雅保公司 (ALB) 2002 Q2 法說會逐字稿

Good afternoon. My name is and I will be your conference facilitator today. At this time I would like to welcome everyone to the Albemarle second quarter earnings 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. If you would like to withdraw your question, press the pound key. Mr. Zobrist, you may begin your conference.

OK, , thank you very much. This is Mike Zobrist and with me on this call I have John Dabkowski, who is Vice President of Polymer Chemicals; John Steitz, Vice President of Business Operations; Paul Rocheleau, who has recently joined Albemarle as our CFO; Mark Rohr, who is President and Chief Operating Officer; and Charlie Walker, our Vice Chairman.

Our comments will follow the presentation that was hosted this morning on Albemarle's Website under Investor Relations Teleconferences with Analysts. And as you can appreciate, we'll be making some forward-looking statements during this discussion and therefore, you should recognize the cautions that are stated That there are many factors which could cause actual results to differ from current expectations.

With that I'd like to turn it over to Mark Rohr, our President and Chief Operating Officer for his opening comments. Mark.

Great, thank you, Mike. I want to thank all of you for joining us today on this conference and also thank those listening in now and later about our Webcast.

I am please to be able to report to you second quarter earnings of 48 cents per share, 10 cents above consensus and 16 cents, or about 50 percent above second quarter last year. Included in this number is a one-time favorable after-tax benefit of 3.8 million from income tax recovery, as well as some items included in operations totaling 1.4 million from one-time adjustments in acquisition asset allocations.

Favorable raw material and energy costs, as well as lower plant costs, offset mix and price effects resulting in some margin growth of approximately 70 basis points through the year. We are obviously pleased with these results and would like to take a few minutes to give you a broad overview of our business before handing off to others.

In fine chemicals, we have seen the benefits of our efforts to focus on growth opportunities, turning in good performance against the second quarter last year, with sales up 6 percent and profits 33 percent. The seasonal downturn of the ag business and a lost absorption from several plants, plant turnarounds in the pharmaceutical area reduced earnings versus the prior quarter. While ag will be essentially flat going into the third quarter, I expect a good pick-up in our pharmaceutical business to yield quarter-to-quarter growth in fine chemicals.

In pharmachemicals we saw a nice rebound in our business additives, as well as flame retardants. flame retardants were especially strong the first few months of the quarter before tapering off in June. And mineral based flame retardants held up well throughout the quarter, an indication of the broader market for these products and a lower sensitivity to consumed electronics. I do not need to report that the consumed electronics business remains tenuous, especially in the and epoxy areas where our customers are struggling to find signs of consistent growth and consumer spending.

On a year-over-year basis, our efforts to lower manufacturing costs continued to show benefits from our cost reduction program. In addition, our purchasing efforts have provided low raw material costs and energy costs, saving us approximately 8 million dollars this quarter versus a year ago. In total, these savings are equivalent to 390 basis points of gross margin improvement, with purchasing representing approximately 335 of them.

We do believe the benefits of these lower costs will begin to fade later this year as price increases announced in the industry by our suppliers begin to take hold. Like our suppliers, Albemarle has been aggressive in driving price increases. Certainly concerns of a raw material price inflation is one of the reasons we're so active. But fundamentally, prices falling to a level where dramatically improve margins to a level sufficient to sustain business long-term.

John will speak to our efforts to drop pricing in a minute and, while I'm optimistic we can be successful price increases, we do need some continued improvement in the global business climate to help this effort.

During the quarter we have taken further steps to reduce inventory and sales outstanding and will continue to do so, taking advantage of the market and product volume surges, further reducing the cash requirements to manage Albemarle. Inventories fell to about 93 days, resulting cash-to-cash is now 110 days and I expect we will lower that a bit further as this year progresses.

We're just beginning to see the from in this year-over-year comparison. However, our GS net rate remains under 12 percent of sales. next quarter we'll have the full reflection of both acquisitions, ChemFirst and , so the comparison will be a more accurate picture of total GS net.

At 11.8 percent of sales for this quarter, this rate was in the ballpark for what we going forward, however we remain convinced that these costs can be gradually lowered to approach 10 percent as we grow to size at Albemarle.

Through this year, our R&D effort, along with our strong sales and technical service, is bringing about 25 new opportunities for our fine chemistry services group per month. In addition, we're working on a schedule to introduce over a dozen new products this year. We have approximately 60 and ag products under development from to Phase III trials, a dramatic improvement over our pipelines a few years ago. This trial performance and development and the continued emphasis we're putting on finding good both on acquisitions should provide the momentum to achieve the 6 to 8 percent top line growth we discussed before. One of the reasons for this success with new products is our increasing investment on R&D of 13 percent year over year, focusing more emphasis on seeking innovative solutions to customer problems including the development of new products.

We are aggressive with our fast rate of reporting, and such do not show all R&D in this category. Looking forward July's business appears similar to June's, but not as strong as March or April's. Our customers, for the most part, believe we are in a period of slow economic growth that will continue through this year, and we're all concerned about the slow return of some markets, like , and a current tremble on Wall Street confident with our position and our ability to deliver a quarterly earnings this year that are in equivalent over those of 2001 in allowable consensus evidence for our corporation before special items. Let me also take this opportunity to restate that we are continuing on track with the plant of our joint venture operation. Utility systems will start in November and commercial operations will begin after the first of the year. And, lastly, should you not be aware, we have made a number of moves to strengthen our moral and better position ourselves for continued growth and acquisition. In just a minute I'll introduce Paul , our newest member of the Albemarle management team who joined us June 15 as CFO.

We got to know Paul when he served as CEO of and over the last several years, Paul has worked with those and served briefly on our board. Paul follows Charlie Walker who is taking on responsibility of driving our M&A effort. Charlie has made a number of--Charlie has a number of opportunities under evaluation and we believe he will be able to average one or two bolt-ons per year while also working hard to find a larger opportunity to gain technology and business energies in a material way. John has moved up to new position of VP of Operations and assumes overall responsibility for both chemicals and fine chemicals as well as sales and business development. John and his team and responsible for growing the top line, introducing new products to the market, and margin improvement. John has expanded his role to include our Asian Pacific region where he has a number of good initiatives underway. John has taken over as VP of Fine Chemicals. This new team is focused on delivering consistent earnings growth for Albemarle and doing so in a fashion of integrity that all share holders' expect of corporate management. I'm proud of what this team has accomplished in a short period of time and I'm very excited about the many initiatives they have under way to further improve our performance for the benefit of the customers and shareholders. Now before turning it back over to Mike, let me ask Paul who many of you have met recently to speak about some of the financial and governess issues we have under way. Paul.

Thanks Mark. Good afternoon. First, let me say that I'm please to be an active member of management after working with Albemarle as a consultant and most recently as a member of the board. Let me start with a quick comment regarding corporate governess and financial credibility. Albemarle already has in place or is actively working on many of the recent recommendations proposed by the SEC and New York Stock Exchange. In the past, the company has had a majority of independent directors and for years our compensation and audit committees have been composed of outside directors. We have also recently placed limitations on the use of our external auditors as consultants. We will continue to monitor development and to be proactive to be compliant with any new regulations. Now let me get back to the second quarter numbers. First, the tax recovery; we have an active tax management strategy that led to a $3.8 million gain for the quarter. This one time adjustment relates to export tax benefits for the years 1994 and 1995. This cash refund was received in the quarter and reduced the company's effective tax rate to 21 percent. We're now forecasting a 28 percent rate for the year.

The interest component on this refund of 1.3 million was recorded in other income and the 2.5 million refund was credited against current period taxes. Without this special tax item, Albemarle's second quarter fully diluted earnings are 40 cents per share.

Mark also mentioned a $1.4 million charge or equivalent to three cents per share associated with purchase price allocations for two acquisitions. First, at Martinswerk we took a charge as we fine tuned the cost of a work force reduction program that was initiated at the time of the acquisition. And in Fine Chemistry Services, we took a charge related to inventory valuations. These charges are not listed as a special item and they directly impact recorded operating profit.

Let me move to a topic that I hope to discuss on a regular basis -- cash flow. The consistency of our cash flow has been recognized as one of Albemarle's strengths. And I'm pleased to report that our net debt positions improved considerably over the past several months. You may recall we purchased four million shares of stock in February for $93 million increasing our net debt to 225 million. Effective June 30th, this has been paid down by almost $50 million reflecting good operating profits and control over working capital.

With our continued emphasis on working capital coupled with strong EBITDA margins, we should continue generating good cash flows through the balance of the year. And lastly, our existing credit facility expires in September and we're in the process of negotiating a new credit arrangement. This credit line will be a $350 to $400 million syndicated revolver with a term of three years.

This will be a floating instrument based on LIBOR with spreads based on our credit rating or leverage. The facility is sized to meet our current needs with headroom for bolt on acquisitions. We expect to have this new facility in place by late August. Now let me turn this back to Mike.

OK, thanks, Paul. The next item is a brief review of financial details for the quarter and then we'll continue with more detailed business reviews. First if you look at our slide two -- financial comparisons -- this shows sales, profits and earnings before the special tax benefit for the quarter compared with the prior and a year ago quarters as well as it shows the effect of the four million share purchase in February.

The year-over-year operating cost comparison is impacted by added GS&A in 2002 for our acquisitions as well as the $1.4 million we've just mentioned in finalizing purchase price allegations as related to both these acquisitions. Our operating margin, even with these items, still looks very attractive relative to our fears.

Next, slide three -- income and EPS. This has similar comparisons as in the previous slide, but does include special items. And as Paul mentioned, the lower tax rate in the quarter will give us a net 28 percent tax rate for the year down from 30 percent in 2001.

Now, slide four -- segment highlights. This gives an overview of sales and profits for each business in the company versus the prior quarters. Year-over-year the sales gains that result from our acquisitions loss sequential will improve in our Polymer chemicals business and they more than offset the fine chemicals drop that we saw in our ag chemicals business.

We take the next three slides, these are designed to provide an analysis of sales gains on a year-over-year basis, breaking down total shown into all the major components of volume, price and mix, the effects of foreign currency exchange and additions from acquisitions and joint ventures.

First, let's look at the overall corporate sales picture. Now, this is the last time, as we see in slide 5, that in fine chemical services will be separated out under our acquisitions and . But for the second quarter they represented a 15 percent increase, almost all of the corporations sales gains of 16 percent relative to the second quarter last year. Now, for the quarter, a 5 percent volume is just about totally offset with a 4 percent lower price and mix effect. But it's worth mentioning that this quarter's gain in volume, even though it's only 5 percent, is the first positive one we've had in the past 7 quarters. With the weakening of the U.S. dollar, we're starting to see what we expect will be a period of favorable foreign exchange impacts. And for this quarter relative to the second quarter of 2001, the effect is nil.

Next, we'll look at slide 6, sales influences for polymer chemicals. Here we have a large volume increase of 16 percent over the second quarter of last year, resulting primarily from the strength of our bromated flame retardant business, with the acquisition adding another 15 percent, the sales on a year-over-year basis. Again, there's only one month of in the second quarter 2001. There's a slight offset in price and mix of 6 percent with no appreciable currency impact this quarter for a relatively strong 25 percent increase in 2002 polymer chemical sales versus second quarter 2001.

Slide 7 for our sales for fine chemicals tells a somewhat different story. Here our acquisitions fuel a 15 percent increase in sales, with lower volumes in price and mix offsetting 9 percent of this to net out a 6 percent increase over second quarter last year. Currency, again, is not a factor.

Now that concludes this financial summary so, at this point, I'd like to turn it over to John and John to comment on the business. First John will discuss our fine chemicals business. He's filling in for John Nichols who's out culling his new fine chemicals customers. John?

Thanks, Mike. Fine chemicals delivered a good quarter with operating profit of 12.2 million dollars, which represents an improvement of 33 percent over the same period of last year. performance in solid revenue growth in our pharmaceuticals business, complete integration of our few acquisitions and excellent execution and cost management in our performance chemicals business.

Sequential comparisons are lower on an operating profit basis due to the normal seasonality of our ag chemicals business. We also had 2 significant plant turnarounds in the second quarter, one in pharmaceuticals and the other in our bromine area, which has positioned us well for the second half as our inventories were reduced.

Now for some additional comments on our quarterly comparisons. Compared to last year, the second quarter ag and pharma businesses delivered solid sales improvement with overall operating profit up slightly. In our Ibuprofen plant, we substantially completed our capacity expansion and quality improvement projects. We are focused now on dramatically improving our international markets share and will be adding directly compressible products to our ibuprofen product portfolio. The portfolio approach to our performance chemicals business and a significant six sigma cost production effort paid dividends for us compared to last year as well.

Versus last quarter, by far the largest contributor to sequential decrease is the seasonality in our ag chemicals business. There certainly seems to be a lot of volatility going forward in the ag markets and weather is a significant factor for our customers in their growing season. We are continuing to see our ibuprofen and products trialed in a growing range of new combinations for the OTC and prescription markets. The balance of our fine chemicals business performed up to expectation. Slide 8 Shows how we have leveraged our technology to drive effort in filling our new products pipeline. Through the first half of 2002, we have more than doubled the number of products in various stages of pharmaceutical development. We have quoted on 170 projects for numerous life science companies and our adding to this list at the rate of 25 opportunities per month. We have the right people doing the right things with the right customers and we are excited about this effort.

As we move forward through the balance of the year, we are looking forward to continuing contributions from our two acquisitions: solid execution from our performed chemical portfolio and good growth from our pharmaceutical segment. There is a degree of uncertainty from our ag chemicals customers base and we will continue to monitor this business throughout the coming quarter. Our inventories are in good shape so we plan on running our plants reasonably hard. Last year at this point in time, we were evaluating a range of manufacturing slow downs to adjust for building inventory. This is just not the case this year. We are also looking forward to adding several new products to our life sciences customer base, contributing to a successful second half in fine chemicals. Overall, as I look out towards the rest of the year, I anticipate a stronger third quarter and believe 2002 should exceed last years operating profit. Now I'll turn it over to my friend, John .

Thanks, John. Second quarter performance in our chemicals business was very solid. We saw a strong demand pick up in the second quarter with inventory rebuild of likely positive contributor. As we go forward, continued strength and consumer demand will be the key. With that as background, let's look at the business and how we did versus prior quarters. First, looking at a comparison versus the second quarter of 2001, we finally past a point where we were fighting quarterly comparisons that still reflected the unusual strong electronic inventory build in the past cycle.

We're now looking at a comparison based upon similar market conditions. With this in mind, sales and profit shows significant improvement over the prior year period. Sales were up 25 percent and operating income up 24 percent. All business areas contributed to these results. However, flame-retardants were especially strong. Here we set an all time volume record and had filled revenue 25 percent greater then the previous years, period. Looking at the chemicals business sequentially from first quarter to second quarter of 2002, we also saw a significant improvement. Bills were up 17 percent and operating income up 62 percent.

Sequential improvement was seen across the board in all product areas. Let's talk about this for a few minutes. In the second quarter, both our agents as well as our agent flame-retardant businesses saw nice increases. Our brominated flame retardant volume was up more than 20 percent versus the first quarter. Price pressures continued, but the positive news is the number of price increases announced during the quarter.

Due to contractual restraints it will probably be fourth quarter before we see how successful these announcements will be. We believe these increases are needed and the industry does not dispute this. However, as you might expect, our customers are resistant to any increase with the uncertainties surrounding our current environment.

In the meantime, we continue to pursue disciplined cost control processes and towards this end took four million out of flame retardant inventory during the quarter.

Coming to flame retardant volumes, we've continued to watch the current board statistic as an indicator to help us understand what's happening in the electronics end markets. We've have been updating this chart for you each quarter and slide nine shows the most recent data.

Remember that this ratio represents order backlog. That is new orders that are divided by shipments. And when this ratio is above 1.0, business is expanding. As you can see, we're definitely on an upswing from a low point in April of 2001, but the book to bill ratio has been hovering around 1.0 for the last six months. This is one of the reasons why we suspect the heavy, large volume flame retardant shipments seen in the second quarter represented a demand spike and I expect some followup of these materials in the second half of the year.

Having said this, however, July is off to a good start and our proprietary flame retardant sales coupled with foreign exchange and continued strong demand for Martinswerk products gives me encouragement we will continue to see overall strength in the third quarter.

Now, last quarter I mentioned that our new business development for flame retardants was focused in four areas: buy/resell, blends, line extensions and new molecules. Since then we've introduced a line of new eco-blends geared toward high temperature, engineered thermoplastic applications and are also moving forward on a new high flow version of brominated flame retardant.

In addition to the engineering thermoplastic area, we're also focused on high impact , polyurethane and wire and cable applications to face more stringent standards and high temperature requirements.

Turning to our catalysts and additives business areas here we also had a strong second quarter. If you look at slide 10 you will see our major markets meaning PVC, polypropylene and polyethylene all appear to be picking up with North American operating rates in the 80's and 90 percent range. In polyethylene alone, North American inventories have been depleted at rate equaling three billion over the last 18 months returning to 1994 levels. Our new with , which is is also off to a strong start. The reception from customers has been exceptional and we're generating a great deal of interest in the tense, stabilizing market. This already is a positive contributor to our overall metallics business.

In addition, new product introductions like the commercialization of magnesium are going well. Our new catalyst program remains firmly in the black where we continue to work qualification with new antioxidant blends.

Turning to regional news, I told you last quarter that I just completed a two month assignment in Asia with my object 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. Since then, as Mark has stated, their relationship has been formalized in our new structure and I now have direct responsibility for the Asia Pacific region.

So I'm happy to report one accomplishment that originated from that assignment. We are now in the process of setting up a trade company the Shanghai free trade zone which allow us to conduct more direct business activities in the country. China is recognized as the major growth engine for Asia-Pacific and this news will allow us to more effectively pursue sales and sourcing opportunities.

To summarize then, we had an extremely strong second quarter and July is off to a good start. I believe that third quarter will remain fairly strong. The real question is how sustainable is this trend. Will we continue to see growth or will there be a drop-back before our real recovery begins to take hold? The signals are mixed. Volumes are, therefore, uncertain and it will probably be fourth quarter before we realistically understand where this, as well as flame retardant pricing, is headed. As we've been saying for the last several quarters, in this environment, we will continue with tight controls in our business, stay focused on our strategies and will work hard to keep our customers satisfied. We believe this paid dividends in the second quarter as we were able to take full advantage of the opportunities presented to us. With that, let me turn it back to Mike.

John, thank you. OK, that ends our prepared remarks. , let's open it up for Q&A now, please.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Karen Gilsenan of Merrill Lynch.

Good morning and congrats on a good quarter.

Morning, Karen. Thank you.

I'd like to talk about that fine chemicals business a little bit more, at least compared to my model even though year-over-year it was a good performance, it was a little bit weaker than I had anticipated and, in particular, when you look at the sales breakdown you saw both volume declines and price erosion. Can you talk more specifically about where that's coming from within your different product areas?

Karen, let me just -- this is John . Are you still comparing year-on-year or sequentially.

Yeah, year-over-year is what I'd like to think about for the moment, but remove the seasonality.

Yeah, last year we did have a very strong Ibuprofen month. Now, in total, our pharmaceutical sales were up at a very high rate but Ibuprofen was down so there is a mix issue there. Our performance chemicals...

Does that affect your profitability? Is that one of you higher margin profits?

Yeah, it is.

So it affects sales somewhat and profits even more.

That's correct. Now, compounding that, again compared to last year, we had this fairly major turnaround of our Ibuprofen plant. OK, so that was a pretty dramatic effect in the current quarter. So you compare that to a strong quarter last year where we were running the plant for the entire quarter versus this quarter where sales were down a bit in the product line and the plant was shut down for the conclusion of those projects.

Now, last year did you take a shut-down like in Q3 that you won't have to take this year? Might we see the flip side of that?

Yeah, we can go pretty strong now in the second half. We may, we may have a, I'd say a minor shut-down in the fourth quarter in that plant, but nothing major.

So that's pretty much behind you then.

And our inventories are actually what I would call very, very low. So we need to run pretty hard now.

OK. And you mentioned another plant shut-down. What was the other plant?

Yeah, we shut down our bromine plant, Magnolia, for a, for some turnaround work. And that, also, impacted fine chemicals. So now our bromine inventory is very tight and we're running those plants very hard as well.

So when you look into, you know, in the first quarter, you saw over 15 percent operating margin in this business. Do you think you can get back to that in the second half?

Oh, yes, I do. In the second half, you bet.

OK, so it really was kind of a one-quarter issue.

You bet.

OK.

But still, compared to last quarter, we viewed it as a strong quarter. And sequentially down because of that -- the chemicals piece.

And was your ibuprofen sales down sequentially, or ...

No, no it was not.

OK, so you're still -- sequentially were up.

Right.

So it was really only the business that was down sequentially.

That's correct.

And that would be the typical seasonal pattern?

Yes.

It sounded from your comments that it may have been a little more pronounced this year, is that fair?

No, no it actually wasn't.

OK.

But going forward, we're a little bit concerned about the fourth quarter in because we're hearing about a lot of volatility in the end markets in our chemicals business. So we're a bit concerned about the fourth quarter. Time will tell.

OK. OK. And your R&D spending on a reported basis for the corporation was down in dollars. Mark kind of alluded to the fact that you're accounting for it differently. Can you comment on that?

Yes, , this is Mark, let me take a shot at that. We're being very aggressive with the standards, and clearly since we acquired and brought that R&D effort into ours, we changed in some way the direction of our R&D effort. It's more applications oriented now, and in fact we are getting some revenue into that after -- from the operations in Dayton and , so we've been more aggressive with our accounting.

When I look at it and roll it up on a total basis, R&D spending is up quite dramatically. And we -- we're investing even more money into it. So I would simply say that we're going to have to do a better job in the future of, you know, culling out these two big categories. numbers are down but total R&D spending, as we call it, R&D is up.

So the other expense -- the rest of your R&D spending, if you will, is showing up in your operating segments.

It's up in S&A.

Yes. Or in your segments, I presume.

Yes, that's right.

OK.

And that number's about $2 million, .

About $2 million that's showing up elsewhere.

Yes ma'am.

All right, that's helpful. Well thanks, great quarter.

Thank you.

Thanks Karen.

Your next question comes from of .

Good morning, gentlemen.

Good morning, John.

Good morning.

The conference was on June 19, and there was a lot of debate when you -- when Mike was up there about this customer pre-buying in advance of the price increases. And you hadn't actually seen it at that point, I think, although it was widely anticipated that there'd be a little bit of a correction.

I think you commented that July was off to a strong start, so did we just have a very quick drop down in the second half of June and then things have picked up again relatively quickly?

This is , . I believe you're talking about flame retardants here.

Right, that's correct. Brominated flame retardants. And maybe I misunderstood the July strong start comment.

No, we've -- the way you should picture this is, is the business was carrying on pretty weak since about the second quarter of last year, and we got to the second quarter, we saw a very strong and pronounced pick up in demand in particularly April and May. And then June dropped on from that spike at that period, but it's still at levels higher than we saw for the last -- for the last year.

OK, but I think when you guys were in town on June 19 that you actually hadn't seen much of weakness -- maybe it was just you hadn't seen the results yet and they'd turned down before then. It just sounds to me like it was a very short correction before things had kind of come back to a more normal level.

July is running like June and you're using the term weakness here. I guess I would not use that term.

Right, OK.

I view June as being a pretty decent month for us, but April and May were outstanding months.

OK. And if customers were holding inventories of flame retardants in the printed wire board market, would your sales force be able to tell that? Do they actually hold inventories of flame retardants? Or do they make bare boards and hold inventory of bare boards?

Well, I think there's inventory buildups that could take place all along the chain. The one that we have the most information on would be our direct customers. And our direct customers, the feel I have right now, is there's not been a huge inventory buildup. If there was, we would be seeing a lot of orders being rolled at this point in time and we're not seeing that.

OK, great. Thanks very much.

You're welcome.

Thanks, .

Your next question comes from of Goldman Sachs.

Thank you very much. Can you talk a little bit about the catalysts and additives business? You mentioned that it's seen some strength, I guess. If I back out the numbers it looks like somewhere around maybe 10 percent volume growth. Is there any reason to expect that business to trend differently than the underlying plastics production? And what can you do there to grow faster than the broader end markets?

You know, the base business for the -- the is John Dabkowski again -- for the most part the base business is going to, I believe, track along with the growth you see in the plastics market, which our customers are telling us and the data from of these research organizations that follow the industry closely would indicate a tracking at this point in time.

How will we grow the business faster than that? It's going to really depend on trying to make some of these step out activities from the past. For example, in the single we've been working on that for a long time, really showing on the profit line now results until last year we finally broke into the black. And this year we're looking to take a step jump increase in performance from our point-of-view there in terms of the profitability of that. So, it's really working on new opportunities, extending our product line in the catalyst area.

In the antioxidants and the curative business that we have, again, they pretty much track -- the base businesses track what you see going on in the polypropylene, polyethylene, and polyurethane markets. The way to -- for us to try to achieve faster growth in that is defined what I call are unique initiatives where I believe we can get the same long-term advantage. I've said many times I don't see us getting into some businesses that others are in that are populated by 10 or 12 competitors around the world with decreasing margins. I think that's a no win game. So, trying to find those opportunities where we have a unique advantage.

And if I could followup with John Steitz. Can you describe a little bit more for us what the -- or quantify the cost of this downtime in the Ibuprofen plant?

Yes, it was down, Bob, between five and six weeks, basically. So, I mean, you look at a quarter being 12 weeks, right? So we were down almost half the month. I mean, it's pretty significant. I mean, we're talking probably a couple million dollars impact in the quarter.

And then if I could have one last question -- your arch rivals in bromine had a really bang up quarter in water treatment and I know that's a business you're still trying to exploit a little bit more. Can you give us an update on where that stands?

Yes, you know, our water treatment business is nowhere the size of our friendly competitor, but, yeah, I notice they did a bang-up job. That was really great to see and ours is a very niche business and we're seeing some nice growth in it. And we turned a profit in that business compared to last year and we're pretty pleased with the progress we're making. So, I mean, we're nowhere near that size. But, it's just, again, part of the overall portfolio approach to our performance chemicals business and it was a reasonable contributor in the quarter.

Gotcha. And let me credit Paul for his conservative accounting here and ask if we'll also see you guys firm the certification on the financial statement.

This is something which, you know, we will certify in the future. We're not making any statements about this quarter. But certainly we want to be proactive in this area. We just want to see what the certifications look like and decide how we want to proceed.

OK. Thank you.

Your next question comes from of Bank of America.

Good morning, everybody. I had a question regarding selling prices. Number one, there seems to be, I think, a disconnect between the announced price increases and what we're seeing in pricing in the numbers. Can you help me out there? Is it a timing issue, can you walk me through what's happening there?

Hey, , this is Marc Rohr. Yeah, there clearly is a lag, a fairly good lag in the systems that exist. A good portion of our products, particularly in the additives area, are under contract and you have price protection when you're under contract. Those tend to run their course over a 3 to 6 months period. So, really, you need to anticipate that the benefits that you'll start to be able to pick up in a bottom line pricing, will be occurring as this year ends, and not a lot before then.

OK, so that means that all of next year will benefit from price increases that we're announcing now? It just takes that long.

Yeah, yeah. I think practically that's right.

OK.

, again, John just wanted to mention, assuming we're successful. We're out there working hard to do it, but you just need to appreciate there's a big lag in this.

OK. Second question I've got regarding currency, we've talked a lot about the translation effect on sales and earnings, but what about the fundamental effect. Had you been suffering from competitors with lower cost bases, let's say in Israel, and to the extent that their currency base increases in value, does that erase a competitors advantage that they've had for some time? And so could we see, you know, better than market growth for you because of that?

You know, the has in itself been very weak and so there have been some advantage they have see, but I think the real place we have seen, to be honest, competition due to currency is really in fine chemicals where you've had, over the last couple of years, a tremendous number of Europeans sort of camping out in the backyard of the U.S. with a 30 percent value swing that occurred since the euro was introduced. Now that's largely evaporated today and so we're pretty confident that there's going to be a more competitive balance between fine chemical production in the U.S. and in Europe.

Now how are they responding, Marc? Are they giving up share to maintain margin or are they cutting their price to maintain share?

You tend to see it in pricing. You know, you tend to see it where you do euro-based pricing, so that tend to come back and it own pricing and, as we try to hold the line in pricing, and you lose share. So that's how we're seeing that and it took awhile for that to happen so it'll take a little while for that to reverse, . But I think chemicals, I would say you're going to see it more than you're going to see it in any other area.

OK, let me wrap up with some -- somewhat accounting issues. We've talked a little bit about the increase, potentially next year, from higher pension expense and higher option expense, assuming that is adopted or the election is taken away on . Paul, can you talk a bit about, you know, the pressure on earnings next year from those two things?

Certainly , and if you go back to our annual report for 2001, we had a pension impact of positive $10 million last year, it was reported. And this is a net figure mark of our pension income offset against other retiree cost, the retired medical. And what we've done, you know, if you look at the forecast this year, we are projecting roughly a 25 percent reduction in that going forward each year for the next couple of years, where this pension impact will unwind completely by 2005, 2006.

We really can't forecast it any than that simply because we don't know what the equity market's going to do and how those portfolios were valued. But, I mean, we had 10 million last year, which, you know, is going to step down by roughly 2 to 3 million each year over the next several years.

Is that before or after tax, Paul?

That is after tax.

The two to three -- OK, so if it comes down ...

We report that before.

OK, so if it comes down and then that's the same each year, there's no year to year impact after the first year? Am I right?

Well, no, there will be an impact. It does an absolute number on an basis. 2001, 10 million, stepping down it eliminates 7 or 8, stepping down to 5 or 6.

OK, OK.

And on the options, again, I can, you know, reference back to the 10-K and annual report. If -- last year we'd indicated that if all of the options that had been issued to the company, so there is very much a retroactive look. If the options were then accounted as an expense using a method of evaluation and looking at divesting period, then that would have had an impact of about $0.04 per share. And you know, with Coca-Cola and other companies now looking at it, they're not taking that retroactive view, but they're taking a proactive view.

If you look forward in our company, and look at the options that we have issued or expect to issue during the course of this year, and again, using the same type of valuation methodology, that would have an impact of about 1 to 1.5 cents. And of course, depending upon, you know, what method of valuations you use. So it's not a major impact to us, but, you know, it's something that we will continue to study and probably report more proactively along with everyone else.

So in summary, the pension side is more important than the option side.

Pension has been more important, that's correct.

OK.

But I do want to add, on the option side, you know, while they're -- while we have not, you know, charged ourselves for this non-cash expense, I also want to remind you that we have been active in buying back shares, so that as we charge ourselves, and you have this, you know, potential impact on earnings the, you know, conversely Albemarle's been very active in buying back stock at least equal to what is issued in options.

Thanks a lot.

Your next question comes from of .

Again, congratulations on a good quarter.

Thanks, .

Thank you, .

This clarification on ibuprofen, you forgave or didn't get a couple of million in sales or ...

Alan, we're having trouble hearing you.

Would you repeat that question again please, you were breaking up a bit.

Let me try, is this better?

Yes, much better.

OK, thank you. In the quarter, you didn't get a couple of million in sales because of the plant shutdown. Are those sales gone forever or are there going to be ganged up in the third quarter?

No, , we did not miss any sales in this quarter. We made all our sales.

OK, I ...

We made all our sales. The point made was compared to last year the Ibuprofen part of the pharmaceutical segment was down on a volume basis. That is because the customer requirements have passed into the second half.

OK.

Primarily. And what I was referring to was that the plant was down so we did not absorb those fixed costs during this quarter because the manufacturing plant was down. That was the reference to the $2 million.

OK, that's very helpful. How are you looking at the acquisition front? There are a couple of pieces of business clearly up for sale that could be an interest to you.

, this is Mark. You know, we've been pretty open with you guys about in the past with our direction. We have interest both in the Polymer Chemical side and the Fine Chemical side. We're very aggressive in that arena today and, you know, working hard to try to bring some home.

I will say, though, that in that process we're going to make sure we do that in a way that these acquisition are accretive and, you know, are consistent from balance sheet point-of-view of how we've managed this company in the past. So, to answer your question -- we're very aggressive. Nothing to report right now, but I hope later this year we'll have some to talk about.

Thank you very much.

Thank you, .

You're welcome.

Your next question comes from Jeffrey Zekauskas of JP Morgan.

Hi, good afternoon.

Good afternoon, Jeff.

Just a few short questions. I apologize if you may have given the answer earlier. Can you analyze your corporate and other expense lines year-over-year.

Your talking on the second quarter year-over-year?

That is you went, I think, from 3.7 million in expense to five -- essentially six million?

Yes, Jeff, this is John Steitz. Allow me to answer that question if I could. The majority of that increase as we recognize I think quarter over quarter it was up -- if my memory serves me correctly -- about 30 percent. About half of that total was the acquisitions that we did and the ongoing expense from the Martinswerk and the Fine Chemistry Services acquisition.

The other majority part of that was the shift of R&D to S&A line that Mark mentioned earlier, which is about $2 million.

OK, so on an -- I can't tell from your commentary how much of that is a one time hit and how much of that is an ongoing expense? That is, what should your normalized quarterly corporate and other expense line be? If that's the right way to ask it.

It's OK. I think the key thing is, you know, we're going to be looking at, you know, a total R&D and SG&A of just over 13 percent of sales.

Hey, Jeff, just to make sure we're not confused -- are you talking about the change in the administrative expenses during the period?

No, I'm talking about in your segment breakdown.

Are you talking about S&A?

I'd say or other income. Well, other income is ...

In your segment breakdown you have Polymer Chemical, chemicals -- below that corporate and other. That's the line that I'm wondering about.

Yes, the corporate ...

Yes, OK.

Jeff, I think the best thing to do there is let me go back and maybe talk with you specifically off-line on that. I'd be happy to try to go through that with you.

OK. That's fine, then. Just quickly, a couple of other questions - questions for John . In terms of your proposed increases in brominated flame retardant prices, you know, what would you count as a success in terms of the amount of price increase you got and what would you think would be a, you know, disappointing and what do you think would kind of be an average result?

Well, I'd be pleased with 100 percent success, disappointing would be zero and I guess Jeff would say anything in between might predetermine what I'm able to do. So, I'm hesitant to comment further on that. At this point, we're pushing this pretty hard and, hopefully, this will start to take over.

So if you got 100 percent, what percent is that?

It would vary according to the products that we, that you're talking about.

Right, that's why I'm interested in the average rate.

We haven't announced the percent as equities. See now we're getting there, Jeff, now I understand your point.

Jeff, this is Marc. Just on that, maybe philosophically, the comment I was trying to make is that we think pricing needs to go up dramatically. This is the -- what I hope will be the first of many steps to draw pricing. So, from just a Marc Rohr point of view, we're not going to be content until we get these margins back up to levels where they're really needed to support these businesses long-term.

OK. And just, I guess, a final question to John .

Yes, Jeff.

You talked about trying to gain business in pharmaceutical fine chemicals area and I think you talked about quoting, I don't know, 170 pieces of business, and 25 a month.

Opportunities.

Opportunities, right. Well, say you got 25 pieces of business, what would that do to your revenues on an annualized basis?I can't tell if this is significant or not significant. I don't know the size of the products.

Jeff, we've talked about gaining -- growing our total new product sales to 15 percent of our average -- our total sales effort. And fine chemicals is about 40 percent of that and that's what we're targeting. So, if you look at the total corporation sales, roughly a billion. You know, if we could get growth from new products in fine chemicals in that 40 to 60 million dollar range over the next 3 to 4 years, I would consider that a good success. The issue is that pharmaceuticals, as you well know, take a long time to develop. The ag chemical are a little faster and quicker on the horizon.

What I was wondering is, just for a product in, I don't know, Phase I trials or Phase II trials, is that half a million in annual revenues to you, on average?

No, it would not be that high.

Not even that high.

It would be, no, it would be in the 1 hundred thousand dollar range, something like that.

OK.

And as it grows through Phase III, that number, obviously, goes higher because these companies are doing larger clinical trials with these compounds.

OK. Thank you very much.

You're welcome.

Thanks, Jeff.

Your next question comes from of .

Special -- I mean, defined chemicals segment swings always sort of phases me, but my question is, the business. You talked about the new products and all that, but the revenue from the business that you purchased, or the ongoing revenues when you acquired this business, have they been declining? Is that acquired piece of business right now a drag on earnings?

, this is . We knew when we bought the business that a fairly significant piece of it was going to away. We knew that. We were more buying it for the real technical horsepower and the capability for really trying to drive and fill our new products pipeline. We also used it as an opportunity to totally reinvigorate how we're doing new products. So in terms of that, strategically it's been a great fit. We've worked through a number of transitional issues on acquisitions, on the acquisition accounting, but to say it's a drag on earnings, no way. We're pleased with it, we're driving it for new products, and we're looking forward to the future with it as being our engine for new products and fine chemicals.

So if I think specifically what we said was at the time we expected the sales, which had been reported at the time of purchase in the range of 60 to 70 million would drop back with the losses to something probably closer to 50 million. And so that's probably more in the ballpark, plus we've obviously -- with the economy over the last year, we've even seen some drop from that. So I think that's what you're seeing more than anything else.

So even in the short run with that declining revenues, the net impact on earnings has not been a negative one?

Yes, I think -- this is Mark Rohr. It's not been negative in a material way, nor has it been positive in a material way. You know, it's -- from an earnings point of view, it's not significant.

OK. That . Thank you.

You're welcome.

There are no further questions at this time.

OK, . Well thank you very much, and we thank everyone else that was on this conference call. And if anybody else other than wants to follow up, I'd be happy to talk with them afterwards. Thank you very much.

This concludes today's conference call. You may now disconnect.