雅保公司 (ALB) 2003 Q2 法說會逐字稿

Good afternoon. My name is Wes and I will be your conference facilitator today. At this time I would like to welcome everyone to the Albemarle second quarter earnings release 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 1 on your telephone key pad. If you would like to withdraw your question press the pound key. Thank you. Mr. Whitlow, you may begin your conference.

Yes, thank you Wes. This is Michael Whitlow, I'm Vice President of Investor Relations for Albemarle Corporation, your host. Our presenters today are Mark Rohr, President and CEO, Paul Rocheleau, senior vice president and Chief Financial Officer and John Steitz, Vice President of Business Operations. Welcome to Albemarle's section quarter 2003 earnings conference call. We have extensive background information on our Website, www.albemarle.com, and I welcome your calls or e-mails with any general or specific questions following this call. To begin the call today we'll hear from Mark Rohr followed by John Steitz and Paul Rocheleau. As you can appreciate we'll be making some forward-looking statements during the conference call. The caution sited on our Website and earnings release indicate that there are many factors that could cause actual results to differ from current expectations. Our forward-looking statements caution note some specific raw material and energy situations I would call to your attention. Please heed these cautions and feel free to call me with any questions regarding our business. The information on volume, price and currency effects on the company and each segment is included in charts on our Website, in a presentation that accompanies the comments we're making this afternoon. If you have not already done so you may visit Albemarle's Website under investor information, teleconference analysts, I'll be happy to answer any questions in the Q&A or you can contact me after the call. Mark, I'll turn it over to you.

Appreciate you joining us on the second quarter conference call and those who are participating via the webcast. We are pleased to announce earnings of 38 cents per share on diluted basis for second quarter of 2003 versus 40 cents the second quarter of last year. The quarterly earnings benefit from the reversal of income taxes reserves following settlements from the Internal Revenue Service in the US, gave us another 16 cents of earnings in the quarter to make our total earnings 54 cents.

Considering the favorable volumes we experienced the second quarter of 2002 and the continuing head winds of this year I feel pretty good about this level of earnings and very good of the effort of our team to continue driving shareholder value; all in all a strong performance in light of the economic circumstances the industry faces. We have been focusing a great deal of attention on improving margins in our business. These efforts along with our continuing activities to reduce manufacturing overhead cost have helped balance the strong negatives brought about by economic circumstances. I'll spend some time with you going over the is analysis of gross margin at the corporate and segment levels before turning over the microphone to John Steitz and Paul Rocheleau for more details on business and financial performance.

Starting with raw materials, our performance this quarter was hit by additional cost of about 3.1 million dollars, or 5 cents per share led by about 1.5 million in additional coring costs versus the second quarter of last year. Energy costs were another 1.4 million negative versus last year's quarter or two cents per share and when added to raw materials amounted to 166 basis point decrease in gross margin or 7 cents per share. These two factors alone cover the 133 basis point decline in gross margin we see this quarter versus last year. The positive impact of our European operations and our export position showed up in the foreign exchange improvement in revenue over last year's second quarter, that brought 179 basis point margin improvement. This was aided by the strong performance of our mineral based business as we continue to see growth in demand for polyolefin wiring cable applications.

As you might expect, the comparison of the second quarter of 2003 with the first quarter of 2003 for the company shows less impact of the combined raw material and energy cost and resulting change in margin in its comparison is also negligible. In fine chemicals gross margin decreased by 186 basis points resulting in an operating profit decline of approximately 1.5 million year to year or about 11%. This performance was for the most part caused by changes in product mix of approximately 174 basis points, due to shortfalls in seasonal agricultural intermediates and some performance chemical volumes. Raw materials and energy year to year were negative 94 basis points. On the positive side we had favorable manufacturing cost and foreign exchange to partially offset these head winds. I'll speak in a minute about our initiatives in fine chemicals which remain very exciting to us.

I'd like to commend our polymer team which had to overcome 3.3 million in raw material and energy cost in the second quarter of 2003 versus the second quarter of 2002, or 223 basis points of margin. Favorable volume impacts of 149 basis points again driven by mineral base flame retardants and favorable FX of about 125 basis points helped hold a proper margin slide of 44 basis points year to year. Operating profit was up 800,000 or 4.6%. In the second quarter of 2003 versus the first quarter of 2003 the polymer chemical segment was positive 119 base points. This improvement came from the volume of product mix, curatives, antioxidants, and other products contributing as John will describe in a few minutes.

As reported first quarter of this year I indicated we had initiated cost savings programs in manufacturing to further drop cost improvements and additional efforts in addressing selling, general, and administrative expenses goal to getting those 10 to 11% SG&A expense as a percentage of sales. In the second quarter we were at 12.6% of slight increase sequentially and a decrease of about 100 basis points over last year's number. In an effort to continue our progress in this area we have made several changes in the organization, to form an alliance services group within Albemarle headed by Vice President Mary Kay Devillier. Mary Kay and her team will address the opportunities to improve transactional efficiencies and reduce costs across a whole range of services within the company. Similar programs under way in Europe. We'll hear more about these and other cost initiatives in the coming quarters. These efforts are obviously critical given the poor state of our global economy.

I'd also like to share some recent figures with you that emphasize what we measure internally regarding our effort in new product development. First our commitment to generate sales from products introduced within the last five years. At over 130 million dollars last year we were well situated to reach our goal of 15% of sales coming from new products this year which had totaled roughly $160 million. As I've said in our previous presentations we also have an active and expanding pipeline in our fine chemicals segments. For the past four months we are averaging 70 inquiries per month up from 45 per month reported earlier in the year. In June we converted 10 new projects and businesses, some of which you'll hear about in a few minutes. In polymer chemicals we acquired another important flamatory technology to add to our portfolio. The acquisition of Rhodia's phosphorus flame retardants, primarily used in polyurethane applications, gives us a well-known brand and places us firmly at the top of the list in three major technologies accounting for more than 80% of the flame retardant applications today. We look forward to developing the level of cooperation with our new colleagues that we have been able to form who brought us new ways to expand our flame retardant business. In combination with our bromium and middle-based leadership, we believe we will be the largest flame retardant producer in the world with a breadth of technology needed and the focus on new product development necessary to fuel our strategy in becoming the source of all our customers' flame retardant needs.

In summary, the fine chemical segment continues to show an ability to bring in new products and develop the niches of profitable products that will carry us forward in bromine base chemicals, pharmaceuticals, agricultural intermediates and other areas. Our more mature products in a few areas are experiencing some competitive attacks and typical market cycles related to the end markets and the economy in general is weak, however we will be able to overcome these head winds and slowly grow the margins in this market segment. The polymer chemical segment is experiencing the positive impact of our acquisitions, particularly the mineral base flame retardant acquisition, coupled with some strength in curatives and other smaller products. Our new products are being well received in the market and as the economy turns positive we will expect our margin improvement efforts will bear fruit. For additional details on these two segments, I'll turn the microphone over to John Steitz.

Thank you Mark. Similar to our last quarter call, fine chemicals business segment continues to manage through some substantial head winds through the second quarter of 2003. A lot of hard work by the team has only been able to partially offset adverse near term profit pressures. The business delivered a 7% year on sales growth, reduced factory cost spending, and increased new product success rate to name a few of the key high points. But raw material and energy increases and select issues in several of our more mature products carried more weight leading to overall profits declines. For the second quarter, the business delivered $11.8 million in operating profit. This was a $1.5 million decline year on year and a 1.6 million decline sequentially.

Let me get into more detail now comparing the quarter's performance with the second quarter of last year. Raw material and energy increases methyl bromide and net losses in our Jordan bromine joint venture, combine to create approximately $3.5 million in reduced profit for fine chemicals in the second quarter compared with last year. We offset the majority of these substantial head winds through good execution and success elsewhere across the division. First let me explain the year on year head winds for fine chemicals. Raw materials and energy continued to be the major issue. 1.6 million dollars unfavorable for fine chemicals. Three major purchases, chlorine, natural gas and linear alpha olefins, accounted for almost $2 million of fine chemical’s profit decline. Some ground was made-up elsewhere through good purchasing but nowhere near enough to offset major pressures from these unfavorable commodities.

Methyl bromide was also predictably unfavorable through last year. It is being phased down this year through the Montreal protocol and contributed about $1 million in unfair profit variances year on year. And finally Albemarle's portion of net losses in the Jordan-bromine company joint venture were just under a million dollars. A good news is that these losses came in lower than planned and expected. As such despite the quarter's losses, we are quite pleased with the performance of the joint venture. The Jordan facilities ran both at higher operating rates as well as at lower costs than budgeted in the quarter. Further the joint venture investment is delivering its intended strategic objectives. It's opening up markets for growth unreachable from Arkansas, as well as helping to drive a global consolidation of bromine assets that that is favoring Albemarle. Beyond those issue, the fine chemical business performance was favorable with strength driving from our newer products partially offset with select weakness tide to mature products. A strong profit growth performance was posted by our fine chemistry services and intermediates business this quarter. Despite an overall tough competitive environment in the contract manufacturing market, we posted gains in several key ag-intermediates, our bromine fine chemicals portfolio generally, landed significant pharmaceutical contract research revenues with several leading pharmaceutical customers. Also, our bromine based BioCide products, marked strong gains, albeit from a small base, reinforcing our view that we've hit on growing profitable niches with these recently developed BioCide products.

Finally, good cost performance contributed favorably for the quarter particularly ibuprofen and Naproxin. These gains were partially offset by declines in lower year on year sales volumes and our detergent builder and paper sizing products. Some share loss to a new U.S. competitor appears to be the cause in builders. In sizes significant customer inventory reductions explain this decline. Now let me add a few comments regarding fine chemicals performance versus first quarter of '03. A majority of the sequential profit decline in fine chemicals is attributed to normal seasonal patterns in our ag-product portfolio. Raw material and energy cost increases added slightly to declines versus first quarter. Other areas were mixed and largely wash-out. The customer inventory correction in our paper sizing product already mentioned also drove a sequential issue for us in the quarter. In addition, ibuprofen volumes were flat while Naproxen volumes declined due to inventory correction. On the positive side we delivered across the board gains in our bromine based products including those for oil fields and Bio-Cides, and our potassium and aluminum specialty products also posted strong gains versus last quarter.

As we look forward into the rest of the year, we expect that many of the profit pressures we've experienced in fine chemicals in the first half will continue to some extent in the second half. Raw materials and energy cost will continue to eat into profits comparing with last year and select issues with some of our older products will continue to impact us as well. We remain vigilant and continuing to minimize the impact of any such issues through our disciplined operational processes. Offsetting this we continue to be quite encouraged by our ongoing progress in several key areas within the fine chemicals business. Our bromine strategy highlighted by our Jordan investment has delivered in the second quarter and is expected to continue to deliver profitable growth for us going forward. Our fine chemistry services and intermediates have impressed the global pharm and ag majors and that has translated into profitable growth in the current tough market this year. Even more encouraging is the exciting growth in our new product development pipeline. We have increased the growth by over 50% and increased the quotes turned into revenues to our highest level ever in June. We look forward to the quarter in the not too distant future where this is coupled with the inevitable subsiding head winds

Year on year Palmer Chemicals second quarter revenue was up 5% and operating income was up 4.6%, results were mixed. Brominated flame retardant were down, reflecting slow electronic markets and the impact of BP shut down of their alcohol facility at our Pasadena site. However these down sides were more than offset by volume growth in mineral and phosphorus flame retardants, and the addition of lube and fuel anti-oxidant to our product portfolio. Also providing encouragement for us in the second quarter was the performance of several of our catalyst and additives products, within the polymer chemical segment. Curatives which are finding markets beyond traditional automotive applications and coatings and other construction areas had a strong quarter. Finally our supported catalyst grew nicely over last year's quarter giving us the opportunity we seek to further develop Albemarle capabilities as a full line supplier of catalysts to poliofilen producers.

We are especially pleased with these results recognizing the tough comparison with second quarter of '02, the lingering impact of the Iraq war, SARS on world markets and the continued rise in raw material and utility costs. With all these head winds overall gross margin for the segment is about flat with last year's second quarter. On a sequential basis Palmer chemicals revenue is up 2% but operating income was up almost 15%. With some minor variations, product volumes were similar to those seen in the first quarter but strong cost control efforts by our plants helped drive profits up. It is worth noting for the first half of 2003 Palmer Chemicals revenue was up 12%, operating income was up almost 18%. Again these results we are particularly proud of, and if the second half holds up, puts Palmer Chemicals in position to achieve a good year on year comparison.

The first half of the year pretty much played out similar to the scenario we have portrayed to you in the last several investor calls. As we look forward our customers generally expect some improvement in the third quarter as stocking begins for the Christmas season. However the fourth quarter remains a guess and will largely depend on how the U.S. and Asian economies rebound. For now, July orders are moderate, customers are indicating a lack of inventory build in the system and we remain hopeful that the sluggishness we had to fight through in the second quarter, will start to abate as economies improve. With our breadth of support to the industry we people especially well positioned to compete and intent to defend our markets. New products are on track in Palmer chemicals to achieve targeted 15% of sales. Our inventories are under control. We continue to solidify customer relationships through new contractual relations and our string of acquisitions continues to perform at or above expectations. With that I'll now turn it over to Paul Rocheleau.

Thanks John. There are a number of clarifying comments I want to walk you through this afternoon. Let me look at revenue and the P&L. As Mark mentioned, the favorable foreign exchange and acquisition provided most of our top line growth of 6.6%. The U.S. dollar was 19% weaker versus the euro and 7% weaker versus the Yen in this quarter versus the same quarter last year. This created a significant tail wind since over 30% of our revenue is based in Europe and we're exporting about half of our U.S. production. We also benefited from the Antioxidant acquisition completed at the end of January which contributed over $5 million to revenue during the quarter. After factoring in these adjustments, the balance of the business was slightly negative, again, further evidence of the difficult environment.

As you move down the P&L, our underlying earnings before tax adjustments were 16 million dollars or 900,000 lower than last year's second quarter. Our gross profit margin of 21.7% this quarter is 133 basis points lower than last year's quarter. Mark took you through the impact of raw materials and our margins were also affected by reduced pension income retiree medical cost and hire insurance cost which created a 200 million head wind versus 2002. You also will notice a $6.6 million benefit or 16 cents per diluted share, associated with the revaluation of the federal tax accrual. We have received notice from the IRS that they have now closed out the review of tax years 1998 and 1999. Unlike the previous tax adjustments this is a change in a book accrual, not a cash refund. Over the past five quarters, we have closed out the IRS reviews from '94 through '99, and have announced over $17 million of tax adjustments plus interest. Over this period of time, Albemarle's effective tax rate was 33.3%. Since a spin-off in 1994 the company has been conservative in reporting tax charges due to the complexity of the issues including spin-off asset values, the Olefin sale, brine field depreciation allowances and other matters. Based on our current knowledge and effective tax planning we should be able to maintain an effective tax rate of approximately 30%.

On reviewing our cash flow statement you'll note that Albemarle continues to generate large cash flows. In the second quarter, our net debt position was reduced by 17.5 million to 125 million dollars. Even with the $10 million increase in inventories. We paid dividends of $6 million and continue with our normal capital spending program of about 45 million on an annualized basis. This includes continued investment in Jordan. As previously announced, we will close on our acquisition of Rhodia's polyurethane flame retardant business hopefully within days. As a result of the acquisition, our net debt is expected to increase to approximately $200 million at the end of the third quarter. The existing $375 million syndicated loan agreement will provide the funding. This acquisition will increase our sales on an annual basis by approximately $65 million. After the one-time transaction cost flow through the P&L the business is projected to be accretive to earnings and cash flow. We also expect the new business to be accretive to our EBITDA margins.

When we secured the revolving debt facility last year we indicated we may elect to pursue additional lines of finance depending upon the opportunities available to the company. We believe the time is right to consider bond issue or looking at instruments such as cash pay convertibles. The proceeds will be used to re-purchase shares, support acquisition or replace some of our floating debt.

As a final note let me repeat our priorities for use using available cash flow. First we want to invest to profitably grow the business through internal development and acquisition, second continue to pay dividends and third, review the value of our equity and make selected repurchases when we believe the opportunities are right. Let me now turn it back to Michael for the Q&A session.

Thanks Paul. Wes, we are ready for questions from our shareholders media and analyst listeners. I will remind you that our conference will be available on a delayed tape basis on our Website for those who might leave us at this time. Thank you for any questions you might have. Ready.

In order to ask a question please press star then the number 1 on your telephone key pad. We'll pause for a moment to compile the Q&A roster. Your first question comes from Allan Cohen of First Analysis.

One, congratulations in carrying through in a tough environment. With the increase in infits cost, I see lots of announcements of yours, Great Lakes and others selling price increases. What if anything was realized on a year-over-year basis?

Hi, Alan, thank you for the nice comment. We appreciate it. It is a tough environment. In brominated flame retardants, which everyone really tends to focus on, we have seen year on year some nice progress on the pricing front. We are getting aided with FX, we are especially aided by some mix effects, but we have gotten some true price increases on year on year. We have experienced what I would say is a small amount of erosion recently and needless to say the best environment to raise prices in is when volumes are growing. And this last quarter we did see a decline in volumes. So we're really trying to come up with some ways right now to continue the upward price momentum that we had really gained over the last four to five months and try to figure out ways to implement that in the marketplace.

What about if I look at the total top-line, what component of that growth was price, approximately?

Allan we'll have some of that for you in a minute. I understand we're having problems with our Website posting that data. We'll get it up on the Website and you'll get some detail on that.

If I may just one other question about your bromine strategy. We have been taking a closer look at that and if you look at over a number of years it is looking to us at least with respect to bromine products, that you become dominant and unbeatable. Is that accurate?

I don't think I'd just those words to describe it. There is not going to be a radical or very rapid change in the share mix if you will in bromine, something you're going to see over night. If you took a long term view of it, we invested in Jordan because we believe to be a major player you've got to be at that low-cost source. We are there and the Dead Sea is there on the other side. Slowly you'll see the production out of Arkansas decline through of the natural decline rate that occurs in that strata of 2% per year. So it's our hope that we can continue to grow that. We think that we're today, we believe we're the second largest producer but we're in effect neck and neck with our friends in the U.S. And in over some time as we expand Jordan we expect to move from that second place position.

Appreciate your conservativism. Thank you very much.

Thank you Allen.

Next question comes from David Begleiter from Deutsche Banc.

Thank you. In regards to your comments on the bromine base, FR in terms of some price erosion, can you discuss when that occurred and how that's occurring and how much of the price increases had you recaptured up until now? And what were the actual volume declines we can did see in the bromine based FRs and what are you seeing from your customers ahead of the potential holiday build season in Asia? Thank you.

Wow, David, that's a mouthful of questions all very good ones. Brominated flame retardants year on year, if you look at our price year on year, in the total brominated flame retardant portfolio, it’s up about 9%. Now, part of that is foreign exchange, and a big part of that is, we were selling, some of our higher priced higher value-added products so we got positive mix effect so overall we were working hard to get prices and I think we're successful in the three to 4% range and we wanted to continue to see that going into the future. Recently we are seeing, we are talking an order of magnitude pennies here and there. I think it is a general nervousness because of the volume declines we've seen. So to answer your volume numbers, year on year, last year, second quarter of '02 was an extremely strong year. You know, I think it was a ream anomaly there. But year on year we've seen volumes decline. Tetrobrome is of the order magnitude to 15%, Decobrome order magnitude 25 to 30%. So we think there is a big inventory we think due to the SARS issue in Asia, buildup of televisions there, big buildup of televisions which dramatically impacted the Decobrome business. Everything else, I think as we mentioned in our conference call, the mineral flame retardants did quite well and our phosphorus flame retardants did fairly well also volume-wise.

So going forward, a lot of our customers are very nervous, just really don't know how to predict things. So there's a lot of volatility in the market right now. July has started out moderate to strong. I can't say strong and it's not weak either but it's just kind of moderate. But we're hearing a lot of nervousness out there about our customers' businesses. So it's really hard for me to predict. It's really tough out there.

That's excellent. Mark, just on methyl bromide, can you walk us through the time line over the next two to three years with that product line, and how much potential erosion are we looking at over the next two years in methyl bromide?

Profit erosion this year David, we have kind of bounced around a number, we shared it publicly, about 5 cents per share of earnings this year. Of course there would be none versus that the following year, and then of course it phases out in 2005. I don't have the number on the tip of my tongue, but let us develop that and get it out on the web page to you guys without going away. I do want to note that there is a lot of activity on the part of farmers in terms of petitioning U.S. Congress and the EPA to continue the use of methyl bromide, many of us are actively engaged in that in this industry and we're fairly optimistic that this product is going to continue in the critical use exemption, somewhere in the 25% level we are today and 50% level we were prior to this period of time. I think 5 cent decline year to year I would expect that to hold and maybe recover some of that going forward if we can get something through Congress.

Thank you.

You're welcome.

Next question comes from Bob Koort of Goldman Sachs.

Thanks. I was wondering if you could help us on the progress of profits into the second half. I think you had cautioned that a lot of the problems that hung around in the first half sustained themselves. So can you just give us some sort of progression you would expect going forward and then Paul maybe you could go over once again as a neater reason to do a debtor conversion issue given the free cash flow.

Thanks Bob. Let me take a stab at that. You know we've not -- we stay out of the business of giving hard guidance Bob, but what I would say is that you know, business has been essentially flat for quite a few quarters now. And we've had some ups and downs and some good volume quarters in there. And I don't see anything today that's going to really change that. We have some -- a few positive occurrences in some areas, but you'll also see negative in other areas. And I can't speak to a single market segment out there that I can say is really on fire today. So in general terms I think when you look at your model and everybody looks at their model they should anticipate for some period of time a continuation of this kind of performance that we've been seeing. I think that goes for all of us in this industry, until we really see the economies of the U.S. and particularly China start picking up again. Let me have Paul answer the same question.

With regard to the financing as you may recall we have a three year $375 million revolver which is providing liquidity for the corporation. This is a floating rate instrument. As we look at the current credit markets, as you know, rates are not quite at the all-time lows, that was a month ago. But they are very attractive. And you know we do study, you know, our financing needs with respect to acquisitions or the potential to repurchase stock. And what we need to run the business. We have great confident in the underlying cash flows of our product lines. Let me be very clear on that. And we expect to see the continued cash flow that we have seen historically. But we may want to take advantage of you know some of the convertible markets which are very attractive and locking in some low cost fixed rates, either debts or -- fixed debt or convertible and we also want to take a look at any opportunities to buy back stock. Yet an argument to be made that you could change the capital structure of our corporation a little bit and actually be earnings enhancing. So there is a range of opportunities that we want to continuously assess. This is an activity that we continue to monitor.

And to the extent share repurchase becomes a reality, would it be -- would you make the first effort to reduce the family ownership as you did a year ago or would it be sort of an open market from time to time, a one-off issue, how would you perceive it?

Bob, I can't comment on the family ownership. They have their own individual judgment. Historically, it's been a combination of both if you look back last two or three years.

Okay, thank you.

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

I was a little bit surprised about the comment you made about softness in the ag-intermediates business. If memory serves me correctly there has been a lot of nice rains in the Midwest, lot of nice weeds which would help drive the demand for herbicides. Can you tell me if my premise is correct and if it is why wouldn't you benefit from that?

This is John Steitz. I'll field that question. It really isn't anything inherent in the markets. This had to do with pure production scheduling of our customer. And they were really moving their production schedule around. So that's really what impacted us. And they ended up calling us about three weeks later and put the gas on, on those materials. So nothing inherent with problem with the markets.

Okay, if it's timing then, did you see the benefit of the extra weeds in the first quarter or will we see this now spill over to the third quarter?

We think it could -- well, we're hoping it would be a slight spillover into the third quarter, and primarily the majority of our sweet spot would occur in the third quarter as that ramp up occurs, if their production schedule continues to hold.

That’s right. This is Mark. This is one watch out because it is awful easy if they have got some inventory left to buy not so much in the fourth quarter and slide it into the first quarter of next year.

Let me try something else in terms of the macrodevelopments here. My working theory is that a lot of your customers might have been overproducing in the first quarter because they were trying to beat anticipated increases in the hydrocarbons, but now with hydrocarbons going down everybody wants to wait to buy anything until those have stabilized in the down side and then demand can resume. Did you see that kind of pattern in your own business and if so, does that bode well for the second half?

That's a very classic pattern for commodity business K PVC and Polly olefin type business. We don't generally see that because our pricing is not so dramatic out there Mark. I don't think we saw any evidence of that. Generally folks are trying very hard to keep their inventory very very low as they get closer to the consumers who are all burned so much by what happened a couple of years ago that nobody is holding any inventory. What I see out there is fairly low inventory levels which would bode well for recovery when it starts, it just hasn't started yet.

I want to make sure I refresh my memory on your classes of plastics additive. You now serve [inaudible], Polyolefins now the newest is polyurethanes, correct?

That’s correct.

Right on.

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

Good afternoon.

Hi Jeff.

I think I'd like to start off in pharmaceutical fine chemicals area. That is excluding Naproxin and ibuprofen, how large is your business?

It's pretty large, Jeff.

Well --

That's all relative, right, Jeff?

I guess it is relative. Like can you give me the first digit?

Well, we've always thought our whole play in life sciences is in the order of magnitude of about $200 million. So about half of that being actives and the other half being intermediates.

100 in the actives. In the actives what sort of percentage goes to generic companies and what percentage goes to ethical pharmaceutical companies?

Of the actives?

Of the actives.

It's probably about 50-50. Ibuprofen is classically 50-50. Some of our anesthetic is more generic, actually today. In our view, but the market is about 40% generic, 60% the classical ethical. So it's in that range. We're pretty well distributed between ethical and generic.

Okay. So and in the --

New development I think it's particularly in Naproxen are in new combinations which would require a total NDA, it’s looking at using the pain relieving power with some long acting antihistamines, things like that. And there is one new migraine drug that is a combination with Naproxin for example.

Are combinations with Naproxin really important with your active pharmaceutical effort?

It's important, it's important. The building up of a you know new customer base and continuing to rejuvenate our customer base is important to us too so we're working on that very hard.

Okay. I guess just one other, maybe too broad a question. Like in rough terms, your sales are up about 25 million for the quarter. And your gross profit was flat, in absolute terms. So like what happened to the $25 million? Or how do you analyze your gross profit or how do you analyze your incremental margins?

Jeff, let me go ahead and give you a little feedback on that.

Sure.

First of all there's the FX impact when you strip out -- when you go through quarter to quarter comparisons. But we go through a classic variance analysis which you will see on the Website, looking at FX, price, volume, mix and cost. I think the way to characterize what's happened in the last quarter just in a general sense we have had a favorable FX benefit, we have done a good job at controlling the manufacturing cost and SG&A, in what I call the local currencies or constant currencies. We have had some margin erosion due to higher raw materials which we have not been able to offset completely with price increases. And you'll see that, you know, on our website as we get that posted. We apologize for not having it up and running right now.

It's not a problem.

Raw materials are --

The raw materials have gone up faster than we've been able to pass through in prices.

Is that situation getting better or worse or staying the same?

Staying the same. I think it's staying the same right now, Jeff. It's Mark.

I guess just as a last question Mark, before you were sort of talking in a more global way and you said well you know, things are sort of flattish and they're going to remain so for a period of time. By flattish do you mean sort of with the second quarter or year over year or what did you mean by that remark?

Well, I think what I am trying to comment on, Jeff, is if you look at the last period of time that I would correlate to something similar to this was the early 1980s, you know. We were into a recession for probably six years then, the industry was, it took a very long time to get out of that. And if you look back and for those of us who lived through that there were periods where volumes ticked up, but it took a long time to build up that global bland to a level that the industry really started moving. So as I sit here and look at this from 30,000 feet, John Steitz and his group are working very hard and they're finding some good opportunities. But frankly as we find some good ones in some areas and some areas we lose a little bit. I think in general if you look back over the last year or so and you project that forward, we got about the same business climate as we had then and in some ways it's worse with energy and raw material pricing than it was. Last year we made up some of that but I don't see things changing until we see some pretty clear indications that the global economy has got some to it.

I guess the last thing, do you think your third quarter earnings will be higher than your second quarter earnings?

Jeff, I'd really rather not comment on that.

Thank thanks very much.

I would like to remind everyone, in order to ask a question, please press star and the number 1 on your telephone key pad. We'll pause for moment to compile the Q&A roster. Your next question comes from Jay Harris of Goldsmith and Harris.

Each of the two years the company has bought back a block of stock from the Gottwald family. Is this -- does this complete the cycle, or is this something we should look forward to periodically going forward?

Jay, just as a correction, you know last couple of years, it's been one instance of buying back stock from the family. There was one family member wanted to sell some stock, and that was in the year 2002, February 2002.

Okay.

Other than that we really have been conducting small open market purchases where we think an opportunity presents itself.

How do you decide how to allocate money between share buy-back and dividends?

Very simply you look at the dividend yields and the prospects of the company and how much cash we're generating and what the opportunities are to use the cash. It is a very complex set of dynamics and I don't mean to simplify it with comments. But it is a matter of looking at the -- you know prospects of the company and what the opportunities are for the available cash.

Well, now, obviously the cash that goes into dividends and the cash that goes into the share buy-back come out of the same pool of cash not needed in the business, right?

You can say that but also you have to look at our underlying debt capacity as well. And I would argue that Albemarle has considerable headway in place, and more if we wanted to do something more dramatic.

What are your unused lines after this most recently announced acquisition?

Roughly $200 million. Feel we could also increase those lines you know very quickly.

Would you use some of those lines opportunistically to buy back stock?

I'll say it's a possibility.

Okay, thank you.

Thanks Jay.

Thank you Jay.

Your next question comes from Frank Dunel of Aday's capital.

It's not a question it's a preference. I'd rather you sell straight debt than convert because converts look attractive, but by the time you through with whatever they’re gonna do with your stock before the issue to convert, it gets to be a rather expensive piece of paper I've noticed for a number of companies lately.

I think certainly the premium and the call provisions you know come into play and as you know there have been a lot of companies issuing cash pick and perks in the last couple of months.

The premium call provisions, your stock price prior to issuance gets a little hairy. That's it.

Thank you.

Next question comes from Jeff Zekauskas of J.P. Morgan.

Last year you had a relatively strong second half in operating profits in fine chemicals. And it's always difficult to know with Albemarle what's seasonal and, you know, what's picking up new business or what's core strength. You know, are you looking to have a relatively strong second half in that area this year?

Well, Jeff, John Steitz. You know, the fine chemicals, the raw materials have really impacted us in our actual bromine business, pouring impact. And the olifins have really impacted our means business and paper chemicals business. That's really handcuffed us there. We can pass through some of the increase in paper chemicals. But that poses some risks to us as well. The ag business is really a fourth quarter through first quarter business. And a lot of that is highly dependent on, you know, a couple of key major customers for us and really what their plans are in terms of inventory for the coming growing season. So we're really susceptible to their whims some if you will. And in large part we are aided fairly largely last year in the fourth quarter by methyl bromide as those credits were unwinding through the course of 2002. So with that, a lot of our success really depends on our new products and how successful we are in getting those out and continuing to grow our ibuprofen and Naproxin businesses and some of our anesthetic businesses. It will be a real challenge for us with these head winds to meaty think what we did last year in the second half.

How large was the benefit from methyl bromide in the first quarter of '02?

It -- it was a pretty substantial piece. I mean, the majority of the earnings on that product came in the fourth quarter of last year. And then there is a big fall -- I mean down to virtually zero in the first quarter. And then sequentially this year in the second quarter we made up, you know, about half of what we sold in the fourth quarter. And our view is that we're going to keep, probably keep that through the third and fourth quarter of this year. We suffered through those volume losses that are mandated by the protocol, but we’ve also increased prices that has just taken into effect and the price increase is going to help us but still year on year, I think as Mark mentioned earlier, year on year we're looking at a 5 cent per share decline due to methyl bromide.

That is really helpful. Thank you very much.

You're welcome.

Again I would like to remind everyone in order to ask a question please press star then the number 1 on your telephone key pad. At this time, I'm showing no further questions.

All right, Wes. Thank you very much, ladies and gentlemen. Appreciate your calls. We will see you next time and feel free to call us at 804-788-6116. Thank you.

That concludes the Albemarle second quarter earnings conference call. You may now disconnect.