雅保公司 (ALB) 2003 Q3 法說會逐字稿

Good afternoon. My name is Jody, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Albemarle third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Whitlow, you may begin your conference.

Thank you; good afternoon. It is Michael Whitlow, Vice President of Investor Relations and External Affairs for Albemarle. We are pleased to be with our investors and analysts again for the third-quarter conference call to detail Albemarle Corporation's performance and to provide our outlook for our business segments.

Our prisoners today are Mark Rohr, President and CEO; Paul Rocheleau, Senior Vice President and Chief Financial Officer; and John Steitz, Vice President Business Operations. We have extensive background on our website www.albemarle.com; and I welcome your calls or e-mails with any general or specific questions following this call.

If you have not already done so, you may wish to visit our site under Investor Information, Teleconferences with Financial Analysts. Again, I will be happy to answer any questions about these charts, or the Q&A that you see on the site. Or you can contact me after the call.

Our traditional tables on the net sales impact of price, volume, foreign exchange, and joint ventures and acquisitions are taking a brief hiatus, as we revise the format somewhat. I will post them to the website as soon as possible this afternoon.

First today we will hear from Mark Rohr; he will be followed by John Steitz and Paul Rocheleau. As you know, we will be making some forward-looking statements during this conference call. The cautions stated on our website and in our earnings news releases indicate that there are many factors which could cause actual results to differ from current expectations. Our forward-looking statements disclaimer notes some specific raw material and energy situations I would call to your attention. And please heed these cautions. Feel free to call me with any questions regarding our business. Mark, I will now turn it over to you.

Thanks, Michael, and thanks to all of you for joining us this afternoon on our third-quarter conference call. I am pleased to announce a record revenue this quarter of $276 million, an annualized pace of roughly $1.1 billion, driven by strong performance in Polymer Chemicals, favorable foreign exchange, and recent acquisitions. While we're pleased with the strong growth in revenue, we're disappointed that we have been less successful in translating revenue gains into profits.

Our earnings of 35 cents per share on a diluted basis for the third quarter of 2003, excluding special items, were off the pace of the Street consensus of 40 cents and last year's third quarter, where we saw 48 cents. In this quarter is a special item related to work force reductions and the true-up of certain income tax adjustments; in total amounting to about 12 cents. Paul will provide you with more details on the special charge in a minute.

Our year-to-date earnings are $1.11 per share, versus last year's $1.26 per share, a 12 percent reduction. While we're disappointed with the current economic climate, I am very positive about the efforts our team is undertaking to drive shareholder value. We remain very committed to materially reduce costs of production at all of our sites, striving for a savings of $50 million by the end of 2005. The charges showing up this quarter for the voluntary separation program are part of this initiative and will deliver about 10 million per year as we see full implementation in 2004.

In addition to the cost reduction, three areas of our growth strategy also should be mentioned. First, we have a goal to build our development product portfolio of Fine Chemicals to 100 products, including many preclinical pharmaceutical intermediates. We are well ahead of last year's pace, increasing our portfolio by 20 percent over 2002 year-end numbers. We now stand at 81 products in this pipeline, and have inquiries averaging over 70 per month.

We have a goal to generate sales from new product introduced in the last five years to reach 15 percent of total annual sales. We have increased our revenues in this area an impressive 20 percent over the same nine-month period in 2002, and we should come close to this target by year's end, prompting us to re-evaluate this objective.

We also have a goal to build greater (indiscernible) our regional sales to the second-largest offshore region behind Europe. I am very pleased that we have identified and recruited an experienced managing director of Greater China (ph). We have formed a new polyolefin catalyst venture, where plant construction is nearing completion. We formed a trading company in Shanghai free trade zone to facilitate direct sales and sourcing. And we have repackaging facilities being developed, offering new supply channels to the Chinese market. Sales in China will be up about 80 percent year-over-year if we continue at the current pace. Within the next 12 to 14 months I expect sales in China to exceed those in all other regions of Asia Pacific.

While these long-term projects are of great importance to our strategy, and are rewarding our shareholders, we have also made significant acquisitions that are contributing to Albemarle's results. The most recent acquisition, the purchase of phosphorus flame retardants from Rhodia, and result in annual revenues of about $60 million dollars; it is already accretive.

In all, our acquisitions within the past four years are producing about 25 percent of our revenues and an even greater percentage of our EBITDA. This effect, coupled with an aggressive new product development program, is part of our effort to transform Albemarle into a company with a broader product diversity, strong growth potential, and we expect a greater ability to translate revenue growth to bottom-line.

Turning our attention back to current events, I would like to review some significant factors in this quarter's performance before turning it over to John for a more detailed look at our two segments.

Raw materials continue to provide negative variances this quarter-to-quarter, as we are looking at additional costs of about $2.9 million or 5 cents per share, driven by higher caustic, ATH, BPA (ph), and olefin cost. Year-to-date, the raw material variances are about $12 million unfavorable. Both of these numbers on raw materials are net of pass-through cost to customers.

Energy costs were another $2 million negative versus last year's quarter, 3 cents per share. As we completed our first nine months of 2003, energy costs were about $7 million ahead of last year's cost.

These two headwinds, raw materials and energy, account for about one-half of the 366 basis point reduction in gross profit margins we see for this versus person last year's third quarter. Were it not for the $17 million energy and raw material variances, profits year-to-date would be about 30 cents per share higher.

While we are not satisfied with Albemarle's performance in the third quarter, we have a strong belief that the company's underlying business and growth prospects are very good. Our industry-leading position in key flame retardant arenas, polyolefin catalysts, pharmaceutical bulk actives, and a growing product portfolio of diversified chemicals, give us a broad base on which to grow our company.

The momentum in new products and acquisition is accompanied by a strong balance sheet and cash flow, which provides for good growth and earnings reliability. As the chemical industry consolidation continues, there will be opportunities to grow our bromine franchise further and make other strategic decisions that will benefit our shareholders.

We have demonstrated in the past, and we continue to prove, that our management of process and technology is among the best of the industry, giving us proprietary positions, cost-saving opportunities, and margin improvement as the economy recovers. Now, for some information on the performance of our two segments, I would like to turn the floor over to John Steitz.

I would like to discuss first the fine chemicals business, and then get into the polymer chemicals business if you will. The fine chemicals business continued to manage through some substantial headwinds, through the third quarter of '03. The segment posted $8.1 million in operating profit, before voluntary separation program charges; or $6.3 million after the charge. Sales were about $6 million below the strong performance in the year-ago quarter. We're reporting this $10 million decline versus the third quarter of '02, where we reported $18.3 million in operating profits.

This is due partly to significant inflationary energy costs and raw materials, as Mark mentioned. But for the third quarter, these also were coupled with the confluence of adverse product-related issues. Lower zeolite volumes and pricing, anemic clear completion fluid sales volumes in the Gulf of Mexico, and weak volumes of naproxen together contributed almost $5 million of gross profit declines compared with the third quarter of last year. In addition, we experienced high production costs due to difficulties in the Arkansas bromine well fields, and weather-related production curtailment at our Thann, France, plant.

On positive notes, we posted solid profit growth in our agricultural-related products and our aluminum specialties; but these gains were overshadowed by the previously mentioned declines.

Switching to Fine Chemicals performance versus second quarter of '03 yields a more mixed, though still unfavorable, performance. Excluding Fine Chemicals separation costs, operating profits were down $3.6 million this quarter versus last. The plant cost issues and oilfield volume weakness previously discussed represented the largest decline factors in the business. Our fine chemistry services and intermediates business posted some sequential decline due to timing of customer campaigns.

On the process side, we delivered a significant turnaround in paper sizing, returning profits to more normal levels after a very poor second quarter. Additional favorable sequential performances were delivered in ibuprofen and methyl bromide.

As we look forward to the fourth quarter and beyond into 2004, we see the third quarter as the bottom point for our Fine Chemicals business. Headwinds, particularly as related to our more mature products, will continue; but not to the extent witnessed in the third quarter.

At the same time, we continue to be increasingly excited about our core areas of our Fine Chemicals portfolio. Our bromine strategy, highlighted by our Jordan investment, and recent market consolidation poises us for a growth in improved profitability going forward. Similarly, while others are shutting down in these markets, we have grown profits and have continued to build momentum in our fine chemistry services in intermediates this year.

By delivering exceptional speed and service to the global pharmaceutical and agricultural majors, and continuing to accelerate successes in our salts and our life sciences new product development pipeline, we believe we're building a solid growth platform going forward.

Switching now to polymer chemicals. Third-quarter revenue from Polymer Chemicals set an all-time record high, $162 million. This was about 7 percent higher than the same period last year, reflecting the successful addition of mineral and phosphorus flame retardants, lube and fuel antioxidants, organotin intermediates, and continued growth in our metallocene-related nucarox (ph) program.

Operating income was down $3.7 million compared to third quarter of last year, $2.9 million of which was due to the voluntary separation charge. The $800,000 residual was due primarily to raw materials and energy costs. On a sequential basis, Polymer Chemicals revenue was up 8 percent and operating profit was down about 10 percent.

The increase in sales reflects the acquisition of Rhodia's polyurethane flame retardant business, which closed in the third quarter. The integration of this business into Albemarle has gone very smoothly, making an accretive contribution to performance sooner than expected.

On the operating profits side, we experienced generally stronger profits in the brominate flame retardants in the third quarter than in the previous quarter. Phosphorus flame retardants also contributed to the positive side. These were offset by a negative catalyst in (inaudible) profits, and some decline in antioxidants and caritus (ph) mostly due to sales volumes.

For the nine-month comparison to the same period in '02, revenue is up 10 percent and operating profits are up 3 percent for polymer chemicals. Unless something unexpected happens in the fourth quarter, we continue to forecast a relatively steady sales profile across all product areas comprising this business segment, which should result in a positive year-on-year comparison.

Over the past several weeks, there have been a number of newspaper articles in some electronic media stories about polybrominated diphenyl ether flame retardants, or PBDEs. Albemarle does not make the products of major concern in these studies; but we do make decabrome, a PBDE. I want to share our views on this subject.

First, lowering flame retardancy standards is not acceptable. In fact, stronger fire safety legislation is required to prevent the senseless and injuries of so many around the world. The U.S. Fire Administration keeps these statistics. The Rhode Island nightclub fire that killed nearly 100 is the most recent example of the importance of flame retarded installation in fabric and building construction codes.

The U.S. has one of the highest fire death rates per capita in the industrialized world. Approximately 5,700 people die in fires in this country annually, and another 29,000 civilians are injured. Approximately 100 firefighters die each year in duty-related incidents. Each fire usually kills more Americans than all natural disasters combined, including floods, hurricanes, tornadoes, and earthquakes. Fire is the third leading cause of accidental death in the home. At least 70 percent of all fire deaths occur in residences.

Albemarle does not make the major chemicals of concern in these studies, commonly called pentabrome and octabrome. We and others make decabrome, a product which has withstood years of testing. Science has shown that this product does not have the risk profile of pentabrome and octabrome in the environment. We also work with our customers to help them practice good stewardship, to take the necessary steps to keep our products and others out of the environment.

Albemarle uses risk-based science to make good decisions on products that provide safe homes, fabrics, electronics, offices, hotels, and entertainment venues for the citizens of the world. Millions of dollars have been spent assessing the risk of polymer chemistry. This analysis has shown that decabrome is in fact a safe product that provides immense value by reducing deaths by fire. To lump decabrome into the broad category of PBDEs is without merit, since many studies have indicated that it is not negatively impacting our environment.

We have put together some additional information on the studies done on this product. They are available at the website, www.BSEL.org. Please feel free to call us with question, should you have an interest in this subject. Fire safety is a vital mission for Albemarle, and in addition to decabrome, we make many flame retardants to help address personal safety, in a variety of products ranging from hairdryers to upholstered furniture.

Because of our scope of flame retardant offerings to over 80 percent of end uses, we will be working with our customers to commercialize alternatives to the products banned in these processes. We feel very confident that our continued emphasis on science-based solutions to flame retardancy problems will continue to provide value to our shareholders. I will now turn our conference call over to Paul Rocheleau.

Thank you, John. There are a number of terrifying financial comments I want to talk you through this afternoon. Let me start with the P&L statement.

As Mark mentioned, our sales improved slightly year-on-year, driven by the recent acquisitions and favorable foreign exchange. Many of our traditional productlines experienced a drop in demand year-on-year. The Rhodia acquisition closed on July 23, and this contributed 12 million in sales during the third quarter. This bolt-on acquisition, similar to other recent transactions, is projected to be earnings and cash flow accretive during 2003.

After factoring in these adjustments, the underlying base business decreased about $22 million, most of this occurring in the United States. This top-line analysis clearly shows the importance of product development, acquisitions, and expansion of our geographic footprint.

As you move down the P&L, our third-quarter 2003 operating profits before special items was off 26 percent compared with the prior year, meaning that our margins were further compressed. The gross profit margin of 20.25 percent is still feeling the effects of the cost of natural gas and associated feed stocks, and the inability to past these costs through in the marketplace.

As a partial offset to the lower profit margin, our SG&A costs are also coming down. As you look at the third quarter SG&A spending, you will see that our overhead costs are 11.8 percent of sales; and we're determined to get this closer to 10 percent over the next few years.

The special charges associated with the voluntary separation program of 7.5 million pretax are clearly described in the consolidated accounts, but let me repeat the impact on our segment results. The polymer chemicals operating profit picked up $2.9 million of these special charges. Fine Chemicals, 1.8 million; and the sales and administrative expenses picked up 2.8 million.

The tax adjustments related to a true-up of interest costs associated with the tax refund due from the IRS, and further refinement of our tax reserves as we work through the impact of prior period close-outs with the Internal Revenue Service. For the quarter, we have projected an effective tax rate of 29 percent, prior to any special tax adjustments. We believe we can hold our tax rate at this level or slightly below it; however we are closely watching the debate on the potential repeal of benefits now provided through foreign sales corporations.

I want to make one comment regarding the consolidation of joint ventures and variable interest entities. We have now reviewed all our joint ventures against the FIN46 guidelines as currently issued; and we have agree with our independent auditors that we do not need to consolidate any of these entities that are not currently consolidated in the results. However, you will continue to see significant disclosure of the unconsolidated joint ventures in footnotes to our statements.

Turning to our cash flow, during the quarter we generated earnings before depreciation, interest, taxes, and the special charges of about $40 million. But working capital increased, and we began to pay against the voluntary separation program, for a net cash generation of about $23 million. Our net debt increased by $80 million, as we paid 80 million for the urethane flame retardants business from Rhodia. We also paid dividends of 6 million and continue with our normal capital spending program of about $12 million. You may also note that we purchased $4 million worth of common stock. Our working capital is expected to decline with the impending receipt of a $10 million tax refund, which we expect to receive any day now.

For the nine months, our EBITDA of 128 million is off from the 144 million level in the first nine months of 2002. We have supplied the quarterly summary on our website, with further information on EBITDA reconciliation to GAAP statements. We continue to generate strong cash flows; and we have almost $200 million in headroom on our existing credit lines.

As a final note, let me repeat our priorities for 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. We also may elect to pursue additional lines of finance, depending upon the opportunities available to the company. Let me now turn it over to Michael for the Q&A session.

We're ready for questions from our shareholders, media, and analyst listeners. This conference call will be available on a delayed basis through our website for those who must leave us at this time.

(OPERATOR INSTRUCTIONS) Bob Koort from Goldman Sachs.

Couple questions. First in the area of flame retardants, I used to think that using the IPC data was a decent proxy for trends in your business. I'm wondering, is that still valid? Or has the Asian production levels become so enormous that looking at U.S.-centric data is misleading?

I will take that question. We still track it and follow it; and we think it has got a pretty good corroboration with the business. So, we use it. And we also use some data on television production and things like that, to help us on the decabrome side. So for tetrabrome, the IPC we think correlates pretty well.

Could you give me a little more insight into what happens to your particular business or competitive position as more and more production moves offshore? We have seen a lot of others that supply that circuitboard and electronics industries in the U.S. really suffer. But I suppose you have got, between you, Great Lakes, and Detsy (ph), you have got a pretty defensible position. And you should be able to continue growing even if your customers (technical difficulty) to Asia. Is that valid? And what sort of market shares or shipments do you have in Asia relative to your U.S. business?

Let me try to take that in the order in which you asked it. First, the impact of moving offshore. From North America to Asia, we have not seen that great of a shift over the last 12 months. It is more the Asian base has grown over an extended time period fairly substantially.

So the bigger concern, if I may, is moving from the previous traditional countries of Korea, Taiwan; and moving into China. We think we have got a very defensible position from a flame retardant perspective and continuing to protect that. Though, we're seeing a more dramatic shift into China on the decabrome or television side, as a lot more televisions are produced in China.

In terms of market share, on the flame retardants side, we're doing more business in Europe and Asia, certainly, than we have in the past; particularly with the recent acquisition of the Rhodia phosphorus-based flame retardant. That was primarily a European business actually, so being in textiles and fabrics, primarily European based.

The Asian business really we find is pretty dependent on the economy. And we saw kind of a big uptick in September; but it came to a real slowdown the back half of September. So we're seeing increased volatility. We are getting off to another strong start in October. So depending on how the economy goes, I think that is how our business tracks. Which goes back to the IPC and it being a pretty good measuring stick for us.

Okay. Thanks very much.

David Begleiter from Deutsche Bank.

Thank you. John, could you comment on flame retardants pricing? What has been happening in the quarter and as well year-to-date? What were flame retardants volumes, basically for the high-volume tetra and deca, in Q3 and year-to-date? Thank you.

I will take a crack at the volumes first. Year-on-year, our tetrabrome volumes year-on-year were down about 6.5 percent. Decabrome volume was down more dramatically, about 15 percent. We had an awfully strong quarter last year at this time. Sequentially, if you look at tetrabrome volume, it is up in this 8 percent range sequentially. Decabrome volume has rebounded; that is back 20 percent compared to last quarter.

On the pricing front, decabrome has been year-on-year pretty flat. Tetrabrome is up by 4 to 5 percent year-on-year. Now sequentially, I think as we indicated last quarter, we have seen some slide erosion in pricing. And sequentially our tetrabrome pricing is roughly flat. We have been reasonably surprised to hold that. It is down sequentially about 2 percent; so it is just down slightly.

It is more pronounced on the decabrome. We're seeing prices more (technical difficulty) 4 to 5 percent range, so we're working hard to defend that. If we can continue to see volume increases like we have had, I think we can get prices heading back up. But it is going to be a matter of months rather than weeks. That's for sure.

John, are you losing any share? Or are you matching the lower pricing? I gather you are matching the lower prices to maintain your share.

We have been defending our share. That has been generally what our mechanism has been, David. So, we certainly don't believe we are being the aggressor out there. We're just working to maintain our share and do not believe we have lost any share. Nor do we believe we have gained any share. So we think it's been pretty flat.

How do you see pricing playing out, heading into '04, John?

I think the holiday season and the turn of the year, volumes after the first of the year are going to play a significant role in how we can get pricing up. So I think it all depends on the economy. If we continue to see volumes, we are going to make a renewed effort to lead some price increasing.

Lastly, the completion fluid weakness; can you comment on that, in particular?

You know, we have seen oil prices hang pretty high. And I think as a result of that, the Gulf of Mexico drilling has been fairly limited. Our customers are telling us that the volumes in the Gulf of Mexico have been down. That is what we're seeing in our bromine completion fluids in the Gulf of Mexico. We're seeing fairly strong volumes in the Middle East, as you would suspect.

Thanks a lot.

Ray Kramer from First Analysis.

I know you don't have those usual volume price FX charts done. Is there any data from that that you can share now? Or that you have ready at the moment? Or even maybe just some qualitative information on that?

You will see on the website, we will post a transcript of this script, which has some information. And we are in the process of updating those variance analyses. We will get those out probably within a few days.

We have to go back to look at the GAAP Reg G stuff, Ray. We (indiscernible) but we're doing that right now, and trying to do it as quickly as possible.

Turing to some more specific issues, you had mentioned weakness in naproxen. Can you comment on that?

Last quarter, third quarter of '02, so year-on-year, we had a very strong naproxen quarter. And it was primarily driven by one of our customers building up some naproxen inventory in the anticipation of developing a new product for a consumer products company. As a result, their customer decided not to proceed with this new product introduction; and hence they were sitting on some significant volume. So year-on-year, we saw a pretty significant drop as they worked off that inventory.

Matter-of-fact, we shut the plant down to control our inventory. So, we are back onto a more normal curve there. We are looking at the fourth quarter being a nice rebound; and actually the third quarter sequentially was up 50 percent as well. So we are back on track, and we think we have worked through that inventory issue.

Okay. On the polymer side, with electronics, any update on the book-to-bill ratio that you usually look at? Are you seeing any signs of a potential increase in that for holiday sales? I think DVD players are supposed to be hot this year, or other electronics like that.

We have seen an awfully good start in October. That is reflective of an increasing IPC ratio. I tell you, it is just getting so hard to predict. It just kind of, at the end of September, just fell off the cliff on us. The phones just stopped ringing. It picked back up again the first week of October, and through mid-October the volumes have remained very strong.

For me to predict going forward, it is just so volatile I can't give you any guidance there. Every day it is a new headline. So your guess is as good as mine.

That's fair enough. Quickly, on the raw material and energy, I was a little surprised to hear that that was up sequentially, if I heard you right. Your raw material and energy costs?

It was primarily energy was up sequentially. Energy was actually up about a third sequentially. Part of that is a seasonal issue that we face. Raw materials were pretty flat sequentially.

That 2.9 million, that was a year-over-year increase in raw material costs or sequential?

Year-over-year. Right.

Okay. Sequentially that was more flat? Okay. Do you have any guess on that going forward? Or any hedging activity? Or anything to try to keep that in control, since it seems hard to bring prices up with that?

We are taking positions in natural gas to try to minimize volatility going forward. Currently we are about 25 percent hedged in our gas for this fall; and early next year we would like to move that up to 50 percent if we think the market is giving us a good opportunity to do so.

With raw materials, it is a little bit difficult to predict. I think our current view is that next year is frankly going to be a bit flat. There is a lot of energy out there to get chlorine and caustic pricing up further. Se we are anticipating some of that. By the same token, we think some other raw materials are really at a peak and are going start easing a bit. So our general view is that if you look forward to next year, our raw materials should be fairly flat with what we they are today. We would hope maybe a little bit of leeway on energy.

Okay. Finally, anything that would make you change your flattish outlook that you gave back in September? Or any updates on your outlook for the remainder of the year?

No, I think what we tried to relate to you in September is that we're seeing a lot of factors out there, that lead us to believe that we are in sort of this -- I don't know, this very confusing period of time economically. As John mentioned, we go from being ecstatic for one or two weeks in a raw; and orders coming in; and talking to customers who are really pumping out a lot of volume; to getting calls from them saying, guess what, Circuit City quit buying and now things are slowing down again.

So we are a bit guarded I guess is the way I would say that. But I don't see anything right now that would lead me to believe that looking forward over the next several quarters you should expect anything other than pretty flat performance out of Albemarle.

Okay. Thanks a lot guys.

Frank Bonel (ph) from Adayish (ph) Capital.

I'm still trying to figure out how you did what you did in Fine Chemicals. It is worse than my golf game was yesterday, and that was pretty bad yesterday. You talked a little about the naproxen; is there any more color you can give on the oil drilling or oil fluids in the Gulf and the zeolite? Not even so much year-on-year; I am trying to get there sequentially. Because you guys were doing not this bad in the first half of the year in this segment.

Sequentially, the company's drop in that range of 3 million or so is primarily due to the oil field, which dropped sequentially about $1 million in OP (ph) profit. The other unique situation for us was we have a plant in the Alsace in Thann, France, which we had to curtail production at the plant, because of extremely low water levels in the river. You may remember there was just some extreme heat throughout Europe in the July, August, early September time frame. Particularly in France. You remember all of those reports of deaths and things due to heat.

We had to dramatically slow up that plant because we had a requirement to reduce the effluent in the river so we would not raise the temperature in the river. That cost us probably about $2.5 million sequentially. So, that is pretty unique to us.

Year-on-year, as we mentioned, a confluence of factors. We saw year-on-year some pretty significant volume declines. I mentioned naproxen. Ibuprofen was soft, not for any particular reason that we can see. Our builders volume was soft; that was down about 6 percent. Our amines volume was down about 15 percent. Our oilfield volumes were down about 12 percent. Our paper chemicals volume was down about 12 percent.

But the good news is sequentially we're seeing some reasonably nice improvement there. So, it is not any chronic problems with the business. It is just year-on-year. We have had a lot of volume issues there.

So is the fourth quarter in Fine Chemicals looking better than the third quarter?

Yes it is. It is.

We think we've got it got it back on tract actually.

Okay. In terms of revenues, you cited the raw material and the increased energy costs; and I guess it cost you so far 30 cents for the year. Is there going to be any offset? Is there any business where you have been able to increase revenues based upon higher raw materials or energy?

We have some formula based pricing we can move, our ag chemicals, our intermediate ag chemicals. We can raise those prices due to increase in raw materials. We basically do a toll arrangement on our builders business; and we can generally pass that through. Our aluminum alkyls business, we can generally pass through the key raw materials there. But the year-on-year dramatic increases that not only our company is suffering but many like ours, it has just been so enormous. It has been virtually impossible to pass all that through.

I will tell you that the timing is a bit unique right now. Because not only these these high energy and raw material costs, but you are also seeing generally a pretty good softness in the global economy. American manufacturing is struggling a bit with that. So just like we're suffering, all of our customers are suffering; they have difficulty passing it on. So we have this inelasticity of the market today that makes it pretty difficult.

We're seeing some signs that things are tightening up a little bit in some of our base businesses. And maybe we can keep our fingers crossed and make sure we start to get some of this back. But today other than those specific kinds of examples that John gave you, it has been very difficult.

Okay. Thanks.

I hope your golf game gets better.

So do I. (indiscernible) Bob Koort can tell you how bad I was yesterday, but I should not tell you (indiscernible) he was on the golf course too.

Bob is always on a golf course.

(OPERATOR INSTRUCTIONS) David Begleiter from Deutsche Bank.

Mark, with Rhodia now done, what is your appetite? And what is the pipeline looking for additional acquisitions?

David, we have a pretty aggressive program, as you are well aware. I think I will speak in two general areas there. In the Polymer Chemicals side, we would like to continue building these base businesses we have. We are quite excited about catalysis, I will just mention that to you. We have just started a new joint venture in China that is going to move us into Ziegler-Natta. We think that opens up some pretty interesting avenues and doors for us.

We're having great success with some of our polymer additives. The curatives business out there that John's team is running is really shooting the lights out. That is pretty interesting to us.

On the Fine Chemicals side, there is a host of opportunities in the API arena that could really build on the fine chemistry services model that is there. So we think that it remains a pretty target-rich environment. The only ting I would say is that the financial buyers are setting the floor out there, and we continue to look hard at these opportunities and where we have been active. We're not going to overpay for one. We are going to bring one in that we can make accretive shortly, and build upon it either technically or as a piece of foundation technology for our growth.

Thanks, Mark.

Todd Peters (ph) from American Century.

Can you please discuss, going back on the use of the cash flow, sort of like the priorities of that? Given, obviously, the tax law change and there has been a lot of other public companies that have made use of this time, with the attractive tax benefit at 15 percent, to sort of permanently move up your payout ratio; or anything of that nature. Any discussion on that that you are aware of?

On the cash flows, we have tried to be very transparent in terms of our cash generation and uses of cash. We will post again to the website in a couple days some additional details there. But fundamentally, we continue to generate a strong cash flow driven by the diverse product portfolio. This is a very broad-based business where you can generate cash from a range of sources.

This quarter we saw roughly the $40 million coming in before capital, before dividends, and before taxes. We have put this money to work. If you set aside the Rhodia acquisition for a minute, what you saw this past quarter is symptomatic of what we tried to do. We bought back a little stock. We certainly paid a healthy dividend, good dividend yield. We continued to invest in the business, in terms of the capital and supporting joint ventures. If you look at the quarter, or go back and look at the first nine months, that is a pattern that we have had in the past, and we expect to follow in the future.

With regard to the dividend, certainly this is considered at each Board meeting. We have a Board meeting coming up later on this year, and we do have a history of nine years of sequential increase in dividends. So we will be considering this once again.

Okay. Thank you.

Paul Christopherson from New Vernon Associates.

What were the respective volume declines for tetrabrome and decabrome again? Which one was down 6 percent and the other one was 14 percent?

Year-on-year, tetrabrome volume was down between 6 and 7 percent (technical difficulty) year. Decabrome volume was down between 15 and 20 percent; that order of magnitude. Sequentially they were both up.

Do you happen to have -- have maybe you don't have it there, sort of nine months year-to-date volume comparison for those products?

Year-to-date. Year-to-date, compared to last year to date, tetrabrome volume was down and decabrome volume was down, even with the sequential increases that we have seen. We can get you the exact number; I don't have it at the tip of my fingers.

They were both down through the nine months though?

That's correct.

But you think you have been defending? You do not think you have been losing market share?

That's correct. It was a very strong second and third quarter, volumewise, last year. In fact the second quarter volume last year was an all-time record for the business; and third quarter was not offset much from the second quarter last year. So very strong comps. But through the course of this year on a sequential basis, we have seen volumes improve.

Thank you.

There are no further questions at this time.

Thank you very much. We appreciate it, and we appreciate all you who have been with us today. Again, if there are further questions, please feel free to call area 804-788-6091. Thank you.

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