雅保公司 (ALB) 2003 Q4 法說會逐字稿

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

Thank you Latoya. Good afternoon, I am Michael Whitlow, Vice President of Investor Relations and an External Affairs and thank you for joining us in the fourth-quarter conference call to detail Albemarle Corporation's performance and to provide our outlook for our business segments.

The presenters today are Mark Rohr, President and CEO; Paul Rocheleau, Senior Vice President and Chief Financial Officer; and John Steitz, Senior Vice President of Business Operations.

Our tables on a net sales impact of price, volume, foreign exchange, joint ventures and acquisitions are posted on the Web site and often on the site of www.albemarle.com. You will find historical information in the form of our fourth-quarter summary. We also provide non-GAAP reconciliation to GAAP numbers on the site and in our news release.

As you know we will be making some forward-looking statements during the call. The caution is stated in our Web site and in our earnings news release indicates that there are many factors which could cause our actual results to differ from current expectations. Our forward-looking statements (technical difficulty) some specific raw material and energy situations that would call your attention. As always, please call me with any questions regarding our business on what we have communicated today.

First today, we're going to hear from Mark Rohr. He will be followed by John Steitz and Paul Rocheleau. Now to Mark.

Thanks Michael, and thanks to everyone for joining us this afternoon for the fourth quarter conference call of 2003. I will separate the fourth quarter and annual comments in what follows and then add some of our perspective on 2004, and following that, John and Paul will add their comments. We look forward to your questions.

I am very pleased that we were able to achieve a second successive record-breaking quarter for net sales. Up over 15 percent for reported net sales for the same quarter in 2002 or $40 million. Giving us 295 million for the fourth quarter of 2003 and putting us over the $1.1 billion mark for the year.

The fourth quarter of 2003 brought us fully diluted earnings per share, excluding special items of 44 cents. An earnings per share level only exceeded by one quarter within the most recent two years and before that back to the first quarter of 2001.

Including the special item for pending sale of our technical center in Baton Rouge as part of our R&D effort, we had diluted earnings per share of 40 cents. Paul will go over the GAAP reconciliation details in a few moments as well as review the timing of our recognition of approximately $3.5 million of sales in the fourth quarter of 2002.

Results in 2003 fourth quarter were possibly aided by foreign exchange helped by European presence and the underlying strength of our global businesses. The total foreign exchange impact on income for the fourth-quarter was about 4.4 million. For the year earnings were boosted approximately 13 million by foreign exchange as well.

We have seen strong growth in volume over the last quarter, 12 of the top 20 products exceeded volume sold in fourth quarter of 2002, and 11 of the top 20 showed volume increases sequentially from the third to the fourth quarter.

This was particularly so in our Polymer Chemical segment. General indicators such as the book-to-bill ratio for print and wiring boards and record performance in the connector industry which began the quarter with the third consecutive month of double-digit gains in orders was cause for enthusiasm. October connector orders were up 34 percent from September for instance according to the Bishop report.

Albemarle participates in this segment with a number of products, however, our recent introduction of a new family of anti-polystyrene based flame retardants is getting rave reviews by the connector giants and we are very excited about the prospect of these new products.

John Steitz will share more detail about the benefit of working with industry leading flame retardant customers in a few minutes.

The inclusion of our phosphorus flame retardants added sales and gross profit impact for the second consecutive quarter under Albemarle's brand. Another earlier, successful acquisition brought us mineral flame retardants which again contributed profits on a quarter comparison from the prior year.

The increased strength of the PDC and polyolefin markets, our acquisitions of a new line of fuel and lubricant antioxidants and internal development of new supported catalysts for the polyolefin’s market, some of which did not require refrigeration, provided positive comparisons for our catalysts and additives in the fourth quarter of 2003 versus last year's same quarter. With this combination of efforts, the team is overcoming a substantial hit to sales brought about by one of our large customers leaving the (indiscernible) market early last year.

For fine chemicals, the fourth quarter of 2003 was characterized by good results from bromine and derivatives and a rebound in a number of our specialty chemical businesses. We also saw a positive contribution from our fine chemistry services year to year. Raw material cost in our Jordan investment were minor offsets. We remain very satisfied with our Jordan investment which is running as hard as it can under the current configuration. We announced earlier last year the addition of (indiscernible) plant to this complex, which will boost our elemental bromine capacity to nameplate on about 50,000 metric tons. This expansion should be on stream by early 2005.

We are also qualifying Techabrol (ph) now produced in Jordan to selected customers to provide an alternative source as capacity demands growth for this product. On the full-year comparison, our net sales increased 9 percent, up $95 million in 2003 versus what we reported in 2002. Earnings per share for 2002 fully diluted were 1.67, excluding special items down about 3 percent from the reported 1.73 per share in 2002 on earnings of 70.2 million, down 6 percent from a reported 74.7 million in 2002. These numbers are excluding special items.

(indiscernible) chemicals income for the year was up over 2002 by almost 5 million, due to the effects mentioned for the fourth quarter. We like what we see for this segment, we are benefiting from our acquisitions, and volume demand remains good this month. We do see some pricing opportunities in 2004. The fine chemicals segment income was off by 17 million in 2003. Significant headwinds in fine chemicals related to two issues, both affecting pricing and both likely to continue through 2004. Several mature products sold to one or a few customers are beginning to lag our growth ambitions.

We are also seeing a new level of competition from Indian and Chinese companies. While we are confident of our ability to compete on the basis of cost, we are going to be challenged in a large volume (indiscernible) pharmaceuticals and are evaluating new areas of growth across a broad spectrum of opportunities in both pharmaceuticals and agricultural chemicals to offset these headwinds. John Steitz will share more details with you in a moment on this.

In addition to the pressures mentioned above, our (indiscernible) unit serving the domestic builders industry is currently idle. We are hopeful of additional orders later this year, but we may elect to exit this business. To ensure we are prepared for that possibility, our asset utilization team and business teams are currently looking at alternative uses for the equipment in evaluating a number of options. Should we make the decision to exit the detergent (indiscernible) business, the impact on a per-share basis is likely to appear in the first half of 2004.

To overcome these headwinds, we continue the expansion of our fine chemistry services model. Our development portfolio now stands at 85 products versus our 2004 goal of 100 new products. The 2003 performance was ahead of 2002 by about 30 percent, and our team continues to generate inquiries for new products to be produced by Albemarle of about 75 per month. At Informax, the major U.S. fine chemicals trade show held last week, we had over 100 meetings with customers, uncovering a number of exciting new opportunities as this model continues to build industry momentum. New products now account for 14 percent of net sales, up from 12 percent in 2002. This achievement has prompted a reevaluation of our earlier goal of 15 percent, and we are now challenging our research and development to make new products introduced in the last five years 20 percent of our portfolio by 2006.

The effort to build a company with broader diversity in its base is continuing with the assistance of acquisitions. Within the same five-year time frame, 28 percent of our sales are coming from new products we acquired. These acquisitions all have been accreted within the first year post-acquisition and, in fact, are adding to our company in many ways. The cumulative change has resulted in about 42 percent of our portfolio being new to Albemarle.

Our recent acquisition of the Atofina bromine business will allow us to be even more effective in Europe in support of our (indiscernible), France fine chemicals products, including a number of bromine-based intermediate (indiscernible) pharmaceuticals and chemicals. These new assets provide a number of synergistic opportunities with our existing operations.

Finally, the opening of a new geographic opportunity continues to gain steam and with the pace of sales in China being one example. We have recently formed and launched our training company in Shanghai, and we have seen an 80 percent increase in net sales in 2003 versus 2002. We are in the process of starting up our joint venture polyolefins catalyst plant in Shanghai and looking at a number of other expansion opportunities in the region.

The continued achievement of our growth goals in these areas is essential to developing both segments of the company, in particularly so for our fine chemicals efforts. We believe our management, our process and technology positions, our cost-saving capabilities, our bromine franchise and our overall portfolio are among the best in the industry, and we're confident of our ability to grow over the next several years.

All this said, I do expect 2004 to present us with special opportunities and also challenge us as we have noted. Given what we have seen in 2003, it would be hard for me to suggest an annual number greater than the current level of earnings or about 40 cents per quarter until we can overcome the headwinds discussed in fine chemicals. So absent any acquisitions, I want to present some caution to the equation, particularly in light of the pressure from raw material and energy price inflation that we expect to continue through the first half of 2004.

We are very aware of the $24 million impact from additional raw material and energy costs (indiscernible) 2003 are more than 40 cents per share of headwinds. I will caution all of you to be mindful as well of the earnings risk to our industry from hyperinflation of raw materials and energy that we believe has not yet completed its run. In recent years, industry earnings have been pinched between low demand caused by worldwide economic slough (ph) and increasing raw material and energy prices. These challenges have demanded a great deal from the Albemarle team, and I want to acknowledge their hard work in overcoming them.

Looking at Albemarle's performance over these difficult quarters, our team has done a good job overcoming the headwinds while systematically building a stronger portfolio based on new technology and serving our customers well. We are pleased with our performance in the fourth quarter of 2003 and look forward to the opportunities that will come our way in 2004.

Now I'll turn over the conference to John Steitz who has been promoted recently to Senior Vice President Business Operations.

Thanks, Mark. Overall, we are extremely pleased with the fourth-quarter performance in both our polymer chemicals and fine chemicals businesses. We certainly believe we have many challenges ahead for us this year, but we are strongly positioned to meet these challenges head-on.

Allow me to talk about our polymer chemicals business first. Compared to last year, the polymer chemicals business in the fourth quarter performed exceptionally well. Our base business in flame retardants and catalysts and additives all grew compared to the same period last year. We did not experience the traditional inventory-related slowdown in December, and our customer markets all seemed to experience a healthy rebound. Strong new catalyst sales, robust flame retardant volumes, and solid cost-effective production were highlights for the quarter.

There are also some exciting new product opportunities where we are seeing commercial success in the curatives, flame retardant and catalyst areas. Our recent acquisitions also yielded very solid results. Our lube and fuel antioxidant acquisition is bringing us some new opportunities which yield above-average margins and are helping us utilize under absorbed assets. The recent phosphorous flame retardant acquisition was accretive in the fourth quarter and fits perfectly into our strategy.

Compared to last quarter, our catalysts and curatives volumes were strong and reflect strength in downstream PVC, polyethylene, and other related plastics markets. Flame retardant volumes overall were up at double-digit levels compared to last year and last quarter, though decabrome volumes were flat sequentially. Pricing for flame retardants were stable on both comparisons. We continue to see strong volume trends but we are also continuing to experience raw material and energy inflation. We are going to do our best to offset these costs were possible with price increases.

Now let me switch gears to fine chemicals. We are encouraged by the nice rebound in our fine chemicals profitability in the fourth quarter but remain vigilant in our mission to return this business to return this business to historic levels of profitability. Our fine chemicals business is a fairly diverse and complex portfolio of different products affected by many different market trends and headwinds. Our exciting new product portfolio in the life sciences and performance chemical arenas are helping build a defense against product obsolescence in the builders and certain agrochemicals.

We continue to see price pressure in our base pharmaceuticals business but believe our proven low-cost position in ibuprofen is an example to serve as a model to build on. An additional headwind relates to raw material inflation, in particular our bromide and aluminum based businesses continue to experience double-digit raw material inflation on core materials like chlorine and aluminum trihydrate. On a sequential basis we saw some nice improvement in our bromine business. With the recent uptick in volumes we are finally seeing some price relief in the market. We are also seeing a solid improvement in our paper chemicals and tertiary amines business reflecting stronger economy.

We experienced a solid improvement in pharma and agricultural intermediates as well. As is normal in the industry, our fourth quarter was aided by strong (indiscernible) bromide volumes. During the fourth quarter we also closed and integrated the acquisition of the Atofina bromine fine chemicals business, and remain excited about the synergy with our own business. The majority of the related acquisition costs are behind us here, we are particularly proud about the speed with which this integration was. Within 24 hours of closing we were shipping and invoicing orders from our own SAP systems.

Also in the fourth quarter, we expensed all related testing costs of an exciting new bromine compound for a specialty application in water treatment. We hope to announce this exciting new product in the coming weeks. Our Jordanian bromine joint venture continues to perform above expectation; our loss in 2004 will be much less than last year. This venture continues to position us with low-cost raw materials and derivatives for many years to come.

On a final note, related to overall business inventories, we did see an increase over the last quarter but this is primarily due to our acquisitions and foreign exchange impact. And with that, I will turn it over to Paul Rocheleau, our CFO.

As usual, I want to take you through more detail regarding our financial statements and let me start with the P&L. As Mark mentioned our top line sales growth continues with a very positive trend. With a 16 percent improvement over the fourth quarter of last year. This increase is mainly attributable to the effects of our acquisition program which added $23 million versus the fourth quarter of 2002 and favorable currency effects of $15 million. Our base business growth was slightly favorable year-on-year adding revenues of approximately $2 million.

As you move down the P&L, our fourth quarter gross profit was up 13 percent over last year, driven by the top line growth as well ad favorable plant spending. Our margins on a percentage basis were kept in check by the higher cost in utilities and raw materials. As a general perspective our 2003 energy and raw material costs were 20 million dollars higher in 2003 than the full year 2002.

Our operating profit was effectively flat with last year largely due to higher selling, general and administrative costs which were up 4.6 million over the previous year. This is mainly due to the currency effect which is attributable about $3 million to that variance and also the affect of acquisitions. Throughout the fourth quarter we continued to reduce U.S. staff through our voluntary separation program and by year end we reduced staff by 89 people.

Let me describe the $2.5 million special charge in the fourth quarter. At present, we have three administrative and research facilities in the Baton Rouge area. As part of our overhead reduction effort, we believe it is possible to consolidate from three facilities into two facilities saving over one million annually. We have been negotiating with the state of Louisiana and Louisiana State University over the past year, where they will purchase one of our facilities near their campus and we will invest the funds to modernize our R&D facilities elsewhere in the area.

The effect of the anticipated transaction is a 2.5 million charge for real estates held for sale. Adjusting for this special item the profit and earning trends align positively with our gross profit growth and reflects our overall operating performance for the quota and you on year. This is clearly described in our earnings release. We continue to forecast an effective tax rate of approximately 29 percent and there are a number of programs underway to reduce this level further. We hope to report progress over the next few quarters.

Now let me move to our cash flow statement. During the fourth quarter we had cash flows of 12 million dollars to purchase the Atofina bromine fine chemicals business. We spent $16 million on capital, including our joint ventures, and contributed 10 million to our pension fund at year end, a total of 38 million. Despite this outflow, our net debt position was reduced by 13 million driven by our strong operating cash flow. When the 10-K is issued, you will note that our pension plan is very well funded with assets of $404 million, up from approximately 330 million at the start at the year. We were well positioned to take advantage of good market performance during 2003.

We have also taken steps to reduce our future pension liability by announcing we will close the U.S. defined pension benefit plan to new employees beginning in April of 2004. This will be replaced with a defined contribution plan. When you look back over the year, our continuing strong cash flows supported $118 million of acquisitions, almost $50 million of new capital, and $18 million of stock repurchases and continued strong dividend program. We will continue to have adequate financial headroom to pursue both on acquisitions and are well positioned to raise additional funding if the need arises.

Let me now turn to the item pertaining to the revenue recognition going back to the fourth quarter 2002. I encourage you to look at the last footnote in our press release. Over the past few weeks the Company and our independent auditors have examined selected transactions relating to the timing most appropriate to report revenue of a certain fine chemical. There are no questions regarding the legitimacy of the revenue. The review is focused on the most appropriate reporting period. As currently reported the revenue for this fourth quarter bill and hold transactions were recorded at the time of invoicing and transfer of title but the product was shipped at a later date. If we change the methodology, the fine chemical sector revenue in the fourth quarter 2002 would decline by approximately $3.5 million and there would be an offset in gain in the first and second quarter of 2003. This change would have caused EPS in the fourth quarter 2002 to decrease from approximately 40 cents to 36 cents with a corresponding pickup in the first two quarters of 2003. We expect to have resolution on the issue by the time our 10-K is issued in a few weeks.

Let me close with one final statement. This revenue examination is underway because of the very high standards we place on accuracy. There are no questions whatsoever of any inappropriate behavior. It relates entirely to a very technical accounting issue. With that let me turn this over over to Michael.

We are ready from our shareholders, media and analyst listeners. The conference call as you know will be available on a delayed taped basis through our website and for those that have to leave us at this time, we encourage them to go there to receive it. We are ready for questions.

(OPERATOR INSTRUCTIONS) David Begleiter of Deutsche Bank.

To clarify the quidance for '04, no more than 40 cents per quarter i.e., no more than $1.60 for the full year?

I think what we are saying is if you look over our shoulder for a minute, we saw well over 40 cents of raw material headwinds at the first of the year that frankly we didn't anticipate. We anticipated some of it but not nearly that much. What we are seeing today is frankly a lot of the same conditions continue. So we are quite concerned about hyperinflation of raw materials and everything from steel and aluminum to ethylene and natural gas, just across the board. And so given that uncertainty, we (indiscernible) have a fair amount of caution. As you know we don't give specific guidance -- I am just throwing out a caution out there right now I would just urge all of you to be very aware of that.

Fair enough. And on flame retardant pricing your competitor implied that you were aggressively pricing to prefill your Jordanian facility. Would you care to comment on that?

I can't comment on one's comment but what I can just describe to you are maybe some facts -- on pricing overall in our bromine flame retardant area compared to last year, I call it stable or basically flat, it's down about one percent year on year. Sequentially, it's down slightly more than that between 1.5 and 2 percent sequentially. With the majority of the price decline occurring more in decabrome which is generally higher priced product used in televisions primarily. Generally we are seeing price trends fairly flat and volumes strong, so we believe going forward we are going to make every effort as Mark described the raw materials and cost inflation that we believe will continue.

Just on Jordan what is the capacity of that decabrome line and where are the customers that you are qualifying product with, are they in Europe or Asia?

The capacity, David, is about 12,000 tons, about 1000 tons a month. The approvals occurring in Europe and Asia.

Thanks a lot.

Alan Cohen (ph) First Analyst.

Ray Kramer (ph) here first with just a couple questions. In polymer chemicals I saw there was a sequential decline in operating margin, it doesn't seem like you had any pricing weakness or at least it was flat sequentially. What was going on there?

Sequentially, I would say most of the decline occurred in one of our special intermediates business where the customer base is fairly limited and one of the large customers really reduced a lot of inventory on this immediate towards the end of the year and sequentially that's the majority of the drop. Seems to be rebounding strongly this quarter.

So what you are seeing so far in January is back up?

Yes.

On China, any update on your progress there, any milestones you can report or updated David targets?

We have we mentioned that we started a training Company in China which has been real exciting for us. We got about 80 percent growth on sales and that is from a fairly small base but it has been really encouraging. We have two joint ventures in China; one is in polymer additives and the other is in catalyst (indiscernible) catalyst. The latter one is just starting up. We have a number of targets in China for products to buy and resell, products to produce, and so we are being pretty aggressive there. I would hope by the end of this year the greater China, Taiwan, Hong Kong plus mainland China, the sales at that are larger than the sales that historically have come out of Japan which is far and above been the largest region we have had in that part of the world. So we have set that as a milestone to grow to that level.

This is Alan just with a simple accounting question, the bill and hold issue. Was there, once they were billed, did they have any recourse to reject the material? And what were the payment terms key to billing which is normal or were they in (technical difficulty) to the date shipping?

Alan, as you may know when you get into a bill and hold revenue recognition issue there are several very stringent requirements. In this particular case there were no unusual circumstances around the receivables; these were normal for this customer and his type of business and really hadn't changed. The real issue (indiscernible) centers around what is the definition of a firm delivery date associated with this transaction. And that is really where the question has been called. I want to reinforce that there are no issues with regard to the revenue recognition in the fourth quarter of 2003. We are certain that has been appropriately booked. Yet we really wanted to go back and look at some of these transactions at the end of 2002.

Again, in your caution and guidance are you, what kind of assumptions are you assuming hyperinflation and you can't get any price increases? It just seems the strengthening economy and people seeing some price relief and you seem to be running the business pretty well, that may be unrealistically cautious.

Perhaps it is, Alan, but I think from our vantage point we have, what we try to convey in this is some pretty encouraging trends in the polymer chemical arena and as John Steitz has mentioned starting however from a low-priced base so they is a lot of energy to work up those prices and you have been around a long time so you know how difficult that is. That is the upside. On the downside, we mentioned the Zeolite business, we got to deal with that, we mentioned headwinds against pharmaceutical products and ag products. So we have a combination of things going on -- all the while we are rebuilding our portfolio. I just want to encourage investors to be a bit cautious with us that we see again some really encouraging signs out there but they are frankly some headwinds we have to deal with that are defined and there are some like raw materials and energy that are largely undefined.

One just final clarification. If you do close down the Zeolites, are you including the close down cost in that guidance?

Generally but it is a pretty broad, without speaking exactly what that could be, let me say it's anywhere between zero to 10 cents per share hit. So the fact we may have to do that is certainly in the (indiscernible).

Thank you very much.

Mark Gulley (ph) Bank of America securities.

You can be justifiably proud of the degree to which acquisitions have added to the portfolio, but if I do some math I want to make sure I am not missing something. Mark did you say about 28 percent of your sales today come from acquisitions?

That is correct.

That would mean then roughly, what I am getting to is if I compare there for the base sales compared to a couple years ago, it would suggest that on a same store sales your sales have declined. Maybe I'm missing something in that calculation.

No, that is exactly right. You are doing the math broadly speaking in the correct way. You got to be careful about FX in there, but broadly speaking you have done that in the correct way and we have been talking a lot about declines in pricing, I think we put out some numbers in the past about how broadly that has hit the entire industry -- it certainly hit us. The Zeolites business was a material business for us and that is in effect going away and it's been in the process of doing that. So, yes our base business has eroded. We are very conscious of the risk of that. Three years ago or so we will have started aggressively on this path and we have been pretty successful in offsetting that and giving us a better platform to grow, I think.

Yes, we quantified off-line perhaps but it suggests maybe your base sales today, let's call it 775 compared with sales based previous years of 900 or something like that. It does sound like it’s a material hit. I had a second kind of a nit question with respect to flame retardance. You talked about televisions being a good end use market for decabrome. Clearly the TV market is changing as people go to flat-panel displays. I believe the plastic housings are getting substantially smaller as the cavity gets much smaller. Is that going to have a material impact on your flame retardant sales of decabrome?

Before we answer that let me just go back to your math. And we will see if we can quantify this a bit for everyone. A number you should have in your mind is a bit closer to 100 million as a reference point of broad erosion out there. Let me turn it over to John Steitz to answer that.

Mark, we believe those dynamics that you are describing are all true but you have to remember the surface area is much greater also. The average size of a TV from a surface area perspective is much larger so to some degree those are offsetting. The real driver in our mind is the economy and the general production level which so far in this quarter we are seeing a nice uptick in it. There has been a fundamental shift manufacturing televisions into China, so we are supplying more decabrome into China than in prior periods.

As a follow-up are you able to maintain the same market share in China as you enjoyed elsewhere before?

Yes, we had a difficult 2001 just because of the general economy. 2002 wasn't much better but this last quarter we saw our decabrome volumes up about 12 percent compared to last year. Sequentially it was flat but reasonably good solid volumes there.

Dimitri Silverstein.

A couple of questions. You mentioned some of the pricing pressures and competitive pressures you are experiencing in the fine chemicals and particularly in the pharmaceuticals part of the business. On the commercial production side. You also have capabilities in the early stage development and kind of gram and kilogram quantities. Can you give us some insides how that part of your business is doing?

Dimitri what we call our fine chemistry service and intermediates business is we are really pleased and delighted with it and really trying to build on that strategy to help us offset a lot of the headwinds we see in some -- as you mentioned, the bulk (ph) pharmaceutical pricing, raw materials, the Zeolites issue, that kind of thing. So we see a real opportunity here to transform our fine chemicals business and hopefully regain the profitability we had four and five years ago. We are also, so pleased with the services side of that business and the gram and kilogram quantity that we are expanding our facility in Baton Rouge to accommodate that growth that we see there. We are also expanding our small site in Dayton, Ohio, a lot of the work we are getting from some of the big pharma companies so we are pretty pleased with it.

And just to follow up a little bit deeper perhaps you mention you are getting more work or your order book is improving enough for you to justify these expansions. Is that coming from big pharma or is it coming from some of the emerging innovators?

It's a combination of both. We are getting a lot of looks and opportunities from the base virtual pharmaceutical companies that do not have an idea, have a lot of cash but do not have the manufacturing capability. Those tend to be smaller earlier stage opportunities. The bigger opportunities are coming from the Glaxo SmithKlines and Pfizers of the world. Those tend to be further along in their FDA development process and those tend to be bigger in scale.

I understand. Just to clarify when you talk about flame retardant volumes us being up double digits year-over-year on quarter on quarter, that is excluding acquisitions, correct? That is internal growth?

That is correct. I was just talking about brominated flame retardants there; we have not made any acquisitions in brominated flame retardants over the course of the last couple of years. We do not include the phosphorous flame retardant acquisition in those volume calculations (indiscernible).

A final question, you mentioned that your Jordanian joint venture is going to be less of a drag in '04 than it was in '03. What was the impact of this on the EBIT line?

I think we said in the past it was just a loss of a little bit less than 4 million dollars for us in '03. We are looking at cutting those losses by about half going forward so we are thinking hopefully a 2 to 2.5 million dollar loss in (indiscernible) this year.

Frank (indiscernible) Adage (ph) Capital.

Just a clarification, the 4.4 million FX, that you said helped the profits, was that before or after tax?

That is an operating profit that is a pretax number.

And was that just for the quarter, right?

The fourth quarter '03 compared to the fourth quarter '02.

So that would be a tailwind at least if the dollar stays where it is now? We exited the year a lot higher than we ended the --.

That is correct.

Hypothetical question, actually not -- start with the less hypothetical question. You have 40 million dollars in raw material cost go up against you last year, how much were you able to pass through, I mean if you look at your prices, justified based upon raw material real price increases, how much did you actually recoup of that 40 million by trying to do pass through?

It was about 40 cents. The number is in the mid-20s for raw material and energy both. Combination and it's probably two-thirds raw material, a third energy is a good order of magnitude view on that.

I haven't looked but I would just take a guess here, my guess we would be able to pass through about 10 percent of it. (multiple speakers) based, and all into bromide flame retardant (indiscernible) fine chemicals --

Now the hypothetical one. If you get -- your customer the first time it happens, they go, well eat it. And then it happens again to you, do they become a lttle bit more sympathetic at some point in time and it makes it easier to pass it through or they just never have any sympathy for you?

Frank, there is not any sympathy out there, strictly business, and that is why a lot of disciplines require and try to pass these increases on when we can. So we have really taken a big hit as you point out in raw materials and natural gas and energy and our view going forward is that's going to continue. We are trying to work hard to pass those through.

Thanks.

Jeff (indiscernible) UBS.

Trying to say it is hyperinflation of raw materials are you talking about the March quarter versus December quarter that your raw material index will be higher?

What we are saying is just as a caution out there, if you look at some of the trends that are going on in aluminum for instance, chlorine for instance, where if you go back -- ethylene a few years ago and people were shuddering capacity right and left, and we are entering a period now where demand has picked up nicely as we have all noted. In Asia-Pacific and even in some venues in Europe and the U.S. and simply in some areas there is not going to be the capacity to provide it. And when you get into that you get into an exponential pop-up in cost and that is exactly what happened in natural gas. The demand exceeded supply, we saw prices go from the 2 to 3 dollar range up to the peaking at the 9 dollar range. So it's an anxiety for us, we do our best to call the pricing to cap that out there, to minimize the rate of hit, and we are not predicting one quarter versus the next what's going to happen there, but it's an area of concern that we have globally. The availability of raw materials and the pricing of them.

All we can do as analysts is use the current quarter as a base and I guess a clean 44 cents in what historically is not your seasonally strongest quarter in the fourth quarter if indeed we have this business turn -- isn't something on the math. I don't think you buy one billion pounds of aluminum trihydrate, I am just trying to understand what other headwinds besides that --

It's pretty close, we buy about 300,000 metric tons of adh (ph) just as an example.

Do you have any price --?

I do not want to go exactly to that one, just the point I am trying to make is that we are pulling through, order of magnitude of about -- I don't know, it must be about 1.5 million metric tons of raw materials through our businesses. And so it's an area of concern for us. And part of the equation of putting out there for you is that we mentioned the Zeolites, (indiscernible) that business in the fourth quarter, we are not running the fourth quarter. We mentioned some of these pricing issues and pharmaceuticals that is a 2004 issue. A non-2003 issue that we are dealing with, and we are seeing some raw material and energy inflation this quarter versus last.

Jeff Zekauskas with J.P. Morgan.

I just have a general conceptual question. When I look at the returns of Dow Chemical and even (indiscernible)to a certain extent and I look at their ability to sort of pass-through raw material cost increases, it seems in general that their ability is better than the ability of sort of the bromine and chemical producers as well as companies like DuPont. And so what I was wondering is sort of what has structurally changed so that it seems that the core commodity guys have more ability to bring on to get somewhat better prices at low utilization rates in comparison to the more specialized businesses with concentrated industry structures.

That is a broad, broad question. The cases you mention where you really deal with (indiscernible) kinds of businesses you need to think in terms of historically thin margins, you need to think in terms of pipeline delivery systems in place, you need to think in terms of historical indifference, I mean the number of ethylene plants that people have just walked away from, Dow included, Lyondell (ph) was pretty impressive. So they reached that point of saying I don't care if you take it or not, you take it or I'm shutting down. But generally the specialty chemical business has not been in that situation. We also have instead of one bid in price that you deal with on a quarterly basis, adjusting we tend to bid our business for a period of time, so you tend to lock in for a period of time. So we are more of a lagger in terms of our ability to get pricing up than a pure commodity play. The other thing I would say is that we are a global business, we are not a regional business. So if you are consuming ethylene from Dow and produced in Freeport and you consume it in a ship channel you have to deal with those local producers there. We are out selling an active intermediate and we are bidding against people in China and India and Europe and the U.S. and so it's a very global business so we deal with other economies out there that have started to have a play. And I would say that Asia both India and China have emerged and having some power in pricing even though their volumes are low in this business.

I think the other comment is if you look at the last three or four years some of those commodity producers in the U.S. have been operating on a very thin margin, very low cash margin. And for anybody to just by staying in business over the longer-term those prices must come up quite sharply from that very low base. We have been operating on a much higher base the last several years.

Those answers are helpful, if I can just sort of try it sort of one more time. When I look in various chemical industry areas and I see concentrated industry structures in everything from propylene oxide to industrial gases, it seems water treatment chemicals, it seems that in many of the concentrated industry structures there has been an ability even on a global basis, not to have prices entirely deteriorate under competitive and raw material cost pressures. What is it about the bromine area that creates very different incentives for each of the players so that all things being equal there isn't the same resilience and global pricing?

It's just a huge question you are asking, let me try to drill down as best I can in this. The market is extremely competitive. That is not even amongst the producers. If you look in terms of the consumers they have options, which polymer base they are going to use, which flame retardant they are going to use. And you have seen PC PBS (indiscernible)emerge in the marketplace impacting ABS, that has a big impact on flame retardants. So whether you have products you can sell into that market or not depends on how you price your portfolio. Earlier there was some dialogue about flat screens and the impact those have had, so there has been a lot of change in the consumption patterns out there and there has also been some change in the production patterns that are out there. I think those things have created a period of price erosion. Is that going to continue is probably the nature of your question, I think fundamentally to the industry we certainly are doing the best we can to try to over some period of time to change that, but that is not going to change overnight.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) At this time there are no further questions.

Thank you very much. Appreciate your time and we will be happy to talk to you after the call.

This now concludes the conference call. You may now disconnect.