor for Polymers to $100 million – to $120 million or so per year, a significant improvement versus 2009.
Turning to some of our strategic initiatives, we talked before about our new
Each one is an important piece of vision 2015 and has an investment pieces space upon attractive, long-term growth trends and our competitive advantages in these specific markets. We’ve not seen anything in the marketplace that would cause us to rethink the timing of these investments and look forward to bring each of them online over the next few years.
Scott will talk to you in a minute about the strength of our balance sheet and our cash flow, but it’s important to note that that strength that allows us to continue both speed ahead with these major projects, fund and pursue of adjacencies, pursue acquisitions that makes sense and return capital loss shareholders.
In this quarter, we repurchase three million shares of stock at an average price of around $57 per share. Our board has also authorized us to buy back up to another 5 million shares if we deem that appropriate.
Finally, we recently announced the 6% mid-year dividend increase which brings our annual dividend to $0.70 per share. As accustomed, I expect the board to consider an additional dividend increase in the spring. We continue to have confidence in the long-term value of our company and we’ll continue to use our cash flow to enhance that value.
In terms of a fourth quarter outlook overall, we continue to believe as we stated during the second quarter analyst call that are second half results will look a lot like the first half so we are comfortable with the fourth quarter consensus which stands at $1.6 share of today.
Despite an anticipated sequential decline in catalyst in fourth Q, we expect it still should be a very solid quarter. The fine chemistry order book trends suggest sequential improvement and profitability versus a third quarter due to continued strength and clear blind volumes, seasonally strong act sales, better mix and a restore of our NV, PT production facility.
That facility was offline during the third quarter for an expansion but it’s back up and running and currently sold out. While Polymer solutions sales and profitability are typically, seasonally weaker in the fourth quarter, current order pattern suggest that volume should remain relatively flat in fourth quarter.
It’s too early to talk in detail about 2012. We’ll share more and we’ll report fourth quarter earnings in January. Nevertheless, the strength of our businesses and the opportunities we see ahead of us give us confidence that assume a slowdown but not a prolonged recession. We have the capacity to continue on our march toward vision 2015 and grow the business in 2012. With that, I’ll turn the call over John.
John Steitz
Thanks, Luke, and good morning, everyone. I’ll start with Catalyst which delivered outstanding performance by any historical measure and set numerous records. Refinery catalyst revenue and seven income each rose over 40% driven by record levels in FCC profit and a double digit increase in FCC revenue to an old time high.
HPC results were also stellar with sales up 55% year over year and biomes up 35%, marketing the third straight quarter double digit year on year growth. In refining, key value drivers for us included higher customer operating rates as plant issues at a few larger customers who were dragged on results during the first half of 2011, and also continued expansion and growth in
Polyolefin catalyst also reported record profits on strong sales growth and double digit volume growth. We continue to benefit from growing global demand for plastics and rapidly developing economies. In particular, traction towards shifting the business toward higher value-specialized catalyst systems and in addition, early success on our new line of High Purity organometallics into the LED market.
On the topic of raw materials, a key priority obviously remains effectively managing the Rare’s dynamic by securing adequate supplies and effectively passing through these costs. If you are aware the rare of price index started 2011 around $60,000 metric ton and rose to $140,000 per ton by the end of June. Starting in August, the index began declining and ended the quarter around 80,000 a ton.
We continue to help customers find ways to minimize the use of rarers in our FCC catalyst. We’ve been successful in these efforts and during the quarters have good traction towards enhancing our low rare earth competitive advantage and demonstrating responsiveness towards our customers in managing this dynamic.
Specifically approximately 38% of our customer formulations have moved to lower rear earth catalyst and another 20% are currently under customer evaluation.
Overall in the third quarter, outstanding supply chain execution, good buying growth and exceptionally good product mix, growth catalyst margins higher. We anticipate finishing the year strong and positioning our business for another year of growth in 2012.
Within Fine Chemistry, performance chemical’s profit grows an impressive 64% on 31% sales growth. As you know, this division benefits from tremendous end-market diversity and a wider array of growth drivers. Clear brine growth remains exceptional with volumes up over 50%. Middle East demand in particular offset continued weak
Other profit drivers included stronger means performance and sales into the food safety, industrial water treatment and mercury control end-markets. Our food safety business set a new profit record during the quarter and in light of the recent food recalls,
While we’re closely watching developments related to the upcoming EPA decision on mercury, it’s notable that mercury control delivered strong revenue in the profit growth benefiting from the advancement of regulations both domestically and internationally where governments have already adapted more strengths and standards.
Fine Chemistry services also reported excellent sales and profit increases of 23% and 40% year-over-year respectively, driven by exceptional results across our specialty pharmaceutical lines in particular. A very healthy pipeline of perspective opportunities and contracts for 2012, including Sega [ph], Emrest [ph] and other proprietary specialty compounds gave us confidence in the outlook for this business.
Polymer Solutions volumes were down in the order of 15% year-over-year primarily due to mineral flame retardant volumes in Europe. However, segment income of 55 million was more than double the product levels of quarters during 2008 and 2009 when we reported similar volumes.
It’s important to note that Polymer’s segment income was achieved despite a 49% year-over-year stabilizers and curatives profit decline due to the absence this year versus last year of the data production campaign supporting high-speed rail orders from
October and November order book trends lead us to expect that the decline in total volumes have stopped while the array of cost, new product introductions and pricing initiatives we have led over the past two years should continue to support strong margins for our business in the future. So with that I’ll turn it over to Scott.
Scott Tozier
Thank you, John and good morning everyone. This quarter marks a new level of profitability for our company as we set an EBITDA record of $189 million up 25% year-over-year, a new record sale of $723 million, up 24%. Our EBITDA margin was up 30 basis points year-over-year to 26%. On a year-to-date basis, we’ve generated $538 million in EBITDA, up 33% from 2010 and our EBITDA margin is 25% of 190 basis points versus the same period a year ago.
Our balance sheet remains very strong. If you go back to the third quarter of 2008, net debt, excluding non-guaranteed debt from our JBC Joint Venture stood at $728 million. And our leverage as measured by net debt to EBITDA was 1.7 times. By contrast today, our net debt is $384 million even after the share buyback this quarter and leverage has fallen to 0.6 times EBITDA. In addition today our businesses are generating higher cash flow than at any other time in our history.
Turning to some P&L details, R&D expense is up 43% year-over-year as we continue investing in organic growth opportunities including the strategic adjacency initiatives we outlined as part of Vision 2015.
So, the first nine months of 2011, R&D cost as a percent of revenue are up 20 bases points, to 2.7% versus 2.5% for the comparable period in 2010. SG&A expense rose 25% versus Q3 2010, principally driven by increased personnel cost, sales commissions and foreign currency impact from the stronger Euro. Year to date as a percent of sales, this line item is actually down 30 bases points at 10.8% versus 11.1% during the same period a year ago.
Our effective tax rate for the quarter was 25.1% up 100 bases points versus the third quarter of 2010 rate of 24.1%, driven primarily by increased profitability and higher tax rate. At this time, I expect our full rate to be 23.7%.
Now on the cash flow. Year to date free cash flow, defined as cash flow from operations, add back pension and post retirement contributions, million dollars for the period and is down 15% year-over-year. Our cash from operations, excluding pension contribution was actually up 13% to $343 million year to date. So, the free cash flow decline is mainly due to higher capital expenditures of $127 million, double the amount spent during the same period a year ago.
The CapEx increase reflects investment in the Korean and Jordanian projects we’ve discussed and domestic investments in our bromine and polyolefin catalyst businesses. We expect full year CapEx to come in between $180 million and $200 million. This is up from previous guidance and reflects excellent traction on our adjacency growth projects and our drive for further manufacturing efficiency.
Notably, year-to-date, we have essentially distributed all of our free cash flow to investors in the form of $178 million in stock repurchases and $43 million in dividends. And we’re still able to fund our ongoing projects. The impact of the shares repurchase during the quarter was $.02 per share for Q3 and will $.04 in the 4th Quarter.
Our weighted average shares outstanding for calculating diluted earnings per share were 90,958,000 for Q3. Unless, we decide to repurchase additional shares during the 4th quarter, you should use 89,684,000 shares for 4th Quarter and 2012 PPS calculations.
Net worth and capital is $110 million net of FX from December 2010 or 23% mainly due to higher business activity in line with our accumulated year to date sales growth of 23%. Our working capital as a percent of revenue is a healthy 21% as compared to 26% three years ago in Q3 2008. Our past due accounts receivable balances remain well-controlled and have actually fallen from 10% at year end 2010, to 5% as of September this year.
Additionally, as sales have grown, we remain vigilant in managing inventory. Specifically, inventory has grown 20% net of FX from the end of 2010, driven mostly by increases in raw material pricing, primarily rare earths. Unit inventory levels are up only 4% from year end and total base sales and inventory are flat. A testament to our increased operating discipline. Further, relative to the 2008 recession, our date sales and inventory has dropped nearly 30%.
Finally, towards the end of the quarter, we entered into an amended and restated credit facility. We now have $750 million five-year credit facility in place of our previous $675 million facility. We also have the ability to borrow an additional $250 million under the terms of the agreement.
A few quarters ago, it was not possible for even strong investment grade companies like ours to obtain five year facilities. Therefore, we are pleased to lock in a five-year deal secure funding at attractive spreads and achieve an improved covenant package, with only one financial covenant, a leverage test of 3.5 times EBITDA.
We believe this credit facility and our exceptionally strong balance sheet provide the financial where – to fund most organic or strategic opportunities, we would likely contemplate as part of our vision 2015 business plans. With that, I’ll hand it back over to Lorin for Q&A.
Lorin Crenshaw
Operator, we’d like to open it up for questions at this time.