雅保公司 (ALB) 2002 Q3 法說會逐字稿

Good afternoon. My name is Toni and I will be your conference facilitator today. At this time I would like to welcome everybody to the Albemarle Corporation third quarter results conference call. All lines are on mute to prevent 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 1 on your telephone keypad. To withdraw your question, press the pound key. I would now like to turn the call over to Michael Zobrist of Albemarle Corporation. You may begin your conference.

Okay, thanks. Toni. This is Mike Zobrist, with me on this call I have the VP of our Chemical Group, John Nichols VP of Fine Chemicals, Paul Rocheleau our Chief Financial Officer, and Mark Rohr, President and Chief Executive Officer.

Let me cover our agenda for today's call. After I have this brief introduction, Mark will have opening comments. Paul will cover some of his financial topics that we want to discuss today and then John Nichols and John Bikowski will each cover key areas of their business and then we'll open it up for Q & A.

Now, as you can appreciate, we are making some of the forward-looking statements during this discussion and, therefore, you should recognize all the cautions stated on our website and in our press release this morning that there are many factors which could cause actual results to differ from current expectations.

In the interests of time I'm going to depart from the past practice and not discuss the factors that affect sales revenue year-over-year, the information on volume, price, currency and acquisitions effects on the company in each segment sales are relatively self-explanatory this quarter and they are included in charts 1-3 on the website in the presentation that accompanies all the comments we are making this morning.

So if you have not already done so, I'd encourage to you visit Albemarle's website at www.albemarle.com. It's under Investor Relations teleconferences with financial analysts. Now, I'll be happy to answer any of the questions about these charts that you have in the Q & A or if you prefer just give me a call after this conference call. With that, let me turn it over to Mark, who is as I said our President and CEO for his opening comments.

Thank you, Mike. And I want to thank all of you for joining us on this conference call and also thank those listening in now and later by webcast. I'm pleased to be able to report to you our third quarter earnings [648] cents per share, 6 cents above consensus and 12 cents per share, or 33 percent above third quarter last year.

Favorable raw material and energy costs, improved volumes plus some price improvement combined to yield a combined increase year to year of about 100 basis points. I also want to point out that we have a clear parson on a year-over-year basis with acquisitions now included in our results for the past four quarters. This gives a true picture of our top-line growth almost 9 percent year-over-year and 7 percent sequentially with any sales now approaching sales of $1 billion in revenue.

In Fine Chemicals there was a good improvement in performance over the second quarter of this year but we were down versus the strong results of the third quarter last year primarily due to the down turn in this year's AG business. This downturn in ag sales will continue into the fourth quarter and we do not expect to see a significant seasonal uptick in AG performance as normally occurs at year end. We did see a good pickup in our pharmaceutical business over both periods. This was anticipated and we expect that trend will continue into the next quarter.

In Palmer chemicals we were up significantly on a sequential and year on year basis. Our catalyst and additives business performed very well and while we are pleased by the continued good volumes that we have seen so far this quarter, we remain cautious in our outlook due to the uncertainty in the end market demand of many of our customers and general concerns about the global economy. The jury is still out on the amount of success we'll see from the industry's announced price increases and what the actual impact of the recent West Coast dock situation turns out to be.

I mentioned earlier that lower raw material and energy costs contributed to our improved results. Our purchasing efforts have continued to provide savings approximately $4 million this quarter versus a year ago. But future benefits will become more difficult to realize as we face pressure from a number of areas. Our team is driving hard for margin improvement. This includes cost reduction, process efficiency improvement and price increases where we believe they are justified. I'm not just referring to flame retardants, which is probably the most visible effort under way.

We are also looking for price improvements in a number of other areas to help us maintain margins as we finish this year and move into 2003. I continue to point out two areas of focus that you should follow to keep a handle on our progress. The first is SG and A with a full reflection of both circumstances the 11.2 percent sales for this quarter is indicative of what we have been expecting going forward and as I stated in the past, I believe this can gradually be lowered to approach 10 percent as we grow the company. Second is our success in introducing new products. Measured as a percent of sales, we have discussed our program and our target to achieve at least 15 percent of our sales from truly new products that have been introduced during the last five years.

This year we are closing in on that number that's sales to approach 140 million or approximately 14 percent of the expected overall sales. One of the reasons for this success with new products is focused investment in R&D with our total expenditures both for the quarter and year to date up slightly over the same periods. As in the past, not all of these expenses show up in our reported R&D. I'm pleased to report a startup. Utility were started up in early October. We have been recirculating BORO we expect commercial bromide production next month ramping up production slowly into 2003.

Looking forward, October is starting out well with relatively good volumes but with nagging concern about global economic stability. We have yet to see the impact of the West Coast dock outage. Our estimates at this point is that it will not have a material effect on our Asian business something under a million dollars and added shipping cost assuming we avoid any customer outages. We remain confident with our position and our ability to continue to deliver quarterly earnings this year that are improvement over those of 2001 and at this point, we are comfortable with a range. Earnings estimates out there for the year before any special items or unusual global events.

And lastly I want to make you aware that Michael Zobrist has announced his intention to retire at the end of the year after 27 years of valuable service. Mike has been a key member of the Albemarle leadership team and we'll miss his energy and efforts to improve our communications with shareholders. With that let me turn it over to Paul Rocheleau.

Thanks, Mark. I just have a couple of points I want to emphasize. First, a topic on everyone's agenda right now is pensions. We operate with defined benefit plans and have historically maintained an overfunded status. With the present situation in US equity markets and current actuarial discount rates, it is likely that we may have to make a relatively minor cash contribution this year to maintain a 100 percent funded position.

Due to our historical overfunded position, we recorded pension income in 2001 and will record a lower amount in 2002. This is expected to unwind further over the next few years. Of course, this is all dependent on the future performance of the equity markets.

Let me also mention that you'll notice the other income line is negative this quarter. This is a result of a 1.5 million pre-tax charge as we adjusted the value of two equity investments. One is a minority position in a JV, and the other a writedown of a small financial investment.

Next, I'd like to remind everyone that we close on a $375 million credit facility to replace the revolver that expired in September. This is a floating instrument and at the present time, we enjoy a 2.4 percent interest rate. We have net debt of approximately $140 million at the end of September, so that leaves us with $250 million headroom to investigate outside opportunities. In addition, we generated over $40 million cash flow in the last quarter after capital and after dividends.

So I feel that we're in great financial shape. You can see this from our net debt charts slide 4 on the website. And lastly, I'd like to restate that we're continuing to operate at a 30 percent tax rate remembering that we had a one-time tax benefit last quarter that reduced our effective overall rate for the year. With that let me turn it over to John Nichols.

Thanks, Paul. Fine Chemicals contributed an operating profit of $17.7 million in the third quarter which was essentially flat when compared with the same period last year but a very strong sequential improvement of approximately 50 percent. Solid performance was achieved across a large majority of the Fine Chemicals segment businesses.

Notable was strong sequential and year on year improvements in pharmaceuticals, driven primarily by a healthier sales mix along with successful cost reduction efforts. On the downside, the AG segment continues to struggle versus both prior periods with high customer inventories being worked off. On the whole, the third quarter added to our strong year-to-date growth in Fine Chemicals of 10 percent versus 2001. In addition, from a strategic longer-term perspective, we continue to drive successes in broadening our offerings and services to the globalized science marketplace.

Now let me provide a little more detailed insight relative to our performance. First let's compare with the year ago. As noted earlier, the ag segment has been affected by unusual spring weather in the US as well as instabilities in Latin America resulting in reduced customer demand for our ag intermediates. Excluding this negative impact the rest of Fine Chemicals experienced double-digit profit growth. We have grown our pharmaceuticals business particularly with Naproxen which has enjoyed greater market penetration in the global analgesics market.

In addition, our performance chemicals area showed strong improvement as our bioscience Zeolite and aluminum-based products posted significant gains. Sequentially, fine chemical profits improved 50 percent. This performance is even more significant considering that historically the third quarter is a better quarter for our seasonal ag business than the second. Sequential improvements in our Fine Chemistry services and pharmaceutical segments in particular more than offset the issues in ag.

We posted strong sequential improvements in our recently acquired Fine Chemistry services segment driven by custom manufactured products as well as increased new products success. In the pharmaceutical area, cost improvements played the major role in its strong performance.

As a final note, we took almost $3 million out of our prior quarter closing inventories in Fine Chemicals, as well. As we move forward, closing the year and into 2003, we remain cautious regarding the situation in our ag markets as well as with generally increasing raw material prices for Fine Chemicals. To offset these concern areas, we'll continue to drive controllable costs down and we'll work selective opportunities for increased pricing in the market.

In addition, we will continue to build our strategic capabilities for the future. Our new product pipeline continues to be an area of excitement for us as well as for our Life Sciences customers. Slide 5 shows our current pipeline status updated from the last quarter adding a couple of new products to our mix. Our focus will be to enhance the global deployment of our new product development capabilities as well as driving improved utilization of our global flexible manufacturing assets.

Finally, as Mark stated, we expect to bring our Jordan bromine and derivatives capacities on stream ahead of schedule and under budget in the coming quarter as we continue to build a leadership position in our core bromine capability. Next, John Bikowski will cover Polymer Chemicals.

Thanks, John. Strong demand pickup seen in the second quarter continued into the third quarter. Business performance was solid across all product lines. All of us are familiar with the various economic reports that seem to paint a negative and uneasy world economy. However, we have not seen this yet in our polymer businesses. While we remain concerned about the future, we have now strung two strong quarters together after a 1 1/2-year industry malaise and October is once again off to a good start.

Let's look at the polymer businesses in more detail beginning with our performance versus prior quarters. First, compared to third quarter of last year, polymer sales and profits showed significant improvement over the prior year period. Sales were up 24 percent and operating income up 50 percent. Flame retardants were a strong contributor this improvement over the prior year quarter. The catalysts and additives were not far behind.

Next let's turn to the sequential performance versus second quarter of this year. Looking at the polymer chemical businesses sequentially, then, we also achieved significant improvement. Recognizing that the second quarter was a strong one for comparison, third quarter sales were nevertheless up 7 percent and operating income was up 12 percent. Improvement was seen across the board in all major product areas. However, the biggest improvement occurred in the catalyst and polymer additives areas reflecting strength in our polyolefin catalyst businesses. Flame retardants remain strong but we were essentially flat compared to second quarter which you will recall had two unusual peak sales months in April and May.

Next, let's hit some of the questions I know are on your minds. First, flame retardant pricing. Our sales team has been working extremely hard to implement flame retardant price increases. We have had to take some difficult stands but I'm encouraged by the results to date. Our customers understand the need to raise prices so competitive actions rise to the top as being the major influence on our success or lack thereof.

While I would characterize our success to date as moderate I must admit I am encouraged by the upward trend that we are starting to see supported by the industry. Sequentially, we did begin to see an increase in this quarter's average pricing, but I would prefer not to comment on the percentages at this point in time since we are in the early stages of seeing these results, plus these results also include some mixed effect. In addition, many price increases will not be realized until customer contracts allow, and shipments against new bids begin to take place over the next couple of quarters. All in all, I believe we're making headway and our sales team will continue to push prices hard.

Next, let's talk about flame retardant volumes and address this issue by first taking a look at the most recent book-to-bill chart which we have been updating for you each quarter. As you can see from Slide 6, we are still hovering around a 1.0 ratio and have been for the last nine months. You may recall the ratios greater than 1.0 indicate an expanding market and quite frankly, I'll feel more comfortable giving you a future outlook once this ratio is above 1 on a consistent basis. Until then, all I can say, we continue to get mixed signals from our customer base. Some are positive, some are negative. And no one seems to know for sure what to expect. We take this situation one month at a time, and for now our plants are running hard and October looks good.

Next let's talk about the effect of the West Coast dock labor action. Like many companies here in the US and exporters from Asia we have been impacted by the recent labor actions on the West Coast. Even with President Bush's move to invoke the Taft-Hartley act after a 10 day shutdown we don't expect normal operations to resume for several months. From our perspective, flame retardants are most affected and we're using all means possible to minimize disruption to our Asian customers. We hope the union and shippers can resolve their differences within the 80 day cooling-off period and to date we have successfully managed the situation with minimal negative impact on our financials. As Mark stated earlier, we we believe we can keep the total cost under one million.

Next let's talk about new business and I'd like to update you on the status of several of our activities. In the catalyst area, our new organo 10J based (indiscernible) continues to be a strong performer and our organometallic line extension into magnesium alkyls continues to go well on multiple customer fronts. In addition the new single side catalyst program has turned around considerably over the last two years and is now a profit contributor and growth area for the company. In fact, we have recently approved the large expansion to keep pace with our anticipated growth in this area over the next few years.

In the additives area, polymeradditives.com our JV with GE specialties and Cytyc remains a viable marketing channel for Albemarle. There is general agreement among the partners not to discuss specific numbers but I can tell you that our total sales in 2002 will be almost double that of 2001 and the new business generated by the JV for Albemarle also will be more than double last year. In flame retardants, we have commercialized and are shipping a new high flow version of brominated polysty rear flame retardant. This will further extend our product line and market reach into high temperature engineering thermoplastic applications.

To conclude my remarks, I once again want to end with the same message I have made in the past. Namely, in this environment, we will continue with tight controls on our business, we will stay focused on our strategies, and we will work hard to keep our customers satisfied. This has paid dividends over the last two quarters which have been wrought with uncertainties. As we were able to take full advantage of the opportunities presented to us.

Looking to the future, October is off to a good start and inventories are tight and in control. However, I anticipate we may see some downward movement in total in the fourth quarter due to several plant turnarounds in our catalyst and additives businesses which we did not experience in the third quarter. We are budgeting improved performance in 2003, expecting some assistance from the world's economies to help us meet our goals, but remain cautious until we see how this all plays out. That ends our prepared comments and now we'll take your questions.

At this time, I would like to remind everyone in order to ask a question, please press Star 1 on your telephone keypad. We'll pause for just a moment to compile the Q & A roster. Your first question comes from Frank Donnell of Adage Capital.

I'm not prepared yet. I didn't think I would be first. Got a quick question. Could you just explain a little further what's happening with the problem or the weaknesses in the ag part of the Fine Chemicals business?

Yeah. This is John Nichols. I'll take that question. Couple of things are happening at the same time. First, the Midwest/US region has experienced a drought and that drought condition as well as issues in Argentina have led to reduced demand for our intermediates which are used for herbicides for corn. In addition, we're also facing some negative impact from the EPA's phase down of Diazinon and lore span for home use in the U.S.

And is this Michael's last call or has he got one more?

No, I think this may be the last call but I'll be around, Frank, we'll still talk.

I'd like to thank you, Michael.

Thank you, Frank.

Okay -- okay, that's it.

Thanks, Frank.

Your next question comes from Robert Court of Goldman Sachs.

Thank you. I'd echo those comments.

Thanks, Bob.

A couple of questions. First, I thought I saw in the press release that you endorsed my two standard deviation optimistic expectation for this year of $1.71?

Yeah. We said that we felt that that range out there was certainly within reason, Bob.

Okay. I appreciate that as your swan song. [ Laughter ] Also, I'm curious relative to what you said, palm, about the great free cash flow, and mark you talked about -- or Paul, you talked about looking at other businesses, can you find assets out there that you will know anywhere nearly as well as you know your own when you can buy your own stock at roughly 6 1/2 times cash flow and most of the acquisitions I would assume you are looking at are going to cost your more than that? Does it make sense to pursue that strategy?

Bob, very good question. And one that we do debate internally. If I could just reinforce that we think we have the cash flow to look at both sets of opportunities, if I can say that we do pay a very nice devidends. We think the opportunities are out there where we can possibly buy in some of our stock and certainly we think in order to grow this business for the shareholders, we do want to look at, you know, bolt-on acquisitions where we do not properties and that they fit in with our strategy and that we can create value greater than a stock buy-back. And we are pursuing and evaluating all these options on a regular basis.

let me ask it -- I appreciate that a little bit differently as well which is I sort of admire the portfolio you guys have. I think a lot of the assets that might be available are marginal relative to your own portfolio. So when you look at -- pick on the additives world where there's plenty of struggling companies, do you look at acquisitions in terms of stuff that maybe you guys can manage more effectively or are you trying to find pockets of business that offer better growth and you might have to pay up to take?

Bob, this is Mark. You really hit the nail on the head. I think we have to -- when go to those analysis, what we do is we look at -- at opportunities simply through management and that's, you know, the kind of cost reduction in classics synergies you get through acquisitions but frankly it takes a lot more than that to justify going out today and purchasing a reasonable property. So we have to have a clear view of how we can bring new opportunities to bear -- you know, with Martinsburg, we had told a lot of folks that combining halogen and non-halogen technologies together you could see some advantages and we have certainly seen those so those kind of thoughts we have for many businesses and we continue to look for a way to acquire those and when you see us make an acquisition, it's going to be to address hopefully both of those points that you have raised, both the synergies with existing businesses we have and building to leverage that up with new products and new opportunities.

Great. Let me ask one more and I'll get back in queue. Do you have any sense of what the inventory levels look like at your customer base? Because I know earlier -- and I mean across the product lines. But I know specifically in flame retardants there had been some caution that maybe your customers were building inventory.

Bob, this is John. In the flame retardant area in particular, to be honest, we get mixed signals. I have talked with customers that say that they have had some inventory build and have actually rolled some orders. On the other hand, I have talked with customers that say that they are moving up shipments and want us to ship as fast as we can. So it's really a mixed bag out there.

Bob that gives you -- that's one of the reasons we have so much uncertainty about the future. We don't know -- we just can't quite understand what's going on.

How about over in the Naproxen area with the inventory situation there?

In Naproxen, we have experienced quite strong sales growth in that product. It's from a relatively small base for us. In ibuprofen we talked about concern over customer inventories being high in the second quarter but we feel quite strongly that those have worked their way through particularly as evidenced by strong sales that we have had in ibuprofen in September continuing into October.

Great, thank you.

Your next question comes from Ray Kramer of First Analysis.

Hey, guys. Congratulations on a pretty solid quarter. A quick housekeeping question here. Any geographic breakdown of sales, maybe effects from the dock workers strike or anything else? That changed anything this quarter?

No, I don't think so. We haven't really seen anything like that this quarter, Ray. I think one of the concerns would be that that next quarter depending on how this things stabilizes, it could affect some of our sales to Asia but we are trying to take actions going through East Coast and through Gulf Coast to try to cover that. So at this point, we feel we are going to be able to probably get out of that unless this thing really extends farther.

Okay. And in terms of guidance, I just did some quick math. Consensus is 165. If I add up the three quarters that leaves me with 39 cents. I assume that -- are you guiding specifically to the fourth quarter estimate of 44 or -- I was a little confused.

We're guiding for the -- we are providing information relative to the total year number.

Right.

And the uncertainty out there as Mike mentioned with the -- dock situation, we have about -- I'm going to give a number here that's order of magnitude right about $7 million of product tied up in that and, you know, depending on how that sorts out that could hit us with a little bit. We also have as John mentioned a number of of outages with key customers and they are scheduled to restart this year, depending if one or two of those slides into the next year, that could have an impact. So we think the total year number is appropriate.

Okay. That's it. Thanks, guys.

Thanks, Ray.

Your next question comes from Mark Gulley of Banc of America Securities.

Good morning, guys. Good afternoon, actually. Michael, congratulations on your retirement. Best wishes to you.

Thank you, Mark.

The question is, number one, from time to time, the greens in Europe will, you know, will come out against housing and flame retardants. You guys did a nice job and I think more in broadening your product lines beyond just halogens. Any kind of an update on what the Greens are up to in the opposition of BFR's in Europe and for that matter maybe even globally?

Mark, this is John. I don't think there's any new news in this area. The Greens continue to put on a strong front in Europe. They are -- there continue to be, you know, we continue to fight what we call a pro-active defense here where we try to bringing science to the emotion. At the end of the day, it's usually a mix of that that plays out. We continue to work with institutions such as the state fire marshals association here in the United States to make sure that people understand the benefits of flame retardants. And what they do for society, which is protect property and save lives. So my view is as we go forward from here, pressure from the Greens will decrease -- won't increase. If anything it will probably increase. And we continue to fight those battles and try to do the right things.

Okay. You've been very cautious about the fourth quarter in terms of volumes and given the things you talked about, but wouldn't one positive influence be customers trying to prebuy in front of what they might think would be successful price increases? Could that also factor into volume in the fourth quarter?

Mark, this is Mark Rohr. I think the biggest part of our caution is reflecting back on what happened at the end of 2000 when folks realized it was going to be a bad recall year. You recall everyone pulled back very dramatically. So we just have a little bit of anxiety with that. There are some good items out there. Volumes are still strong today. The global economy is still chugging along. So perhaps we are being a bit too cautious but I think given the uncertainty that's out there and given the dock strike and our lockout ripple effects of that and these outages, we think it's prudent to reflect the current year end numbers probably -- our consensus estimate is probably the right range for us.

My third question had to do with year 2000. That was your prior peak. That was -- you did earnings per share in excess of $2 like a lot of companies, given the recession last year, 2001, managed to dig yourself a big hole pretty much in polymer chemicals. Mark, any view as to when you can get back to the prior peak? Have you thought about that much?

I think we need a -- we need a strong period of growth. So for that to happen next year, we really need to see the growth continue as we have had the last couple of quarters. I frankly don't think that's going to complete I think the economy is going to stutter-step a little bit. I really believe you are talking to see numbers that are materially higher than that. You are talking about the following year. 2004.

Okay.

Thanks, Mark.

Your next question is from Karen Gilsenan of Merrill Lynch.

I think she means me.

Go ahead, Karen.

First, a quick question. Your other income which you know I recognize bounces around a bit was a big negative in the quarter. Any comment on that?

Karen, as I said, it was a $1.5 million pre-tax charge. We had a very small financial investment in a private equity firm that was somewhat related to some of our technology. We decided to write that down in a quarter. And we also had a -- we had a minority share in a joint venture operating over in Asia and we just felt it prudent to mark down some of the equity income that we have taken from that joint venture. So it's really two very minor items. But, you know, we wanted to err on the side of conservatism.

And kind of related to that, one of your polymer additives dot-com partners Cytyc wrote down their investment in that to zero. I'm not aware that you have done that have you? Or do you have any plans to do so?

Again, we don't have any plans to did so. We see continued value from polymeradditives.com within Albemarle. As John was indicating, our volumes sold through pa.com have doubled year on year. We believe that Cytyc probably was the smallest of the partners, you know, within pa.com and I think it probably took a different view. We think that the Internet selling and bundling with GE and -- creates considerable value for us.

Okay. And then... just -- just finally, uhm, getting back to the second quarter in a row, a very, very strong volume growth in flame retardant. Do you have any sense if you're gaining share? Do you think the market is moving along that quickly?

Karen, this is John. I don't have a sense that we're gaining share. I think that it's more that the market is recovering from the position it finds itself in at the end of the Year 2000.

Okay. And the pricing year over year, John, would that be up? I mean....

Year-over-year, our pricing is down because of the decreases we saw in the beginning of the year. But with the price increase efforts as I indicated in my remarks we are starting to see on the average in bromineated flame retardant some increase now.

Okay, thank you.

Your next question comes from David Dedlinger of Deutsche Banc.

Thank you. John, can you remind us in reference what the price decline has been the last two to three years? And has the tone of your conversation changed since your last price increases? You're a little more positive in getting some increases here?

I don't have in front of me our average in brominated flame retardant over the last three years but it's down considerably. In the last year and a half average pricing brominated pricing is down 20 percent or more. And then in terms of the tone that I have and when I speak about the price increases, I guess what I detect is you feel I'm being more positive about it than I have been in the last two phone calls and I think that's probably correct.

There's been a lot of positions taken with customers and as I've said, I don't think we are getting any negative reaction from the viewpoint of is a -- are increases justified? More of what we're having to handle now is dealing with discipline in trying to implement these increases and dealing with specific customer situations and competitive situations that arise. But I'd say for the most part we are starting to see some of these in particularly as we move into the fourth quarter and see shipments on new bids begin to materialize in the fourth quarter and first quarter, we should begin to see some of this.

Thank you. Question for Mark and Paul. Can you just discuss for '03 raw materials and what you are expecting to happen in that basket?

Yeah, David. Actually, we're forecasting an increase in raw material costs next year and that's based on, you know, really what we're hearing from our suppliers who are pushing hard to get raw material prices up. Some of that is starting to roll through. But we've, you know, frankly, we're fairly well protected and insulated for the next several quarters. I don't have a number in front of me but I think the -- we would expect to reverse some of the gains we have made this year in raw material pricing if the world economy grows as it's forecasted to.

Mark, what is your chlorine purchasing -- buying strategy? How far out ahead do you contract chlorine?

What we've done is we have classically bought chlorine on an EC(phonetic) basis and about 18 months ago we switched to separating chlorine and costing which proved to be extremely valuable to us as a corporation. That situation is pretty much in place and will be in place for another year or so. We've always bought chlorine on a contractual basis with summary openers on price in there and we'll continue to do it that way.

Thank you.

Your next question comes from Richard Leader of Burnham Securities.

Hello, everybody. Good quarter.

Richard, thank you.

On new products, would you spend just a couple of minutes on any recent successes and of the many new products in the development stage, about what would one expect next year in terms of your estimated volumes would come from new products? And then, uhm, I know there's a reason for this, about would you also remind us about research and development expenses? That as a reported figure is coming down pretty rapidly in recent years, and but the research and development projects continue apace. Can you just touch on the accounting for the development of those projects?

Yeah, Richard. Let me speak to that first and I'll is ask John to talk about some of the new products out there. we're taking a very critical look, if you will, critical internally with our view of any R&D that's tied to contract services. We are not including that in our R&D, you know, FAS 2 R&D. That's not the case a few years ago. So we have adjusted those numbers and we have adjusted them dunn a fair amount. You'll see in the numbers they are fairly constant for a couple of quarters now, I think three quarters so I wouldn't expect there to be any material change in our accounting methodology from that. And that's why you're seeing that gap. We've also seen an increase in the same period of time in our sales administration costs and that's where those costs are accounted for when they don't qualify for FAS 2 by our definition of that. Let me ask John to comment on new products.

In new products, I mentioned some of these already, just to highlight them once again, maybe add a few comments. In the polymers area we have seen a real nice pickup from our new JV Stan ca, we have begun selling organotin intermediates which are converted into heat stabilizers for the PVC market. I mentioned magnesium alkyls today and a think I have mentioned those in the past in several phone calls, to be, but this is a line extension from our aluminum alkyl portfolio and is directed toward the polyolefin industry. The single (indiscernible) program that we have going on depending on what terminology you are familiar with, some people call it Metallocenes, but this is new catalyst area we have been working in for many years, last year we basically broke even on the -- on this business area after many years of putting investment into it.

In this year, we're seeing some actually significant profit contributions to our bottom line in a nice turnaround over the last two years. And as we look out, the customer interest and orders that we are getting have let us -- led us to actually expand our -- put in a project and begin expanding our facilities here in Baton Rouge to make those products.

In addition, then, in the flame retardant area, we bought I guess about two years ago or so Farrow's brominated polystyrene product along with a plant in France. We added to that one of our own brominated polystyrene products so that we have today basically two-thirds of that particular market and now we're adding and have we gun shipping under contract a third brominated polystyrene that will allow to us go after the segment of the market that's in the high temperature higher performance level that we had not been able to pursue as agress ill and we would have liked to.

And then in this whole area of higher performance particularly for these new high temperature and miniaturized applications requiring high flow, we have new products that were -- that we're introducing in the blend area in that area that will be contributing as we go forward.

Would you care to estimate approximately what kind of volume current volume comes from products that were developed over the last, say, two or three years, and then maybe prospectively what you expect to roll out next year in terms of increased volumes?

This is Michael Zobrist. Let me take a shot at that because I think if we combine both the Fine Chemicals and the polymer, we have a chart that we basically show in terms of revenue from new products and Mark referred to that approaching about $140 million this year. That was -- that chart shows about $120 million last year. About 20 million dropped off because between last year and this year and the increase really is a combination of some.

Points that John mentioned with Stanika (phonetic) being part of the new business we have and also with the application we're finding in our Fine Chemistry services, we're seeing some significant new growth and new volumes there, too that more than offset what was dropped off. So basically, we lost 20, we probably added on top of that an additional 20, so there was a net Delta, if you also of $40 million between last year and this year. And we're expecting something probably similar going into '03 where we'll be losing something similar to that 20 million but we are going to be seeing the addition of a number of new products broadly across all the areas.

To more than offset that?

To more than offset that right. And we're -- and we have actually predicted that it's going to go from the 140 to something in excess of 160 next year.

Good.

But that's a broad spread across a whole host of different new products coming out there.

Great. Thanks a lot.

Your next question comes from Eric Sale.

Capacity utilization and if you -- do that sort of thing, if you would by segment?

Eric, I'm sorry, we missed the first part of your question. Could you repeat it, please?

Yeah. Just wondering if you could characterize capacity utilization rates? And if you did, if you could do so by different segments? -- for the quarter?

Uhm, this is John Nichols. Let me start with a few comments relative to the Fine Chemicals area. A big area of Fine Chemicals is bromine and bromine derivative production. And this area is running very strong especially given good overall performance in the non-FR applications plus the strong growth in volumes in brominated flame retardants and that John talked about. In addition, in ibuprofen, our capacity utilization is running relatively high but we have recently did a small de-bottleneck that gives us some room to grow in the near term.

This is John. Let me talk a little bit from the polymer side. I'd say in flame retardants it's going to vary by product but on the average probably running 85 to 90 percent kind of rate today. In our alkylated phenol businesses, probably 95 percent-plus kind of rates. Our (indiscernible) business is in terms of the catalysts themselves is running basically full out. That's the reason for the expansion. And in the catalyst -- the base catalyst business itself, I'd say that today we're running maybe at about 80 percent rates or so.

Okay. Sounds good. Thanks.

Your next question comes from Jeff Zekauskas from J.P. Morgan.

Hi, good afternoon.

Hey, Jeff.

What percentage of operating income in polymers stems from brominated chemicals of one time or another?

I don't know if I have that.

Or what was the percentage this quarter?

We actually don't break it down that way, Jeff. You got us all kind of staring at each other. Uhm... uhm... --?

Rough ballpark terms -- (overlapping speakers).

I don't know. More than half? No. No.

Has there been, uhm, can you talk about the sequential profitability in the brominated chemical area? -- and, I don't know, maybe rates of growth in sequential profitability?

Jeff, are you talking frame flame -- are you talking flame retardants or brominated products across the board?

Both, both are fine.

This is John Nichols. I'll start the Fine Chemicals side. It's been the major markets that we sell into that are not flame retardant are, uhm, merchant markets for elemental bromine itself and the oilfield market.

Right.

And these two areas have been quite stable and with small modest growth in volume over the last several quarters. -- comparing -- as well as comparing with last year.

This is John. I'll talk from the polymer chemicals side. 2,000 was a great year for us so profits were, -- profits were extremely good in in a area, falling off in December as the market indicated. As we entered into 2001, actually our first quarter of last year, it was pretty strong for us but then we really started to fall off a cliff and sequentially second through fourth quarter of the year 2001 brominated flame retardant profits dipped significantly which you then saw reflected in our total polymer chemicals results. That started to pick up some in the first quarter of this year but still, uhm, not as strong as we have seen back before the dip took place. And then as we entered the second and third quarter, the pickup was stronger than in the first quarter.

Jeff, just to close that with one comment. If you look at -- I'm not going to give you the exact numbers but if you look at the trough that occurred in 2001, we were probably down in terms of bromine production 30 percent. -- our capacity in Arkansas. And --

Okay. Thank you very much.

Your next question comes from Mike Beale of Davenport.

Good afternoon. The bromine plant in Jordan, what sort of earnings impact do you expect from the startup this year and will this be a contributor next year, do you think?

Yeah, Mike. We're going to be starting that plant up in the next, you know, four, five, six months if you look at the sequential products we are bringing online this won't be a contributor in a material way probably for I'm going to say two years and I think -- I don't have the number, next year it probably is going to drag us down a few million bucks perhaps but just as we get through the startup and commissioning phase, the real the -- real value that unit brings to us is when you fast forward three, four and five years, we are going to have a world scale bromine facility producing the lowest cost bromine in the world. And so we have a longer-term view on that. I guess you guys have the same.

Not necessarily. [ Laughter ] In a Naproxen was going to be a big product for us it seems like three or four years ago and you made mention of some better sales there. Can you give us some sort of idea of how big you think this can be? Is this going to be a material contributory profits in the future? Can it continue to grow? I know it's coming from a low base.

Yeah, hey, this is John Nichols. Naproxen's done relatively well compared to past periods. But I need to qualify that really, the performance is not reaching our target level of profitability yet. However, the strong volume growth recently has led to a lot of favorable improvements where -- with respect to how big this could get for us, I would not expect this product to come close to approaching the size of Ibuprofen in the medium term but it will be a significant product for us and it's one that we have good expectations of continuing to grow from its base today.

We have substantial capacity there. Is that still the case?

Yeah. We have some spare capacity in this asset. However, we've, uhm, we've had a lot of our new product investment focus on utilizing that capacity not only for they Naproxen growth but also with some new products and we're on the cusp of some good successes in that program.

Thank you. Last thing, could you remind me what your expected capital spending will be in '02 and then sort of an early look at '03? Obviously, exclusive of acquisitions.

Mike I think the total capital for '02 is going to be in the rake of $45 million. And for next year, we are going to be roughly in the same ballpark, uhm -- in '03 it may bump up a little bit more depending how fast we accelerate some additional investments over in Jordan, as well. But I think, you know, between 45 and $50 million is a good number.

Okay. In '03, that 45 to $50 million is that -- does that include Jordan?

Yes, it would.

Thank you very much.

You have a follow-up question from Frank Donnell.

I'd just like to talk about the Jordan plant again. How do we maintain the discipline in the market that you're trying to instill as we bring this plant online? In terms of pricing?

Well, I believe you look at the overall marketplace, that's out there bromine derivatives now, the growth in that market continues to be order of magnitude 2, 3 percent per year some years it's flat but that's been the average we see and we don't expect that to stop for a good period of time. The depletion rate in Arkansas for bromine reserves is about 2 percent per year and that, you know, if you look at it on a broad basis, that's half or over half of the world's capacity of bromine. So you get a pretty good drop-off in bromine production capacity in the world scale we expect Jordan to be able to fill that and that's how we maintain the discipline.

This is John Nichols. Framing up the numbers, the capacity of the bromine plant in Jordan is stated as 50,000 tons. And the overall capacity for bromine in the world is on the order of 500,000 tons. So the increment that Jordan will bring on is sizable but it's not substantially large relative to the total market. And, you know, currently given the strong recovery in brominated flame retardant, we're pretty well full up in magnolia at this point.

Okay. Thanks.

You have a follow-up question from Mark Gulley of Banc of America Securities.

Yeah, two follow ups. One was without trying to tip your hand, this is kind of for John and for Mark, as you try to become a more broadly based polymer additive supplier as you talk to your customers about what they're looking for, they're not getting from other suppliers, where do you see the product gaps that you would like to fill?

Let me start with that and, John can fill in, Mark. I think where we see the real gaps, there are plenty of products out there today. The real gap, though, is having a -- from a customer point of view, having a supplier that brings a lot of different chemistry to the table and know-how to the table because the new products that we're seeing really are operating in that gray zone between new chemistries that exist currently. So again, Albemarle will bring both bromine and our halogen and non-halogen to the table has been unbelievably strong in our wiring cable network companies as an example. So what we really look for and I'll just say is that gap in the ability for us to fill that gap and that's largely chemistry-driven so if you set back and look at our portfolio of chemistries and you look at what we have versus what we don't have you pretty clearly see the areas we'll be going after.

And Mark, what I would add to that, you know, polymer chemicals, the name of the game always has been and always will be cost performance. And so as we view cost performance, I think innovation is going to continue to be an important criteria of our success and any company's success in polymer additives in general. And I've used the example with you before that in the brominated flame retardant area, for example, that 50 percent of our sales are in what we term proprietary products and I think that's played a large role in our success with our customers in terms of both our sales, our profitability, but also our dedication to the -- to that particular business. So as we go forward, what I'm looking for are things that can help us improve our ability to innovate that can help with cost performance concerns or things that our customers may be looking at. Today what really takes the priority and seems to jump off the page is a trend toward high temperature kind of applications and being able to use these additives and additive packages in more and more stringent requirement environments than they are used in today.

Okay. That's helpful. And then lastly, I was going to ask a question about Cap Ex. As recently as many 1999 or so you were spending maybe 10 percent of sales on Cap Ex and what you said today says you are going to be like 4 1/2, 45 against a [INAUDIBLE] sales. Can you keep Cap Ex below 5 percent of sales for a while or just a point where in order to grow, you need to bump that up?

I think if you look at our capital spending if you going if you go back to the last couple of years and what we're looking forward to in '03 we're spend building $25 million a year on sustaining capital, maintenance, environmental, and all the monies needed to maintain your plants. And then there's roughly another 20, 25 million or more to expand the existing capabilities for -- in product line extensions, de-bottlenecking and so forth. That will probably continue. We don't foresee any immediate needs or near-term needs for major expansions of the facilities. Certainly, if the opportunity arises we'll certainly put the capital into the business.

We're blessed, Mark, with having good assets that we put into place. We don't have a large number of assets. So we're able to look at those assets and modify them and incrementally expand them and keep our Cap Ex low. So I would anticipate this kind of level short of some major opportunity that comes up and right now, you know, that's just not on the horizon. Paul, did you want to mention Jordan?

Just one comment on the Jordan capital. It is not included in that Cap Ex numbers that we mentioned a minute ago.

All right. Okay. Thanks again.

Sure.

You have a follow-up question from Robert Court of Goldman Sachs.

Thanks. Couple other issues. You mentioned there might be some raw material pressure. I was surprised you didn't highlight phenol. Did you guys have contract protection from what's going on in that market currently?

Yes. [ Laughter ]

That's a brief and appropriate answer.

But, you know, it's one of the ones when you look out, that's short term, Bob. And so it will all catch up with us... you know, going forward.

How about, uhm, an uncharacteristically positive comment about Zeolite? Can you give us a little update on what's changed there?

Uncharacteristically -- why would I do that? [ Laughter ]

To jinx yourself!.

Zeolites has been a real interesting story. You know, really that Zeolite business has been going away. We continue to implement cost reduction initiatives in a plant which we have actually managed to call out of a negative position and make a little bit of money on the contract that's up for renewal has yet to be resolved. So we are, uhm, we're still proud of that business but we don't really hold much hope for it to have a future with us.

Okay and can you, uhm, talk a little bit about your reluctance AT&T to share your tetrabrom forecasting model I guess because it was wildly conservative? What does it tell us about next year? [ Laughter ] [ reluctance ]

This is John. I guess that because of all the uneasiness we all have as to what's going to happen with the world conditions, I'm just reluctant to do that right now.

We'll give you the historical perspective, Bob, next quarter when we, you know, redo it so it's more an -- accurate.

Is there any reflection on Zobrist retirement, the comment about SG&A being lower going forward? [ Laughter ]

There is a direct correlation, Bob.

Thanks.

You have a follow-up question from Eric Sparrow.

You have actually answered the question. Thank you.

At this time, there are no further questions.

Okay, then. Well, thank you very much. I want to thank all those that have been in on this call. I just want to say that he I have enjoyed the experiences that I have had and relationships and, uhm, I'll have my phone lines open so please call. And happy to talk to you some more. Thanks.

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