雅保公司 (ALB) 2002 Q1 法說會逐字稿

Good morning. My name is and I will be your conference facilitator today. At this time, I would like to welcome everyone to Albemarle's first quarter earnings 2002 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key.

I will now turn the call over to our host, Mike Zobrist, Vice President of External Affairs and Investor Relations. Mr. Zobrist, please go ahead, sir.

Thank you, . With me on this call we have John Dabkowski, our Vice President of Polymer Chemicals, John Steitz, Vice President of our Fine Chemicals Business, Mark Rohr, our President and Chief Operating Officer, and Charlie Walker, our Vice Chairman and Chief Financial Officer.

Our comments will follow the presentation that was posted this morning on Albemarle's Web site. It's under investor relations teleconferences with financial analysts. And, as you can appreciate, we will be making some forward-looking statements during this discussion and, therefore, you should recognize the cautions stated, that there are many factors which could cause actual results to differ from current expectations.

Now, with that being said, I'd like to turn it over to Mark Rohr for his opening comments. Mark?

Thanks, Mike. I want to thank all of you for joining us today on this conference call and also thank those listening in via Web cast. I'm pleased to be able to report to you earnings before special items of 39 cents per share, which is two cents above consensus and six cents per share or 18 percent above our fourth quarter results.

Business, while improving gradually, remains very tough, especially in the polymer chemicals arena. During these tough times, the efforts by Albemarle Associates around the world, with new product development, cost reduction, raw material sourcing and out-carrying today for all of our shareholders. This quarter, we have continued to aggressively look for innovative strategies to improve productivity and efficiency. You all will recall that, last quarter, we took some steps on our technology areas to improve productivity. This restructuring effort focused our technology group on new product development and chemistries for fine chemistry services and also polymer additives.

The net R&D expenditures today at Albemarle are approximately $8.8 million per quarter, which is above our expenditures last year by almost a million dollars. More R&D today is directed towards custom work through product applications than before. This quarter, we have about an $840,000 charge for the residual effects of the restructuring effort that occurred last year.

Overall, our fixed cost containment program continues to yield very positive results. Year over year manufacturing costs are down, driven by our Six Sigma effort. In addition, favorable contract positions on raw materials, as well as general decline in utility costs, have resulted in a cost decrease of almost $4 million, or approximately 200 basis points versus last year.

GS&A costs, reported higher this quarter, now includes overhead costs from Martinswerk and ChemFirst, also some R&D costs resulting from our interpretation of FAS-2 classifications.

Both acquisitions made solid contributions this quarter. The integration of ChemFirst is complete, and we're pleased with our product pipeline, which, today, has 36 products under development between pre-clinical and phase three. In March alone, we had over 20 requests for new products being processed by the Fine Chemistry Services group.

The Fine Chemistry model is bringing in the opportunities we had hoped for. Now we've got to translate those opportunities into sales.

We are moving forward with SAP implementation at Martinswerk for this facility, and we have offered a voluntary retirement to the employees that has been well received and should result in cost savings in future years.

We are very pleased with the Martinswerk organization, the quality of all the individuals and the contribution they are making to Albemarle.

In Polymer Chemicals, we've seen some improvement in flame retardant volume, and our econometric models indicate we can expect that to continue through this year. Unfortunately, we're also seeing further erosion in pricing, brought on by the capacity overhang.

This erosion of flame retardant pricing effectively reduces our gross margin by about 150 basis points year-over-year. Savings in costs in raw materials, which are favorable, effectively offset this erosion.

Compounding price erosion is a further softening of the yen and euro leading to year-over-year fixed net . Effects, in fact, were about 100 basis points also.

On the positive side, we'll be showing interest in several new flame retardants that we believe customers will be excited about, and John Dabkowski will share some of this with you in a few minutes.

Pharmaceuticals had a very good quarter, and John Steitz will share with you information, including some information on a profit center that I think that you'll find encouraging.

All in all, we're very excited about our performance and believe the efforts of everyone at Albemarle to push innovation and new product development are paying dividends. At the same time, our efforts to drive efficiency and cut costs are allowing are company to stay competitive in this tough global economy.

As we have said since early last year, business will be essentially flat through the first half of this year, followed by a period of gradual improvement, as the polymer industry starts to recover. We still believe that to be the case.

With that, let me turn it back to Mike.

Thanks, Mark.

Before we begin to discuss all the financial and the business details for the quarter, I would like to address two items that were specifically mentioned in our - in our earnings release.

First, we had a $2 million charge in our water treatment business, which was for a developmental venture that we entered into in the mid-90s with a customer to commercialize an approach to the recreational water treatment market.

This business has never been profitable and would have required some additional funding, thus we decided to terminate our support and to withdraw from this venture.

Second, Mark had referred to the 850,000 charge that was taken for head count reduction. I just want to add for those of you that are fine tuning your model, this was all taken as a corporate admin charge.

Now with that, let's review some of the financial details for the quarter before we get to the business reviews. If you turn to the first slide slide number two this talks about financial comparisons. This shows sales, profits and earnings before the special charge for workforce reductions for this most recent quarter compared with the prior and the year ago quarters.

Then if we go to slide number three this is income and EPS. This has the same comparisons as that previous slide, but this has special items included. One note that I want to make here we are using a 30 percent tax rate for this quarter and we expect that that's going to be the rate we're going to use for the balance of the year. This is the same as the overall rate that we had for 2001, but in the first quarter of 2001 we had a rate that was just a little over 28 percent.

Slide four is segment highlights for our businesses. This is an overview of sales and profits for each business and for the customers for each of the prior quarters and for the year-over-year quarter.

Now, with that get back on information. I'd like to go to the next couple of slides. I'm giving you the same information as I did last quarter on the effects of volume price, mix and currency on sales revenue including also acquisitions in that. This is based on year-over-year periods and I started this last quarter. But at your request, I'm going to use the tables that are attached in slides five to seven as opposed to the bar charts. So you can put away all your rulers. We not going to do anymore measuring.

Look at slide number five. This is sales influence for the corporation. You can see the effects of acquisitions that offsets the negatives of volume, price and foreign exchange. But you can see that volume is still an obvious issue for the company.

Slide six shows the same set of conditions for Polymer Chemicals. Here again are the Martinswerk acquisition nets of the relatively large negative volume impact on the rest of our business. Price on a year-over-year basis was still a $4 million negative is much less a factor than volume.

If we turn to slide seven we show sales influences on Fine Chemicals. This is essentially of the same story except not as large a volume hit so we get a sales gain. Note that the price effects for Fine and Polymer Chemicals is about the same on a year-over-year basis.

OK, with that let me just turn this over to John Steitz and John Dabkowski to comment on their businesses. First, we'll let John Steitz talk about our fine chemicals business.

Thanks, Mike. And good morning, everyone. Operating income for fine chemicals was up 12 percent versus a year ago. And our April, by the way, appears to be off to a strong start, as well. Both our performance chemicals business and our pharma and ag business, except for our fine chemistry services area, were up over both the year ago quarter and the recent fourth quarter. And I'll talk more about that later.

Versus the year ago quarter, first quarter of 2001 - this is somewhat of an apples to oranges comparison because there are two acquisition of mid last year - and Martinswerk were obviously not in the first quarter 2001 results. However, you can see that our results are improved over last year's, primarily due to our pharmaceutical business and excellent performance from our manufacturing organization.

Our performance chemical business was up slightly and that was about offset by a slight decline in ag chemicals, which experienced a marginal drop in revenue, driven by our customer's management of inventories. And our customers, as general - in general, as you would expect, are closely watching the working capital, as are we, in view of the cautious economic outlook.

Versus fourth quarter of 2001, if we look at the sequential performance for fine chemicals, we're down a little, primarily as a result of reduced volume in our fine chemistry services area and the resolution of the water treatment venture issue in performance chemicals that Mike discussed earlier. Our pharma business is slower than last quarter, primarily because fourth quarter of 2001 included an annual customer campaign in one of our anesthetic products.

For the rest of our pharma and ag business, we saw more mixed results. Ibuprofen was off a bit, due to a customer inventory adjustment, while naproxen had a strong quarter. We're seeing more customer demand and new qualifications for naproxen. And we're encouraged by this. This will represent a significant positive profit swing for us this year versus last year. Our view for ibuprofen growth has not changed. We still anticipate a mid single-digit growth, supported by new combinations using ibuprofen as the anti-inflammatory of choice.

In fine chemistry services - this is the business we acquired from - we said, at the time of the acquisition, that there is a piece of the business we expected would go away at some point. And it has. This was an ag chemical intermediate and this eventuality was negotiated in the price at the time of the acquisition.

That shift occurred this quarter and will continue into the next quarter. We are in the process of filling that capacity with other ag opportunities and, longer-term, are working on more pharma-oriented developments. In addition, we're working through some acquisition and integration issues which are now behind us, but have geared - and really are focusing on gearing up our people to expand their energy on new products.

I'd like to focus for a minute, though, on the new product pipeline that this acquisition brought us and how we're leveraging that.

Mark referred to the large number of new product opportunities that are shown in slide eight, titled Fine Chemistry services - new products pipeline.

This gives you a picture of how we've leveraged the fit between Albemarle's' existing facilities and those from ChemFirst to fill out our toolbox.

I referred earlier to adding ag products today, but indicated our efforts are also aimed at longer term pharma opportunities. That's the case with the majority of those products found in this pipeline. But we're not stopping there, and, I have to say, I continue to be very pleased with our research efforts.

Through this past quarter, we have quoted on over 75 developmental projects, primarily in support of pharma innovator companies showing a continued high level of activity and demand for the value we can offer.

Also on the new product front, our first curer business will be launching 17 products in late April, some already in existence at Albemarle. But this'll be done at this year's RadTech show in Indianapolis. This is a significant show that focuses on radiation curing and coatings.

This whole effort in new products is around a new radiation curatives business acquired in the ChemFirst acquisition. We have a very small market share in this large growing market.

I said earlier that performance chemicals was up sequentially versus fourth quarter. Again, another set of mixed results with oilfield chemicals down as a result of volatility in the global oil markets, but offset by the rest of our bromine, intermediates, paper chemicals and zeolites businesses.

Once again, solid cost control and excellent manufacturing operations contributed to our success.

Overall, as I look out towards the rest of the year, I anticipate a slightly weaker second quarter when we typically see some seasonality in our ag chemicals business. But then stronger succeeding quarters such as in 2002, should exceed last year's operating profits.

Now with that, I'll turn it over to my friend John Dabkowski.

Thanks, John. Let me start by giving you the big picture in Polymer Chemicals.

Overall, market conditions remain tough, but we're starting to see some pickup in demand. I'll speak to that in a minute, but that's far more positive than it would have been a couple of months ago.

Let's start by looking at how we did versus prior quarters, first comparing to first quarter 2001.

We have a poor comparison versus a year ago. This is understandable if you remember that we did not have the Martinswerk non-halogen flame retardant business in the first quarter of 2001, and that the acquisition was not completed until June of 2001.

Also, in the first quarter of 2001 we saw that as our last strong quarter for the Polymer Chemicals business before we began to feel themajor impact of the electronics and general business slowdown.

I think it is more meaningful to focus on sequential fourth quarter into the first quarter of this year comparison since this gives a better indication of the ongoing health of our Polymer Chemicals business. And here we see some improvement. Sales were up two percent. Operating income up 25 percent.

Overall, we saw steady improvement each month during the first quarter with sales up 13 percent in March versus January. And a monthly increase across the board in all product lines. However, the major story was in flame retardants. So let's talk about this for a few minutes.

First quarter flame retardant volume was up five percent versus the fourth quarter. Press pressures continued especially on large volume products such as where our average prices were down on a percentage basis in the low double-digits from last year. We're still concerned about the impact of over capacity in the industry as well as the deterioration of regional pricing which is adjusting to lowest global levels.

On our other products we have not seen this magnitude of competitive activity and our overall flame retardant pricing average again on a percentage basis was only down low single digits compared to the fourth quarter while gross margins improved substantially. Improved volume sales and inventories were kept in check.

Turning to volumes. Let's look at a couple of indicators that may help us understand what's happening in electronics in-markets. First, if you look at slide nine, this shows the book to billratio for . This is the indicator we've been updating for you each quarter in this presentation. Remember that this ratio represents order backlog. That is new orders in are divided by shipments and when it is above 1.0 the market is expanding.

As you can see, it appears we have climbed out of the deep hole that bottomed out in April of 2001 and have been on relatively steady increase since that point in time. January and February has essentially been at a ratio of 1.0 which is the highest seen since November of 2000. While this is good news, as you can imagine, I would like to see a few more data points before I become too positive on where we are headed.

However, since volume is a key to our flame retardant business, one more indicator that we've recently begun to track is based on an econometric model that we have developed internally for several of our products. If you go to slide 10 it shows our forecasting model. This is a chart that Mark first discussed at our recent investor conference. This is still fairly new and represents a regression model based on a number of econometric variables that we have identified as having a potential impact on predicting our sales.

We'll have to wait and see whether this is a good overall predictor of our future business, but for now it shows a good recovery over the near term. We haven't put a scale on either the X or Y axis because this shows our actual production in our forecast. However, you can see where we peaked in 2000 and, essentially, hit bottom in 2001.

Switching gears to flame retardant new business development, we're focusing in four areas - buy/resell, , line extensions and new molecules. While I don't wish to go into detail, I can say that we are making progress on all fronts. Most of our work stems from new, more stringent standards and higher temperature requirements our customers face, particularly at engineering thermoplastics, high impact polystyrene and polyurethane applications.

In our catalyst and additives business, slowness in the PVC stabilizing markets and buyback of some inventory in preparation for the startup of , was offset by recovery in our antioxidant business and continued improved performance in our new catalyst results. On April 1, 2002, the was finalized. officially began operations and we have begun making our first sales. We expect this will be a positive contributor to our overall business as we work to build volumes around world.

In our annual report, we indicated that EP Amoco has given Albemarle notice that they will shut down their synthetic alcohols facility in Pasadena, Texas later this year. This will adversely affect aluminum alkyls business. We expect to mitigate a major portion of this impact through development activities such as and new product introductions. And we're making good progress in commercializing products such as magnesium alkyls and other high value specialties.

In addition, our new catalyst program continues to advance with a sharp focus on activators and is achieved improved profitability. In our additives area, our technical work is targeted at several large volume opportunities, emanating from the oil field and construction industries that have the potential to substantially grow our curatives business.

Before ending, I would also like to mention that I took a temporary two-month assignment during the first quarter and spent February and March in Asia. My objectives were pretty straightforward - to become more engaged in this region of strong polymer growth, to move our major projects faster and to address infrastructure needs to foster growth. Together with our Asian team, we covered a lot of ground in two months. While we had many activities on the drawing board, some highlights include beefing up our activities in China, stepped up sourcing activities and advancement of flame-retardant catalysts and antioxidant projects.

I also took the opportunity, while in the region, to gain a perspective of our customers' current business situation. Their outlook is more upbeat than in the past year but still uncertain. Most are seeing demand pickup, but they're not yet ready to record a sustainable trend.

To summarize, we're starting to see a pickup in sales, particularly in flame retardants, with momentum being built monthly, during the first quarter, that seems to be carrying forward into April. We believe some inventory rebuild may be occurring, so it's too early to tell if stronger demand is also a factor in our current picture.

We are beginning to become cautiously optimistic but will have to wait for the second quarter to give us a better indication of what to expect. As we said last quarter, in this environment, we will continue with tight control, stay focused on our strategies and work hard to keep our customers satisfied.

With that, I'll turn it back to .

OK, thanks, John. I think, , at this point, we're ready to open up for Q&A.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the umber one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from .

Good morning, and congratulations on another good quarter.

Thank you, .

I have a question for you. I noticed in your Fine Chemicals business that year-over-year price factor really deteriorated this quarter, and I was wondering if you could comment on that.

And then, secondly, if you could let us know if there's any signs of ending to the erosion in the commodity lines and the flame retardants. Any signs of encouragement there either?

Hi, - John Steitz. Let me talk about Fine Chemicals just for a moment. I think there's two factors to that. One is some raw material pass-through that we have in contracts in some of our base business in Ag and in performance chemicals. So that's part of the price drop that we've experienced.

And the second part of that would be a mix issue as some of the Martinswerk volume kicks in. So that's - those are two of the primary drivers.

Can you be more specific on which raw materials you're passing through?

Ethylene is a big one, and caustic is the second largest.

Hey, . Let me just add in here, for John Steitz, as we've seen in the past, especially on the ethylene and other raw materials, in many cases with our contracts we've been able to offset some of the increases. We have the same thing - that it, you know, impacts us here when the price is going down. Bottom line is really no impact in terms of the market itself.

Yes, that's great.

And John John Dabkowski, you might want to talk about our flame retardants.

Yeah, I think the second part of your question, , concerned commodity flame retardant pricing. I don't really see much change today. It continues to be a tough competitive market. The demand pick up that we're seeing is really relatively new. Hopefully that will continue and have some impact on the situation.

Market by market are those commodity prices continuing to fall or are they at least stabilized here?

Pricing really doesn't fall on a monthly basis. It's more like a quarterly or half-a-year basis. And I'd say that in the first quarter prices came down from the fourth quarter of last year.

, this is Mark. On a big picture basis if you look at year-over-year we're down maybe four percent on a combined average. If you look at the first quarter we're down about two. So we saw a step down the first quarter. And that will run its course for awhile and hopefully we won't see any more than that. But as John has said, it remains pretty weak out there and we need some frankly, we need some volume pick up to try to stop that trend.

You're hopeful that we've hit bottom, here?

Yeah.

And then the last question I had was just this $2 million charge that, you know, you refer to? Where does that show up in the ?

Well, that would show up in the performance chemicals area.

And how about on, you know, the or SG&A?

It would be in the cost.

Oh, OK. And do you have an after tax number for that, Mike?

It'll be 70 percent of that.

OK. Just use the 30 percent tax rate. Great, thank you very much.

Your next question comes from .

Good morning everybody. A couple of questions. First, these volume trends do look reasonably negative year-over-year and it appears as if there's been a bit of an acceleration. You said the outlook very briefly in your remarks towards the end, Mark you said that you thought things maybe pick up in the second half of the year. Can you give us some color as to why you believe that?

Well, you know, I'll take you back to the econometric model that John Dabkowski showed you, , the slide. We put a heck of a lot of energy into all of our basic products in the polymer additives area. And there's a collection of those that we've literally spent months with our customers looking at market data to really understand what drives these volumes.

And we're seeing a number of signs out there that indicate to us that a good part of that volume fall-off was a depletion of inventory out there that, in effect, overshot the real impact of the general economic slowdown. And so, we think, with some confidence that we're going to see this volume continue to build.

Having said all of that, the world remains, I think, quite concerned about the slowness of the economic recovery. And so, there is some uncertainty in our ability to predict that. But our models would indicate, as they're showing on, I think, slide...

Slide 10.

... that we should see some pretty strong volume movement towards the end of this year.

It seems to back-test pretty well, so I guess it looks pretty interesting.

As you'd always told me, I mean, looking over your shoulder doesn't give you much confidence in terms of your ability to predict the future.

OK. Secondly, I'm very intrigued with the new product portfolio pipeline with respect to fine chemicals. That was a very helpful part, as well. Is it possible to characterize the kinds of pharma companies customers you have in terms of size, geography, whatever. Are we talking about big pharma - the Mercks and Pfizers of the world? Are we talking about - or early stage companies? Is there any way you can kind of characterize the customer base without giving away specifics?

Yeah, . As you're aware - this is John Steitz. As you're aware, in these new product opportunities, there's a lot of proprietary nature of them because most of them are with big pharma companies. And most of them are between the United States and Europe. I can give you a sense of the nature of these. One in the horizon is a hepatitis B vaccine. Another is in an analgesic. A second one is in a new antibiotic that we're going to be supplying an intermediate for, we have a lot of high hopes for. The last one is an anti-epileptic drug we're supplying an intermediate for. So, it's pretty broad-based, but it has mostly to do with the big pharma companies.

OK. That's very helpful. My last - was this. The price is down, let's say, low double-digits in tetrabrome and that's in the - in, I think, with the background of rising chlorine prices. So, does that suggest that the margin squeeze is really significant, even though you might have a lot of contract chlorine purchases as well?

- Mark Rohr here. Good question. Fundamentally, we have - we have seen chlorine price take off quite dramatically, as you're probably aware of and stock prices are in the high 300s today, if you can even get it. We have very good contract positions and our contract positions allow us to escape the brunt of that price run up. At the same time, we're still seeing softness in other market areas that, in effect, kind of offset that.

What my concern is, is looking out towards the end of this year. If we still see raw material prices taking off and we've yet to get volume really kick up in tetrabromine and other areas, I think you could see us get a margin squeeze out there.

Currently it's not - frankly, it's not too bad. But it does - it does raise a caution flag for the end of this year.

And then can you quantify the lost sales to BP Amoco from the lost sales of aluminum alkyls?

, this is John Dabkowski. I'd really prefer not to do that. I'm concerned that might give away customer and competitive information.

Ok, thank you.

, let me just make one other comment. We really haven't seen anything yet. It's a future event that will be expected to occur near the end of this year. So you shouldn't assume that any of those have already been shown in any current results.

Right. But I'm trying to, you know, model things out towards the end of the year and next year. So that was the reason for the question.

Like John has said, he is also looking at trying to offset a good portion of that and I think some of that will become obvious, and we'll try to address that more when we get into those latter quarters.

OK. Thanks.

Your next question comes from .

Good morning. I wanted to ask quickly about the analgesics market.

I know that some of your big competitors are offshore, particularly in Asia and India. I wanted to find out, because I know ibuprofen's a bit of a maturing market, if you're seeing any pricing pressure there - and also naproxen.

And then I just wanted a quick update on the Jordan plant, if you don't mind.

Yes. - John Steitz in Fine Chemicals. Most of the pricing pressure we see is in those third world and developing markets. So as we try to grow our market share where that competition exists, that's mostly where we're running into that kind of competitive situation.

On the naproxen side, most of our growth is coming from the proprietary brand. Aleve is growing at very high rates, so there's a natural growth in the generic alternatives to that. And we're very well positioned to take advantage of that. The raw material as a percent of end price in the market is not an important driver.

But generally speaking, we're hopeful that some volume growth will really help us there.

Thanks.

And, Mark, I'll let you talk ...

Yeah, - Mark Rohr. Jordan plant is still moving along quite well. I mean, that area has been, as we're all well aware of, has been a bit chaotic lately to say the least.

But our construction effort in Jordan has proceeded, essentially, on track, and we don't see any reason why we shouldn't be in a position to start up, really, the end of this year, early next year, with a bromine part of that venture.

So we're still moving forward as scheduled.

Any idea on when the would come on? Or is that still too difficult to predict?

Oh no, right now it's still - it's still, in effect, on hold until we - until we feel that the market has rebounded