BRK.A (BRK.A) Q1 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Sutherland. Please go ahead.

Thank you Terry and Thank you all for joining us today, May 2nd, 2008 for a discussion of our first quarter 2008 results, which were released this morning. This call is being webcast by ccbn.com and will be available for replay beginning about 6:00 p.m. Eastern Time today and continuing for the next 30 days. Our internet site, www.lubrizol.com, has several supporting documents for this call at the Investor Relations, Earnings Release page. You can access a presentation entitled First Quarter Teleconference Slideshow and you can follow along with during today's teleconference. From this site you can also access the replay and a written transcript of this call. Also on our site you will find reconciliations to GAAP financials. Our prepared remarks today include references to non-GAAP financials in our discussions of earnings, EBIT and outlook. We want to remind everyone that this webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission or reproduction of this call without written company consent is prohibited. Participating in the call with me today are James L. Hambrick, Chairman, President and Chief Executive Officer; Charlie Cooley, Senior Vice President, Treasurer and Chief Financial Officer; Greg Taylor, Vice President for Planning, Development and Communications; and Scott Emerick our Controller. James will open today's call with some brief comments on the quarter and how we see performance going forward. Charlie Cooley will discuss the quarter's results and update our outlook for 2008. We will then open the lines for questions and discussions. I need to remind you that some of the information to be furnished in today's session will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those focused on future plans, objectives or performance as opposed to historical items. We remind you that actual results could differ materially from results projected or referenced in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements in this teleconference are contained in the risk factor section and the forward-looking statement section of Lubrizol's most recent filings with the Securities and Exchange Commission. With that I will turn it over to James.

Thank you, Mark, and good morning, everyone. I'd like to thanks again for joining us. As usual I will keep my opening comments brief and to the point. As I noted in our February teleconference, we concluded 2007 with good momentum and that we were off to a good start in January. That trend did indeed continue through the first quarter of 2008 as we set a record for revenues in a quarter as a result of strong volume and improvements in the combination of price and mix. International revenues in both segments were particularly strong. Also, it was our second best quarter ever with earnings of a $1.06 per share, or $1.10 per share on an adjusted basis. That's an 11% increase compared with the previous year. Lubrizol Additives performance continued to be strong, posting a record quarter for revenues, for volume and operating income the best way I can explain that you is it's simply result of a solid line-up of products and commercial strategies that combination are designed to help our customers succeed in their marketplaces. Segment results also benefited from our 2007 refrigeration lubricants acquisition. In our February call, I expressed our concern about increasing raw material prices and the likely impact on margins. Those concerns proved well founded and to begin to address the impact on margins, Lubrizol Additives announced a global price increase in mid-February... we'll realize the benefits of this action in the second quarter. However, prices have continued to rise and it's almost certain in the environment that I see now... we could be chasing material and operating cost increases from quarter-to-quarter. Very hard work necessary of course and we've been here before we understand pressure and lags we'll get that work done. In March, we announced a phased capacity expansion plan for Lubrizol Additives. The focus of the plan is to improve operating efficiencies and add incremental capacity by refurbishing and de-bottlenecking existing facilities in North America and Europe. We also announced we will build a greenfield facility in China, in phases, to strengthen our position in that growing market. Be assured, as we add this capacity we exercise great care and the size increments so that we match it to a future demand, we want to be a reliable supplier to our customers and on the other hand we will make modest investment to insure that we earn proper returns on capital. Turning to Lubrizol Advanced Materials, the results for this segment were mixed just like they were in the previous quarter. Needless to say I'm disappointed by the overall financial performance; however, I do remain encouraged by progress that we are making, I described that in our earnings release this morning, but in summary fashion again, good pricing success across all of our product lines, its been slow and tough to get there but we have gotten traction there across all of product lines, continued solid geographic growth, and increased innovation success as measured by meaningful new product introductions. And may be just as importantly to build up in the product pipeline behind that. During the quarter, we internally announced several important new steps in our plans to improve the business performance of our Coatings product line. We are narrowing our focus to three key markets where our technology offers customers valued and differentiated advantages. These markets are really related to the technical films sectors of industrial coatings and adhesives, it's a board category. But the technical film niches in those market also in graphic arts, as well as technical paper and textiles. We are realigning our manufacturing assets to simultaneous to focusing on higher value we also seek much higher utilization as our volumes have declined so... coatings utilizations and we announced the disposition of our textile compounding plant in Lawrence, Massachusetts, and the impairment of a textile coating manufacturing line at our facility in Gastonia, North Carolina. These actions largely account for the restructuring and impairment charges incurred in the first quarter of the year. And then continuing on into the second quarter in April we eliminated about 30 sales, marketing and R&D positions in coatings and created about 10 new unique applications in commercial positions. We expect to record additional restructuring and impairment charges in the second quarter of 2008 related to this action. In his discussion Charlie will detail the $6 million in annualized savings expected from the announcements to-date, so that everything that I have just summarized for you. In addition, we are considering other business improvement opportunities in Performance Coatings as we strengthen our market, customer and technology focus. And I should add here it's not just about coatings we are making consideration really across several aspects of our portfolio very important positioning work. It's key to competitive success the only way to really improve results significantly overtime and we are determined to make that happen. Let me summarize by saying I am pleased in our overall with where we are at the end of the first quarter, despite the margin pressure and the lags, I continue to project 2008 as another year of solid growth as we continue to execute our basic strategies of organic growth through innovation and geographic expansion, operating efficiency improvements, and targeted acquisitions. Thank you very much and I'll turn it over to Charlie, now for the details.

Thank you, James, and good morning everyone. I'll start my comments on the quarter with a few headlines and then will get into a more detailed discussion. Earnings this quarter reflected record performance in the Lubrizol Additives segment for volume and operating income. The segment delivered double-digit volume and revenue growth in all international zones. The Lubrizol Advanced Materials product lines produced mixed results and experienced generally weak demand in North America. As James just discussed, business improvement initiatives for the Performance Coatings product line were announced and will result in restructuring and impairment charges in the first and second quarters. Both segments took additional price actions in the quarter to address higher raw material and operating costs. The net result for the quarter was strong overall operating performance, as we carried our 2007 momentum into 2008. If you're following along with the PowerPoint presentation on our website's Investor Earnings Release page, I'm now on page 4 where you can see the consolidated earnings for the first quarter of 2008 compared with the year-ago period. As a reminder, all references to earnings per share will be on a diluted basis. This morning we announced that consolidated earnings for the first quarter of 2008 were $73.6 million, or $1.06 per share, including restructuring and impairment charges of $0.04 per share primarily related to the disposition of a North American coatings production facility. Consolidated earnings for the first quarter of 2007 were $71.3 million, or $1.02 per share, and included a restructuring credit of $0.03 per share related to the gain on sale of the Bromborough, U.K. site. When we exclude the restructuring and impairment charges and credits in both years, adjusted earnings of $1.10 per share for the quarter were 11% higher than the first quarter of 2007. The primary drivers of consolidated earnings growth were an improvement in the combination of price and product mix, higher volume, favorable currency, a lower effective tax rate, reduced net interest expense and contributions from acquisitions. These positive factors to earnings more than offset the impacts of higher raw material and manufacturing costs, and higher selling, testing, administrative and research, or STAR, expenses. In addition, other income in 2007 benefited from the gain on sale of real estate of approximately $5 million and there was no significant similar benefit in 2008. Slide 5 compares the adjusted earnings for the first quarters of 2008 and 2007. We have noted some of the non-operating and economic factors that influenced our results for the quarter. First, as just noted, we booked a gain on the sale of real estate in the first quarter of 2007, whereas in the first quarter of 2008 there was no similar benefit. Second, currency favorably impacted the quarter by an estimated $1.13 per share based on our pro-forma calculation that compares actual results to pro-forma results when translated at the prior-period's exchange rates. Finally, a lower effective tax rate on earnings, as adjusted, contributed approximately $.05 per share when compared with the relatively high effective tax rate in the first quarter of 2007. Turning to slide 6, consolidated revenues increased 14% from the first quarter of 2007 to $1.23 billion. Compared with the year-ago period, volume increased 6%, improvements in the combination of price and product mix increased revenues by 4%, and currency also was 4% favorable to revenues. Included in these factors was the incremental impact from our 2007 acquisitions, which contributed 3% to consolidated revenues in the quarter. Gross profit rose 5% in the quarter as the higher revenues more than offset higher raw material and manufacturing costs. Gross profit margin percentage declined 200 basis points from the year-ago quarter, but was up 20 basis points sequentially. Continuing the pattern we've seen over the last several years, the gross profit percentage declined year-over-year, even though gross profit dollars increased, because the rate of increase in revenues due to pricing has outpaced the rate of increase in gross profit dollars. STAR expenses increased 6% from the first quarter of 2007. Research and testing expenses of $54 million in the quarter were up 5% largely due to higher costs for salaries and benefits as well as unfavorable currency. Selling and administrative expenses of $109 million were up 6% with approximately one-half of the increase due to unfavorable currency. The balance of the increase related to project costs associated with our SAP implementation in the Advanced Materials segment. Higher costs for salaries and benefits, reflecting increases of both compensation expenses and growth resources in Advanced Materials, were offset by reduced incentive compensation expense. Adjusted EBIT, which excludes restructuring and impairment charges and credits, rose 1% in the quarter to $125.6 million. Net interest expense was 20% lower than the year-ago quarter as lower interest expense more than offset lower interest income. Turning to taxes, earnings as adjusted for restructuring and impairment charges and credits were taxed at an effective rate of 31.6% in the quarter, as compared with 35.0% in last year's first quarter. This lower rate was driven mainly by lower U.S. tax costs associated with foreign subsidiary earnings. I'll note here that for the remaining three quarters of the year we forecast the effective tax rate to be higher than the prior year mainly because we do not expect a repeat of favorable discrete tax items we had in 2007. And now I'll turn to segment results, which are shown starting on slide 7. Revenues for the Lubrizol Additives segment in the quarter were up 19% year-over-year on 10% higher volume. The combination of price and product mix improved revenues 5% and currency contributed 4%. Volume set a quarterly record and was particularly strong outside of North America. Latin America volume increased 34%; Europe was up 13%; Asia-Pacific was up 12%, and North America volume rose 1%. The quarter benefited from a favorable comparison with the first quarter of 2007 as well as from changes in customer order pattern in this year's first quarter. In addition, the two acquisitions completed in 2007 constituted about 25% of the volume growth in the quarter. Excluding these factors, our quarterly volume grew approximately 6% primarily due to business gains in Latin America that were realized in the second quarter of 2007, as well as to growth in the Asia-Pacific region, particularly in China. We attribute these business gains to the strength of our new products and technologies, which have contributed to our customers' success. The global price increase that Lubrizol Additives announced late in the fourth quarter of 2007 was implemented fully during the first quarter of 2008. We also announced a global increase in February, which is being implemented during the second quarter. Since the time of the February price increase, raw material and operating costs have continued to rise. As James commented, we have entered a period where we may be chasing material cost increases with further pricing actions, so we are monitoring the situation carefully. But I want to note that we maintained our unit material margins in the quarter compared to the first quarter of 2007. Segment operating income in the quarter increased 12% primarily as a result of higher volume, favorable currency and the contributions from last year's acquisitions. As I referenced earlier, in last year's first quarter Lubrizol Additives earnings included a gain on sale of real estate. Excluding from both periods the contribution from acquisitions and the gain on sale, operating income increased 15%. Turning to the Lubrizol Advanced Materials segment on slide 8, first quarter revenues were up 5% over last year. The increase reflected a 4% favorable impact from the combination of price and product mix, a 3% favorable currency impact and a 2% decline in volume. This is the largest increase in the combination of price and product mix that we have seen in this segment since the beginning of 2006. In fact, our unit material margins in this segment were higher in the quarter versus last year's first quarter. More than one-third of the volume decline recorded by the segment in the quarter was attributed to the loss of some AMPS specialty monomers business, mainly in Europe, as the result of production problems last year. Excluding this business loss, European volumes declined 3% due to softness in the textiles market. Asia-Pacific volumes grew 11% thanks to double-digit growth in Performance Coatings and TempRite Engineered Polymers. North American volumes were down 3%, primarily due to the impact of the very weak housing and textile markets. I'll now go into the Advanced Materials product lines in a little more detail. The Noveon Consumer Specialties product line had revenues of $109 million, up 6% from the first quarter of 2007. Volume grew 9%. A significant portion of the volume growth was in North America where our lower margin surfactants business showed strong growth, and our new liquid Carbopol products continued their excellent performance with 33% higher volume. We did see a decline in our powdered Carbopol products primarily driven by customer order pattern. In fact, we are seeing a rebound as April orders were very strong. Revenues in the Performance Coatings product line were $134 million in the quarter, which was level with the first quarter of 2007. This product line continues to be impacted by the weakness in the North American textiles and coatings industries that we have discussed in previous teleconferences. We also experienced weak demand in Europe particularly in our textiles business. All coatings product areas showed volume declines except our hyper dispersants business, which performed well in all regions. I'd like to elaborate on James' comments regarding our plan to improve the performance of our Coatings business. The Coatings team has commenced a series of business improvement actions. The actions announced to date resulted in restructuring and impairment charges of $0.04 per share in the first quarter, and will generate at least another $0.04 of charges in the second quarter. These actions are expected to generate cost savings of $3.5 million to $4 million in 2008, and over $6 million in 2009. We hope to take further steps this year that would produce additional benefits. The Engineered Polymers product line, consisting of TempRite and Estane engineered polymers, reported revenues of $158 million in the quarter, up 10% from the first quarter of 2007. Estane products had a record quarter for revenue, volume and earnings as we experienced double-digit revenue growth in all regions. We had continued strength in North American film and sheet applications due to strong orders with our major customers, and significant growth in a new electronic industry application. We also have been successful with several pricing actions over the last six months. Global volume for TempRite CPVC products increased 4% in the first quarter compared with the year-ago period. All international regions saw double-digit increases thanks to strong customer demand. North American volume was down 4% as a decline in residential plumbing volumes more than offset a 15% increase in our commercial plumbing and fire sprinkler applications. TempRite had the largest year-over-year decline in profit contribution of all of the Advanced Materials businesses, and this decline was almost entirely due to material cost pressures. In April we announced significant price increases in all regions to offset the steep run up in raw material costs, and we expect to see the full impact of the price increases in the third quarter. To summarize the results of Lubrizol Advanced Materials, segment operating income in the quarter decreased 32% from the first quarter of 2007. Our Estane business delivered great performance and is well-positioned for a very good year. Noveon Consumer Specialties results for the quarter were less than expected due to changes in order pattern; however, we believe the business will meet our earnings expectations for the year. Earnings in our TempRite business were significantly below last year's results as the business was impacted by the very weak North American housing market and higher raw material costs. And to address the higher material costs, we announced price increases in the quarter that we forecast will boost significantly the product line's second half results. First quarter results in our Performance Coatings product line also were behind last year largely due to weak North American demand, especially in textiles, and we have several initiatives underway to improve the operating margins of this business. Incremental expenses associated with the SAP implementation also impacted the segment's quarterly results. I'll now comment on several other financial items noted on slide 9. Corporate expenses were $21 million in the first quarter of 2008 and were comparable with the first quarter of last year. We generated $43 million in cash flow from operations in the first quarter, down from $98 million in the same period in 2007, largely the result of our efforts to increase inventories in Lubrizol Additives. By contrast, during the first quarter of 2007 we were reducing inventories. Also contributing to the working capital build in the quarter were the company's strong revenues and higher inventory costs. All that said, we continued to manage our working capital well in the quarter. Collection efficiency and inventory days improved compared with the first quarter of 2007. Regarding our uses of cash in the quarter, capital expenditures were $52 million. We repurchased 430,000 common shares for $25 million. And we paid out dividends of slightly over $20 million, reflecting the 15% increase announced last April. This past Monday our Board of Directors approved a 3% dividend increase effective this quarter. As the result of these activities, our cash balance at the end of the first quarter of 2008 was $459 million, compared with $502 million at December 31st, 2007. We currently anticipate using some of this cash in December to retire $200 million in notes. For the 12 months ending March 31, 2008, return on invested capital was 11%, compared with 10% for the comparable period in 2007. Now I'll turn to our outlook on slides 10 and 11. Our economic assumptions behind our updated 2008 outlook are unchanged from those we expressed at the February 8 teleconference. That is, we expect the continuation of essentially the same fundamentals we saw in 2007 in the broad array of end-use markets that we serve. In view of our strong first quarter results and our projections for the balance of the year we are increasing our guidance. Our new guidance is $4.17 to $4.37 per share, including $0.08 per share for restructuring and impairment charges related to the improvement initiatives in our Performance Coatings product line that I described earlier. Our revised guidance for adjusted earnings, excluding restructuring and impairment charges, is in the range of $4.25 to $4.45 per share, which is a 5% to 10% increase in adjusted earnings compared with 2007 results. Here are the updates to our key assumption, consolidated revenue growth of approximately 11% to 12%, and consolidated adjusted EBIT growth of 11% compared with 2007. For Lubrizol Additives, excluding acquisitions, we continue to forecast volume growth consistent with the 0% to 1% long-term growth rate of the additive industry. For Lubrizol Advanced Materials, we now project volume to be unchanged from 2007 due to North American demand weakness. We are modeling raw material costs to increase through mid-year and then stabilize in the second half. We are modeling STAR expenses to be approximately 13.5% of revenues. We are modeling net interest expense to be approximately $65 million. We have revised downward our effective tax rate assumption for the year to 32.0% and we are modeling the euro to average $1.55 for the remainder of the year. As we noted at the February teleconference, we expect a tough comparison in the first half but a quite favorable comparison in the second half. A significant factor behind this pattern is the unusually low effective tax rate in the second quarter of 2007, which was driven by some favorable discrete items. We are amending our expected earnings split to be more balanced between the first half and second half of the year when compared with our previous guidance of a 51:49 split. I'll note a few factors that would enable us to hit the upper end of our range including better margin recovery due to pricing actions, higher volume growth, especially in Consumer Specialties and Engineered Polymers, lower operating expenses, and a lower effective tax rate. The key updates to our cash flow outlook are shown on slide 12, and are these; capital spending is projected to be between 225 and 235 million dollars. We are increasing our capital spending estimate as a result of the Additives manufacturing expansion plan that we announced in March. This higher level of spending compared with 2007 is driven by production capacity expansion in both segments and by the SAP implementation. And we are now assuming a working capital build of approximately $100 million, mostly in lubricant additives inventory, due to higher material costs as well as our plans to maintain security of supply for our customers. Though not a change, I do want to point out that we currently are targeting to repurchase approximately $100 million of our shares in 2008, and, as I mentioned earlier, our Board raised the quarterly dividend to $0.31per share effective in the second quarter. So, I would like to conclude by saying that we're obviously very pleased with our first quarter performance in 2008. Our overall fundamentals remain strong, and we feel we're well-positioned for the balance of the year. The second quarter is off to a good start with April sales the highest of the year, reflecting healthy demand in both segments. Now, with that, we can open it up for Q&A. Terry. Question And Answer

Thank you. [Operator Instructions]. And we will go to the line of Dave Begleiter at Deutsche Bank. Please go ahead.

Good morning.

Good morning David.

James you comment on the trends through the quarter that March weekend versus the first two months and is it unusual that April is the strongest month of the year up till now.

Actually the volume, volume pattern looks pretty typical David, April is always very strong month for us concerning first quarter it's strengthen during the quarter, now which state right along it's January track. We could tell January strong and it's straight right with it role right on end April.

And just on Performance Coating what were the volumes in the quarter.

Sorry, I don't have my little red book with me. Charlie can you help me.

Yes, well, David we don't actually...

We will give you site, he will give you some indications.

But the volume is... I mean as we noted the volume challenges in Performance Coating continue largely as result as we have been talking about for many quarters now that continued decline in the textiles markets in North America. But the fairly significant quarter-over-quarter declines. One thing I do want to emphasize and I try to highlight it in my prepared remarks is that when we look at the earnings results of the Performance Coatings product line, though and we don't report these obviously. But just kind of give sense of the relative impact or contributions to the quarter-over-quarter operating income decline of the segment. Actually Performance Coatings while there earnings contribution was down, it was only down marginally. So the larger impacts where in TempRite, the largest impact of it was in TempRite due to material cost pressures.

David, I would like to just... not trying to give you a numerical number. But a qualitative number, I really continue to characterize Coatings as... from a kind of a volume positioning point of view is going side ways. I had said at the last teleconference, I had projected, '08 overall operating income performance Coatings to be up relative to '07, I stand by that, its not going to be as high as I said it was. But nonetheless, we are not continuing to go down, we are basically going sideways and going to rebuild from here.

Very good and just on pricing in the lub additives industry. Are still seeing competitive support for these price increases?

Yes, we are.

With latest phase of oil price increase, we can expect you to recapture that as well.

David, we have been very good, the team has been really good and being able to track not only on a kind of a margin basis, unit margins basis, but really on a cash basis, and there is no question. We are going to begin to lag a little bit just because of the rapid escalation. We will keep track of that and recoup as time goes on.

Thank you very much.

You're welcome.

And next go to line of Jeffrey Zekauskas with JP Morgan. Please go ahead.

Hi, good morning,

HiJeff.

Few questions, what was the effect of the AMPS monomer incident you had on quarter's earnings and have you fix that. And what is the benefits from closing of the textile facilities that you talked about?

The AMPS monomer business is not the one that gets whole lot of attention, Jeff. But it is one that has some problems, that I think in the perceivable future will represent business we will going to able to market back, and we would estimated that's... having had about $0.02 negative impact in the quarter.

There was second part to your question, Jeff, that was about textiles.

In other words you taken some structuring actions, what are the cost savings that you expect from them?

Yes, Dave it's Charlie again. The actions that we took in the first quarter together with further actions that we announced internally in April should benefit 2008, by $3.5 to $4 million. And a full year run rate is that 6 million plus the James referred to. And I do want to know that, this is the first step on a series thing we hope to be the taking to get the performance of this product line up to appropriate level.

Yes, if I can just ask one question which is probably a little too ornate. What you said that was the split of your earnings is going to be more I guess 50:50. So we if take the mid point of your guidance which is 435, half of that is 217.5, your reported as $1.10 for the first quarter. So essentially you're saying, your second quarter earnings was $8 or a couple of cents lower than the first quarter.

Yes.

Yes, I guess my question is sort of what's work so presumably your saving some money in Advance Materials and you have fixed some things there. Your lub additive prices increases effect April 1. So, all things being equal would seem to me that you would earn more than a $1.10 in second quarter. So, why are you going to earn less is that... is it the case that lub additives is just going to be lower because of the raw material squeeze or that's what you worry about?

Jeff I am going to... this is going to be tug [ph] team James and Charlie. So I am going first... let me just talk about pricing and timing, I have said this before and I really don't let Charlie [ph] into my black box but it really is a art, we had a increase going into fourth quarter, we had another one going in February. And we see raw materials continue to escalate. You should think of that it's not necessarily as neat and clean as it look from the outside. It can be a bit messy inside, and so there is some continuing pressure and there is some continuing lag. Nothing to be concern about, but it does slow us down. So, that has an impact at the top-line and Charlie can talk to you about the savings that we see and how that's going to feather in and how that will effect second quarter.

Yes, then... I will started by saying that really was an ornate question Jeff. If you we don't quarterly guidance... we stopped doing that several years we think it's healthier to sort of focus on your full year update. I think two factor are going as one think about our performance for the second quarter. First as James just noted we are in a period of particularly, rapidly, rising raw material cost. I think the last time we saw this was in the fourth quarter of 2004. And so it's that's kind of environment that were seeing right now. The second thing I would note is the tax rate. The tax rate that we had in second quarter of 2007 was a little over 28%. And were our guidance for the before year now is 32%. And I have gone in many times talked about why is that we have such low tax rate in second quarter last year. So those factors there result and want to conclude that we can have a particularly good comparison in the second half, but not so great in the first half.

Okay, thank you very much.

And next go to line Rosemarie Morbelli at Ingalls & Snyder. Please go ahead. Rosemarie Morbelli - Ingalls & Snyder: Good morning all, since I am kind of new to the Lubrizol story could you give a little bit more details in terms of the performance of the additive, you are talking improved fundamentals of the business and therefore you are doing to add capacity are the fundamentals improved because of the high price of crude which allows you to raise your on prices and if pricing comes down then how would those fundamentals look?

I think... Rosemarie look this is James Hambrick. I would like to focus really just on volume the nature of our global supply chain. We run a very small asset base hub-and-spoke global distribution. We spend a lot of time holding that capacity down and what we are really trying to do is match we had a modest market growth with reinvestment in our existing facilities. We have a good solid position in Asia through subsidiaries and joint ventures. We need to add some more greenfield capacity. These are relatively small increments and they will be added overtime. So that's really how I look at it is from our supply point of view and the reliability associated with our customers. Rosemarie Morbelli - Ingalls & Snyder: So even if the environment in such that price increases are no longer justified. The fact that you will have a higher volume going through all of your facility is enough to keep the profitability of that business at the current level?

Charlie can talk to you about your view of operating leverage. This is something that he is studies very carefully, but yes in affect we run very high utilizations.

Yes, its Charlie, we are actually running at probably the highest utilizations we have seen in decades right now. The industry is producing at very high volumes in general. So we've as an industry gotten to a point where a prudent approach to capacity expansion is now call for. And as James noted, we're now getting to a level of profitability in this business that justified these incremental investments in capacity. We're looking at expanding capacity in Asia which is where the it still remains to be a very high growth region for the lubic and additives industry as level as de-bottlenecking some units in our Deer Park facilities. So as long as the profitability in this business continues and we are feel increasing a good about the fundamentals in lubic and additives and we believe these types of capital investment can be justified. Rosemarie Morbelli - Ingalls & Snyder: How is your competition operating in terms of capacity addition could they... are they disciplined or could they over the next couple of years grow in good things.

Well, we can't, we obviously can't predict the future I would say that the industry has demonstrated discipline over the last 10 years in terms of capacity rationalizations and utilization. And I don't see a change in the behavior in the industry. Rosemarie Morbelli - Ingalls & Snyder: Okay, that is very helpful thank you. And I was wondering if I could ask another question regarding new product which seems to be what you are emphasizing? What are they as percentage of sales, currently versus last year? What is the goal and could you give us some examples?

Yes, this is Charlie, I could talk help a bit on the revenue growth that we projected for Advance Materials in our model now is about 8% and new product would represented 2.5%, 3% of that. I think we talk in the past about the combination of the price increases together with the revenue contributions from new products being about 5% of our revenue growth projection in 2008. The all four products areas of advance materials are increasing their kind of productivity in new product introduction. But I would say that half of the revenue contributions from new products introductions in '08 will come from Estane. We talked about a particularly interesting... electronic industry application that is quite fruitful. We are also looking at some opportunities to cross fertilize our technologies for example taking our hyper dispersant and finding opportunities to use that technology in other product areas. So, I just, we just go on and on talking about the type of things. We are a specialty chemical company. So, new products are many and small individually and so it's a pretty rich array of things that we are introducing across the product line. Rosemarie Morbelli - Ingalls & Snyder: So, as a percentage of total revenue for advance material. What do they represent more or less?

In 2008... I think it's about 2% something of the revenue growth. Rosemarie Morbelli - Ingalls & Snyder: 2% of the revenue growth...

I am sorry 2 percentage points of the... 2% over 2007 revenues. Rosemarie Morbelli - Ingalls & Snyder: Okay, thanks.

... about $40 million. Rosemarie Morbelli - Ingalls & Snyder: Alright, thank you.

And next we will go to the line of PJ Juvekar with Citi. Please go ahead.

Yes, hi good morning.

Hi PJ.

Hi PJ.

Your lub volumes are up 6% in the quarter, organically and still you are forecasting volume growth of 0 to 1%. I am just wondering given the strength in lub additives if you are low blowing on the volume growth number?

I will try that PJ, its Charlie. We don't ever deliver low-balling on the volume growth number. I'll try that one that PJ, its Charlie. We don't ever deliberately low-ball but I hope you are correct. This is going to be the pattern to volume that we see in '08 is a little different than what we seen prior year. And that, first quarter volume could well be our highest volume quarter. But that's because of some of order pattern and new business gains, factors that I talked about and will be lapping those business gains in the second quarter. So our projection currently for volume growth in the second, third and fourth quarter will be basically in that 0 to 1% kind of area.

Okay so it's more due to order patterns then anything else?

Yes, first quarter had a heavy amount of contribution just from a little bit of December volume flowing into January, but also benefited from a really good comparison prior... compared to the first quarter of '07.

Okay, and then secondly you know you bought Noveon to get more growth away from Loops. Now it's sort of ironic that Loop profits are up while Noveon profits are down more than that. I guess my question is, if you think through the cycle what are you doing about future growth and where you are looking in terms of new acquisitions?

In terms of, that's a compound question, PJ. Let me... first of all let me just take the kind of the relative performance of additives over time. So if you were to go back over 10 or 20 years you would find that the additive business is performing at really a historical high. It just doesn't happen as a result of just being lucky. A lot of hard work, a lot of positioning work done over a period of time to properly get that business in a position where it can deliver those kinds of results. Advance materials is at a different stage in that process. It was not, is finally homed and positioned its additives. And so now it's not performing as well in the cycle, but nonetheless long-term shareholder value building is going on in terms of investment and that business is very, very capable of performing just as additive has, it's just not quite there yet. In terms of what else I think Charlie and I both, as we've spoken in conferences or in individual sessions with you others, we've described our... generally described our portfolio as a pie-chart, we in fact frequently we showed it as a picture that way. And talk about the various opportunities for cross-fertilization within those segments as well as additional bolt-on and complementary acquisitions that we seek that will fit in their over time. So we're very, very satisfied with the portfolio that we have, the state that it's in and the build-able position that gives us for the future.

Okay. That's a good answer. And just one last question for Charlie. There is $1 billion of capital spending that you announced in lub additives. I mean how is that paced, is that front end loaded or is it sort of more on... sorry even paced.

It doesn't represent hardly in '08, it's a single-digit millions in 2008. We will start seeing some more sizeable numbers in 2009. But I guess I would generally portray it first playing out that the $1 billion includes the historic kind of regular capital that we've always been spending. And then on top of that it includes $200 million or so of incremental capital. So it's really the $200 million that we're talking about here. And that we see that being spend over much of the 10-year period. So we are going to be in an elevated period of capital spending over the next four or five years, but it's not going to be particularly lumpy.

Okay. Thank you.

And next we will go to the line of Lawrence Alexander with Jefferies. Please go ahead. Lawrence Alexander - Jefferies & Co.: Good morning.

Hey Lawrence. Lawrence Alexander - Jefferies & Co.: Can we drill down into the industry additives market, you know what trends you are seeing there and also M&A opportunities.

Yes, I guess, it's about as deep as I am going to drill, Lawrence, is to suggest to you that the industrial additives market in general is one that continues to be very interesting to us, it's a very fragmented market with a lot of opportunities, where we bring technical skills, an area that has what I would characterize as probably a whole array of different directions that we can go and bolt-on that we can make. Just a good solid build-able area for the future, that's about as deep as I would want to go at this point.

I could add on a little bit to that, Lawrence; it's Charlie. The current market in... for us are, and they were hydraulics, is up; metal working grease is up; and we're seeing terrific performance in our refrigeration lubricants business. And we're very delighted with that acquisition that we did last year. When we look at North America industry volume is stable to down due to the economy, but not particularly hurting Asia Pacific, it's been a great growth market for us recently, particularly, in metal working and hydraulics. Lawrence Alexander - Jefferies & Co.: And secondly, can you give update on the... on the heavy diesel application. How volume should trend over the rest of the year?

I don't think I've got a good answer for you on that.

As far as I know that standard is basically rolled out through North America, and it's in place now, it'll continue to roll out across the rest of the world, but I think it's basically in place now. Lawrence Alexander - Jefferies & Co.: And so from your perspective the next most important standards would be gasoline or is there another... or would it be the off-road

The next one is a push... Lawrence, you know we have been through this several times. There are U.S. based standards, there are European based standards, and then Japanese based standards, and sometimes there is even global standards. But without getting into all of the complexities, diesel in U.S. led; in Western Europe, there is both diesel and gasoline; in North America there is gasoline upgrade coming; and Japan normally follows those two. Lawrence Alexander - Jefferies & Co.: Okay. Thank you and

You asked about M&A too? Lawrence Alexander - Jefferies & Co.: And I guess one last question is, when you look at the back half of the year, you have taken down, both, slightly your tax assumption and also your interest expense. Is there anything else going on in the back half where it changes in terms of your expectations on demand drivers, except core raw materials for why the full year outlook didn't move up further than it did?

Well, the big changes would be that in this period of margin... raw material cost recovery we need to get the price increases out there. So we have this water under the bridge effect. And so we would expect that the margin recovery, margin recovery would occur at year-end which tends to be a lower volume part of the year too. So, there is going to be the timing of our price increases may well, not be fully in-sync with when we see most of our volume. But our model shows a slightly higher volume for lubricant additives in 2008 versus the model that we are looking at back in February. So it is a more slightly better volume outlook in '08 for volume.

Lawrence just kind of the take away for me, this is a little bit of conservative view on my part. I am really... I talked about it in February, I am talking about it again now. There are going to be additional raw material pressures and volatility. I just know it's going to be the case, and I am just trying to prepare us and all of you for the fact that... we are going to hit our numbers, but it's going to be slug all the way. Lawrence Alexander - Jefferies & Co.: But in effect if the pricing then is going to be back-end loaded, you should have a pretty good tailwind into 2009?

That's what we are working for. Lawrence Alexander - Jefferies & Co.: Okay, fair enough, thank you.

Thanks Lawrence.

And next question we'll go to line of Saul Ludwig with Keybanc. Please go ahead.

Good morning.

Hi Saul.

Charlie, you talked about the building of the inventories this year, whereas last year you were sort of curtailing on. And I know when that happened you have either overhead absorption or under-absorption, how much was little bad that's profit helped this year versus what pain they had a year ago because of the changes in operating rates.

I don't have at my finger tips the lubricant additives number, but I can give you... but I'll give you a number that probably is just figure on close, but the year-over-year swing of what we call LNO changed, there is about $11 million.

Positive.

Positive.

Right, so then in a sense with the really the change in the operating rate really is what drove the lub additives profits up by basically that amount of money. And if you run on apples-and-apples basis, their profits would have been fairly level.

I think that this line of question, while I know it is the way the accounting works, but I think it gets a little misleading as... what we mesh our cost of production to the sales that go out the doors. So I would not characterize these LNO changes as necessarily benefiting or hurting, this is simply the way the accounting works and it's fairly driven by the volumes that we are selling and when you got a strong volume quarter like we did, we are going to see much better, what we call, absorption or fixed cost.

Right. What was year a unit raw material cost change in both segments?

In lubricant additives it was up 14%, and advanced material was up 13%.

Right. And James, from a strategic standpoint, this coatings business given you nothing but fits since you have the business, and there has been... you've taken steps to try to get it fixed, when you look at your position in that market in a competitive sense. The... why keep it... why fight the uphill battle as apposed to saying... hey, maybe this is in our bag and let's concentrate on areas where we're a powerful force rather than trying to play catch-up?

Thank you for that strategic suggestion, Saul. Obviously we look at, we look at whole range of options across our portfolio, you point out rightly so that it's a business is not performing I feel very comfortable that we have the capability to make it perform. It's a great build-able position. Is there an opportunity to do something better with it, we are always looking across the portfolio at opportunities to add shareholder value and we will continue to do so.

Okay. Charlie, when we look at your volume assumptions for advanced materials between what you gave us back in February and what you are now giving where you went from plus 5 to 0. You knew about the AMPS monomer business loss back in February, I assume. So is the change from the plus 5 to flat really reflective of things that had nothing to do with the loss of the AMPS monomer business.

That's right, Saul. The change in volume outlook is primarily coating.

Okay. And then finally in lub additives, have you announced the price increase yet in light of what all the discussions that you have talked about with raw material cost. And if not; maybe why not.

No, sir, we have not. And I am not going to say anything else about it, Saul.

Okay, very good. Thank you very much guys.

Thank you.

And next we'll go to the line of Robert Felice with Gabelli & Company. Please go ahead. Robert Felice - Gabelli & Company: Hey guys, just a couple of quick questions. Guess first I wanted to piggyback on some of the additive questions asked earlier. I know it takes some time for pricing on the additive side to roll-in versus the base oil increases, which really come pretty quickly overnight. Given where you stand today in terms of pricing and how you expect pricing to unfold during the quarter, should we expect a greater magnitude of year-over-year operating income margin compression in the second quarter versus the first quarter?

I would say that based on where we are at the moment... and by the way you... base oil maybe very visible to you, Robert, but essentially the whole raw material slate from ethylene, propylene right on up through the aromatics, through inorganics, there is a massive wave coming. And so yes we are... we are well positioned to catch that wave, but nonetheless it is going to be ahead of us and we are going to have to chase it.

Yes, we did not experience margin compression per se in the first quarter. But we do see, and I'm really speaking now of our EBIT margin for lubricant additives with the trending down for quarter or two as we... as pricing catches up with raw materials. Robert Felice - Gabelli & Company: Okay, and then I guess looking to 2009, would I expect that you can achieve the operating income margin levels of '07 in '09, in other words do you think you can catch up?

Oh, yes. Robert Felice - Gabelli & Company: Okay. And then I guess a broader question just on the industry's overall fundamentals. If I look back over the last decade or so in the additive space, the last meaningful capacity addition was probably Oronite's Singapore facility. And there were a number of dynamics then that caused the pretty big supply/demand balance that the industry faced, but that facility certainly didn't help. With the industry only growing at 0% to 2%, what's different about this capacity addition that you've recently announced?

It's not a fully integrated maximum capacity increment addition. It will be phased over time. We're actually talking about that at the individual component level. Robert, I think you know we already have a very strong manufacturing base in China through our joint venture as well as our wholly-owned subsidiary activates. We are simply taken on a greenfield site with the anticipation of incrementally adding capacity over time, that Charlie had indicated not only over a ten-year period. Asia is obviously growing at a faster rate than the overall global growth rate, and so we need to be positioned to supply our customers. Robert Felice - Gabelli & Company: So, it sounds like you are going to manage the capacity and the volume to prevent oversupply.

I think I said that.

Yes, absolutely, but it's worth repeating, that is absolutely part of the strategy. Robert Felice - Gabelli & Company: Okay, and given the fixed cost of each incremental capacity addition, should we expect any margin compression as those pieces come on, given the time it will take to fill the volume.

You will never see it. Robert Felice - Gabelli & Company: Okay, great, thanks so much.

And next we'll go to the line of Dmitry Silversteyn with Longbow Research. Please go ahead.

Good morning. Most of my questions have been answered by now, but I'd just like to... just add a little bit more what you meant by change in order patterns when discussing the additives business. Was that... were you referring to the business gains that you've gotten in last year that are anniversary as of the first quarter of this year or is there something else that you mean.

When we talk about customer order patterns it will be in the range of things that could influence a customer from either accelerating a purchase due to some specific but unusual reason or decelerating. So what I'm specifically referring to hear, related to order patterns is really two things. One is that there were some shipments that could have gone in late December or early January that ended up falling into early January. So that ended up kind of relatively favoring the first quarter. So that was the first quarter '08 order pattern phenomenon. There was also first quarter 2007 phenomenon going the other way, in that we had a number of Asia Pacific customers that had took unusually low volumes. So the year-over-year comparisons due to order pattern was fairly meaningful.

Okay, so this is not a change in the industry or how the industry operates

No

... have been going on for a while.

It's particular to us.

Okay. I got you, secondly, as you look at the raw material inflation and your own pricing actions. The new products that you are launching, and the efforts that you've undertaken to improve the coating segment, how should we look at operating margin delta year-over-year basis, in the two divisions, are we going to be basically comping margins down for the balance of the year or do you expect to kind of cross the line if you will in the third or fourth quarter towards the end of the year and actually have margins that are more comparable on year-over-year basis.

When I look at. I was just looking at our model now. And when I look at lubricant additives for the full year, we are modeling comparable year-over-year EBIT margins which means that as we would be hitting the fourth quarter we would be getting up to operating margin that are... will be above the full year average and better than full year 2007. When we look at advanced material, as you can imagine just based on how we've revised our guidance. Our outlook for operating margins has declined based on this guidance versus how we are looking at just couple of months ago at the February teleconference. So our current model would show a 50-ish so basis point decline in EBIT margins in 2008. But with the activities that we've got going on with respect to pricing, for example, in TempRite, as well as the improvement initiatives in performance coatings should position us quite well for margin improvement as we go into 09.

Okay, that's helpful. Thank you very much.

And at this time I have no questions in queue.

Thank you, Terry. With no further questions, I want to thank everyone for dialing in this morning. And I would like to provide two numbers for follow-up; one is my direct line for clarifications, and the second will be the dial-in for the telephone replay. My number is 440-347-1206. And Terry, would you please provide the replay number and access codes.

Thank you. And ladies and gentlemen this conference will be available starting today at 12 noon through May 16th at midnight. You may access the AT&T Teleconference Replay system at anytime by dialing 1-800-475-6701 and entering the access code 918742. For international parties, the number to call is 1-320-365-3844. Again those numbers are 1-800-475-6701 and 1-320-365-3844 with an access code of 918742. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.