雅保公司 (ALB) 2004 Q3 法說會逐字稿

Good afternoon. My name is Lynn, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Albemarle Corp. 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). Thank you. Ms. Ruiz, you may begin your conference.

Thank you, Lynn. Good afternoon. I'm Laura Ruiz, Corporate Director, Investor Relations, and I want to thank everyone for joining us today for a discussion of Albemarle's third-quarter results, which were released this morning.

Participating with me on the call this afternoon are Mark Rohr, President and CEO; John Steitz, Senior Vice President, Business Operations; and Paul Rocheleau, Senior Vice President and Chief Financial Officer.

As you know, we completed our acquisition of the Akzo Nobel's refinery catalyst business on July 31st, 2004. We recently filed a Form 8-K that includes certain historical and pro forma financial information about the newly acquired refinery catalyst business. In addition, we filed a Form S3 registration statement covering $700 million of securities and providing for a proposed offering of common stock. As a result of this filing, we are currently in a quiet period. So we must limit our discussion to our results for the quarter and nine months ending September 30th, 2004, which include two months of the refinery catalyst business. We will not be able to discuss guidance for the remainder of 2004 or 2005 at this time. And we really appreciate everyone in advance for your understanding.

Please note that the tables on net sales impact of price, volume, foreign exchange, joint ventures, and acquisitions are posted to our website at www.Albemarle.com under the "Investor Information" section. You may also find an updated non-GAAP reconciliation to GAAP numbers on the site, as well as our news release.

A transcript of this call will be posted from Thomson Financial within 24 hours following the call.

I also want to remind you that some of the information to be presented in today's discussion may constitute forward-looking statements, and I would like to call your attention to our caution statement posted on the website, also under "Investor Information." For a list of the factors that could cause actual results to differ materially, please refer to our earnings press release. I would now like to turn the call over to Mark Rohr, who will provide you with a summary of the highlights for the quarter.

Thanks, Laura, and good afternoon to everyone listening in on the call, and also those of you that are listening in via the webcast.

I'm pleased to report third-quarter 2004 net sales of roughly $414 million, up 137 million or 50 percent from the third quarter of last year. This quarter benefited from the newly acquired refinery catalyst business, as well as solid growth from our heritage polymer additives business. For the first nine months of this year, net sales were $1.06 billion as compared with 815 million in the corresponding period of 2003. That's an increase of roughly 30 percent. If I exclude the Akzo Nobel business, net sales would have been up roughly 20 percent year-to-year for the heritage Albemarle businesses.

On a net income basis, third-quarter earnings totaled 20.3 million or 48 cents per share exclusive of special items, and that's on a diluted basis. This is a 37 percent increase from the reported third-quarter results of last year of 14.7 million or 35 cents per share. After adjusting for special items, which are primarily related to the catalyst acquisition, third-quarter 2004 net income was 2 cents per diluted share. Paul will be giving you more detail on special items later in the call.

To say we're happy about the progress made today in integrating the catalyst business of Akzo Nobel will be a huge understatement. The Akzo Nobel team truly is exceptional by every measure. And having now grown with the addition of our polyolefins catalyst business unit, is working with individuals now more aligned services to complete the integration over the next 10 to 12 months. For the third quarter, we realized better than anticipated results from our new catalyst segment, both in refinery and polyolefin catalyst sectors, driven by the growth in the end markets and strong demand for fuels. We're also beginning to identify synergies in the supply chain and R&D areas, which is reinforcing our view that the creation of the new catalyst segment will yield a unique business and technical platform supporting growth into the future.

Third-quarter performance of our heritage business was also impressive, driven by strong volume gains across flame retardants, plastic, and fuel additives, approving pricing on key products such as CP 2000 , mineral flame retardants, plastic additives, and strong demand and improved pricing in bromine and derivatives.

We also saw increased volume and improved product mix in Fine Chemistry Services and Intermediates areas in the favorable effects of foreign exchange to the tune of about $1 million. Gross profit, including special items, was up 30 million to 86 million for the quarter, including the new refinery catalyst business, or 50 basis points versus the third quarter of 2003. We are working hard to increase price for elemental bromine and bromine derivatives to levels needed to cover the raw material cost inflation and yield the margins required to support this industry long-term. We have been successful in raising prices in several areas, and John will speak more to that in a few minutes.

It's important that all these factors came together in a fashion that is helping us face strong head winds from the raw material and energy cost inflation. We are now projecting an annual increase in raw materials of 27 million this year, led by bisephenol-A (BPA), alumina trihydrate, phenol, chlorine and tin. Of this increase, roughly half occurred during the third quarter or up to the third quarter, with a balance expected to occur in the fourth quarter of this year. Energy prices are also up by a little bit over $3 million for the year. We do not see raw material inflation slowing anytime soon, and expect next year to face continued pressure from raw material costs and energy that will have to offset the higher pricing.

In terms of new product development, we continue to strengthen our product portfolio. We've added five new products to our refined chemistry service intermediates area pipeline this quarter, bringing the total in various stages of development to 88, which is an increase -- continuing on a way of increase we've shown over the last several quarters. This is particularly important for the Fine Chemicals segment, as we work to offset the impact in the discontinued zeolite business.

In Polymer Additives, we announced an important new alternative to pentabrom for use as a flame retardant in polyurethane foam. This product, Saytex RZ243 is a non-reactive product, which can easily substitute in existing formulations. We believe this product meets the foam manufacturers' needs for high-efficiency flame retardant, while importing anti-scorch properties to foams used in furniture bedding automobiles, and packaging.

As you may be aware, pentabrom , which Albemarle does not produce, will be voluntarily phased out at the end of 2004 by its sole manufacture.

Looking ahead, the rate of growth in the electronics sector has definitely slowed versus the previous three quarters. While 17 out of 20 top products in the third quarter of 2004 increase the net sales year-over-year, only six of those increased from the second quarter to this -- second quarter of this year. We've also seen the book-to-bill ratio of Printed Wiring Boards continue to trend down in terms of orders versus shipments. In addition, a number of the majors have announced our finished goods inventories. So while demand at present remains very strong and we are running our major flame retardant plants hard to meet customer needs, it's obviously important for us to stay focused on our price increase efforts to catch up with inflation, to manage a smooth integration of the refinery catalyst business, and continue to commercialize winners for a new product development process, in order to overcome the continued raw material cost inflation and any slowdown of the general economy.

With that, I'd like to turn the call over to John Steitz, who heads our business operations.

Thanks, Mark. As I make my comments today, I will be reporting on results excluding any special items. Paul will cover those in more detail in a few moments. The strong results we reported today were the result of excellent execution of a number of important programs involving cost reduction, price improvement, and contribution from our new product and technology platforms. I would like to highlight these efforts, which have occurred in all three of our business segments.

This is the first quarter we will be reporting results of Polymer Additives excluding polyolefin catalysts, which are now included in our catalyst segment. Year-over-year, Polymer Additives segment net sales for the quarter were up just over 31 percent. Operating profit improved 21.6 percent to $20.7 million. This is due to strong volume gains across flame retardants, plastic fuel and lube additives, improved pricing on some key products such as CP 2000, that is our branded tetrabrome product, and mineral flame retardants. Foreign exchange effects contributed approximately $1 million to Polymer Additives' profitability this quarter as well.

Our new product development platforms contributed significantly to our sales growth this quarter. We have been successful in applying Albemarle's unique product development technology to applications such as our all blend antioxidant blends program, which produces a proprietary pelletized form of stabilization; Ethacure curatives that impart unique properties in polymers used for artificial glass replacement; along with some others that address specific needs. For example, the run flat tire project that is being commercialized as we speak. A number of new fuel and lube additives that address requirements for low sulphur formulations, designed to meet more stringent fuel quality standards. In addition, as Mark described, we announced an important new flame retardant -- Saytex RZ243 for use as a pentabrome replacement in polyurethane foam.

On a sequential basis, third-quarter net sales in Polymer Additives were at a record high of $186 million. We have focused on overcoming phenol cost increases through improved pricing and antioxidant and the special intermediates businesses, while continuing to raise prices for flame retardants, particularly the CP 2000 and mineral products, where BPA and aluminum cost increases have impacted us the most.

Looking ahead to the fourth quarter, we expect continued margin from pressure from raw material costs, particularly with BPA, ATH, and tin, as we continue to push for pricing improvement across all our businesses. We are also cautious about the general softening in the electronics industry outlook, which calls for continued but slower growth for the remainder of 2004.

Switching to our new catalyst segment, net sales were $106.5 million for third quarter 2004. As previously stated, this segment reflects two months of results from the recently acquired Akzo Nobel refinery catalyst business, and three months of results from our legacy polyolefin catalyst business. Catalyst operating profit was $13.4 million, excluding special items, which was better than anticipated, both in the refinery and polyolefin sectors. Our polyolefin catalyst profit was up 45 percent year-on-year due to continued strength in polyethylene and PVC markets and a lot of help from some new product activity in that market.

There also is an additional benefit of $1.5 million from some one-time related research credits in the refinery business. FCC shipments were favorable due to strong demand for gas and fuel. As oil prices continue to rise, the spread between low and standard quality crude oil is becoming larger, driving demand for high performance catalysts.

In our HPC business, volumes were strong, but we faced escalating metal prices on molybdenum, cobalt and nickel, which are key raw materials in catalyst production. We are making every effort to capture these increases at our customers. Head winds for the remainder of 2004 will continue to be metal pricing, energy costs, and the general economy.

Third-quarter net sales in our Fine Chemicals segment were up 6.4 percent over last year in a very difficult environment, despite the loss of nearly $10 million in Zeolite sales from last year's third quarter. Year-over-year, operating profit in Fine Chemicals was up just under 21 percent despite continued raw material costs inflation. This improvement was driven by strong performance in several key business segments and the effects of foreign exchange. Excluding zeolites, operating profit benefited from continued strong demand across a variety of our products.

Through the end of the quarter, we have made significant progress on our price increase efforts in the bromine and derivatives area. but we have more work to do in light of continuing raw material cost inflation. We have been able to manage tightness in the chlorine market with no disruption to our bromine business during the quarter. Bromine prices are up roughly 20 percent from last year in a tight market. Oilfield chemicals have rebounded based on increased drilling activity in the Gulf. And Fine Chemistry Services and Intermediates posted strong gains with the increased number and improved mix of new products in our pipeline.

On a sequential basis, third-quarter net sales were essentially flat while operating profits were down due to continued challenges on the raw material front and the normal seasonal downturn in our ag intermediates portfolio in the third quarter. We have curtailed production in our JVC joint venture to complete tie-ins related to our new chlorine production facility there, which is expected to be operational by year-end.

Looking forward to the fourth quarter, we will experience some unabsorbed factory costs resulting from a turnaround in our Ibuprofen facility, which is associated with the cost improvement and automation project tie in, which will continue to help us drive down our cost of producing Ibuprofen. We expect continued growth in demand for bromine and derivatives, and do not anticipate any slowdown in shipments in the fourth quarter due to the tightness in the chlorine supply situation.

In our ag intermediates business, we are experiencing some tight supply in some key raw materials, which may impact us toward the end of the fourth quarter. So with that, I'd now like to turn over to Paul Rocheleau.

Thanks, John. There's a lot to go over this afternoon. First, let's start with the statement of income for the third quarter. Once again, let me mention that the reported numbers include the impact of the refinery catalyst business since August 1st.

Compared to the third quarter of 2003, finally catalysts added $83 million in net sales for the quarter. In the press release, you'll see the reconciliations from the reported GAAP net income and EPS to our earnings before special and nonrecurring items. Excluding the special items, we earned $20.3 million or 48 cents per share in the third quarter. And let me walk you through these special items. These are all on an after-tax basis.

First, there were $21.8 million or 51 cents per share of onetime expenses associated with the acquisition, including $10 million in charges associated with foreign exchange hedging of the purchase price, 8.5 million for the markup of acquired inventory to reflect selling value over book cost, our write-off of $3 million of in-process R&D, and 0.3 million of deferred costs associated with the financing completed in September 2002. I want to stress the values associated with inventory adjustments and in-process R&D are subject to further review, and are the best estimates at this time. The foreign exchange hedging charge is associated with the difference between the dollar euro upon closing, which was 1.2025 on July 31st, and the average net value of foreign coverage of approximately 1.23. Since the U.S. dollar and Euro have fluctuated as much as 10 cents over the last nine months, we decided to cover the transaction in the weeks leading up to closure.

In the third quarter of 2004, we also had two special items associated with insurance recoveries. First, we'll receive cash payments of 6.9 million over the next two years, generating a $4.4 million after-tax gain to settle the dispute regarding environmental claims within a historic insurer. We also took a book charge of 2.4 million after-tax as a write-down of a receivable associated with a product liability claim. Combined, these adjustments resulted in a special gain of 5 cents per share.

In preparing the segment detail for the quarter, we've made two adjustments. First, we simply took the additional polyolefin product's P&L and rolled the values into the acquired catalyst business. The 2003 comparisons reflect only the legacy polyolefins catalyst products.

Secondly, we allocated 1.2 million of SG&A to the new catalyst segment. You'll undoubtedly note the higher unallocated SG&A of $10 million versus 5 million in 2003. The variance is due to incentive compensation accruals, lower pension income, and higher legal expenses.

Our consolidated balance sheet is based upon an estimate of the purchase price allocation associated with the refinery catalyst business acquisition. I want to caution that the asset values, intangibles and goodwill recorded in the quarter are also subject to further review. An independent appraisal of the purchase price allocation is underway.

As general perspective, the EUR615 million purchase price has been allocated to working capital, fixed assets, joint venture equity, amortizable intangibles and goodwill. Overall, approximately EUR195 million of the acquisition value has been allocated to non-amortizing accounts, such as working capital, J.V. equity, and goodwill. And EUR420 million is estimated to be amortized over 15 years.

Our $5.7 million of third-quarter financing expenses, which excludes the write-off of deferred financing costs, reflects the increased debt associated with the acquisition. Upon close of this transaction, we had total indebtedness of about $1,025,000,000 composed of a $450 million bridge loan, a $450 million term loan, 60 million drawn on our 300 million revolver, and other miscellaneous debt. As of September 30th, our indebtedness, including J.V. debt guaranteed by the Company, was reduced to 990 million. Our net debt, as of September 30th, was 930 million. These reconciliation are on our website. Virtually all of our debt is floating with an average rate of 2.6 percent in the third quarter.

Our current liabilities include 450 million of bridge financing plus the 45 million associated with the current portion of the amortizing term loan. The bridge will be taken out with a combination of debt and equity as we had previously indicated.

You will note that we continue to record a tax rate of 29 percent. We continue to benefit from the foreign sales corporation benefits and depletion deductions, as well as the impact of the special items.

I now want to make a few comments regarding cash flow. Even with the special items, we have generated 131 million in operating cash flow over the past nine months and 46 million over the past three months. Our capital spending in the third quarter, including investment in joint ventures, was $20 million, reflecting the addition of the catalyst business and the continued investment in our Jordan Bromine Company joint venture. Due to the strong organic growth in each of the business segments, we are considering a range of attractive projects to support our continued growth.

In the third quarter, we also paid $6.1 million in dividends to our shareholders. Once again, I want to mention that the consolidated cash flow statement and balance sheet contain estimates for working capital and other investments. There will also be a final working capital reconciliation with the seller of the catalyst business.

On our website, you'll notice our reconciliation of reported net income to EBITDA. For the quarter, we reported earnings before interest, taxes, depreciation and amortization of $32 million. And I want to stress, this includes the special items.

I want to close by mentioning that two of our corporate priorities are to complete the permanent financing associated with the acquisition and to continue to pay down debt, further strengthening our balance sheet. Let me now turn this call over to Laura for the Q&A.

Thanks Paul. Before we start the Q&A session, I want to again remind you that we are in a quiet period and must limit our discussion to the results for the quarter and nine months ending September 30th, 2004. We will not be able to discuss at this time any guidance for the remainder of this year or 2005. Okay, I think we're ready to begin.

(Operator Instructions). Our first question comes from Bob Koort of Goldman Sachs.

Thanks, very much. I appreciate that. I was wondering, you mentioned that obviously volumes have been terrific in the flame retardants business. But starting -- maybe you'll start to see some deceleration. Can you give us some sense of how you expect to phase in production out of the Jordan plant?

Yes, Bob. This is John Steitz. Thanks for the question. Well the Jordan plant is specific to tetrabrome. Overall, we do see some deceleration in volumes, but compared to last year, we still believe there will be some reasonable, maybe low double-digit increases compared to last year. So on the tetrabrome front, which is specific to the Jordan facility, there is a fairly major backlog in orders there. Our first priority is to continue to drive pricing up, but we are having strong demand for the product as well. So our near-term horizon for that product continues to be fairly strong volume gains due to the lower-priced electronics market. That seems to continue to be reasonably healthy.

And I thought Mark made a comment that when you go to customers, you can't go hat and hand and just talk raw materials because that's not enough. Also, you have to restore margin to reinvestment levels. Can you give me some sense of how much higher prices have to go before you hit those sorts of levels?

Well, I tell you, we've had a number of contracts and bids that are in play that have gone into effect in the fourth quarter. And we're having a lot of success getting prices up. The problem continues to be the rampant escalation we've seen in BPA and our anticipating continued tightness in chlorine, which directly impacts our bromine costs. So I think, you know, we're still chasing a very rapidly escalating raw material curve. And we'll continue to be doing that, we believe, for quite some time. So to get significant reinvestment economics, we think prices have a ways to go yet.

Let me actually ask it a different way, since obviously there are two moving parts to it. You need sort of 15, 16 percent segment margins to get to that reinvestment level. Or should I look at it some other way?

Yes, I think that's a good number. We certainly -- if we get enough tail wind behind us here, we'd be happier with more. But that -- I think 15, 16 percent margins, we'd be reasonably pleased with.

Great. Thanks for the help.

Your next question comes from Ray Kramer of First Analysis.

Hey, guys. Two questions if I could. First, looking at gross margin, I was pleased to see it was up sequentially. Can you comment there? Was that just getting some price through? Or was there a gross margin benefit from the Akzo catalyst business?

Yes, Ray, John Steitz. We've had some success on the pricing front. But you have to keep into account that, again, the raw material escalation in the third quarter was fairly significant between raw materials and energy. We were talking in third quarter year-on-year about $9 million. So that continues to be a big challenge for us.

The margins on the catalyst business were good. They're better than we expected. We're quite pleased with that. Our own legacy polyolefin catalyst business did quite well. Very strong finish to the third quarter. And we've had a number of businesses that did well on the Fine Chemicals front. Our Fine Chemistry Services business did better than we expected. We're really proud of that team and their effort. Our bromine business did well. The volumes are up and we're getting some price pass-through. Thank goodness for the price pass-through because chlorine remains a pretty big issue. Our oilfield business did better. Our ATH businesses did -- were strong, both on the performance chemicals side and the flame retardant side. So things kind of clicked for us. So we hope that momentum continues.

Ray, and on that, the point John is making, I really want to reinforce here. The mental picture you should have of raw material inflation is that through the first three quarters, as I've noted, we've seen about half of what we're going to see this year. So there's still a lot in front of us here that we're working hard to cover. So you're seeing a whole bunch of efforts that resulted in that positive margin growth. We hope we can keep that going.

So given the price increases that you've gotten through so far for the fourth quarter, do you think you can maintain gross margin, given that there's the big increase in raws? Can you keep increasing it sequentially? What's your best guess?

Well, what we've got in place now, we think we can cover it. We think we can cover it in the fourth quarter.

Okay. Wonderful. And then just finally, a question on the Polymer Additives front. Given reports this quarter from some of your competitors, I know Great Lakes had volume up 8 percent, price up 3; CIBA, volume up 12, price minus 2. And then with your much stronger results, are you still saying that you're not gaining share? Are you ready to admit that now? How do you view that environment?

No. We don't believe we're gaining share. I think we've had very good cost control, very good cost management in our plants. We've had a tremendous -- expended a tremendous amount of energy to make sure of that -- that we try to offset the raw material inflation. I think it's been no surprise to us, to some degree, that we kind of foresaw this at the beginning of the year.

We didn't expect BPA to go up as dramatically as it has. So that's kind of -- we've recalibrated our thought processes on the pricing there. But we do not believe we're gaining share. Our customer base has been very solid in the brominated flame retardant area. We've got a lot of specialties, very strong mix there that comes into play. Our mineral flame retardant business has -- that whole market has grown nicely for us.

The companies you named, we don't compete with in this area. And our Fine Chemicals is a fairly unique combination of different businesses. So we don't believe we've gained market share on that front. Though in the Fine Chemistry Services area, we've, I'd say, captured a lot of new product opportunities because of our really strong model for generating new business.

Looking just at net Polymer Additives, I mean with volume growth on the order of two times that what you're seeing from other competitors, how do you explain that? Is it just the niches you're in are growing really strong? Or what's sort of the -- how do you explain that?

Well, year-on-year, I mean there's a big improvement in the markets. You have to consider that last year in the third quarter, I mean, there was some very slow volume growth at that time. We just started to see the volume growth pick up say October of last year, and it picked up through the fourth quarter. So year-on-year, a big part of that is just a rebound from a very slow market. So sequentially, we're not seeing the kind of dramatic growth that you're suggesting that would indicate we're taking market share. Decabrome (ph), sequentially, is down a bit. Tetrabrome, sequentially, is up. But there's also been a -- there's a pretty big backlog of orders there because of the rampant escalation in the growth of that marketplace. But I think in large part, it's growth year-on-year in the market.

Okay, and then finally, with the Jordan joint venture, if you bring capacity up there on schedule, would your plans be to bring it up in such a way as to gain market share eventually? Or what's the strategy in terms of the timing there?

Hey, Ray, this is Mark. We've been running that unit and producing tetrabrome there for almost a year now. We've been in the market with it and we've done that in a very prudent fashion. What we're really starting up now in this next phase really is not an expansion of that unit per se. We're putting in a chlorine plant. We've been buying chlorine and trucking it in, which is a pretty awkward situation. So we're putting the chlorine plant in. We're now starting the facility for that up, and it should be running by the end of the year. And so what that will do is it will dramatically lower our cost -- raw material cost -- of the unit. It's not going to bring new product in the market that's not currently there.

Okay. That's helpful. Thanks a lot, guys.

Your next question comes from David Begleiter of Deutsche Bank.

Thank you. John, on your chlorine costs, how much do you purchase on an annual contract basis? And what would that imply for a chlorine head wind in '05 versus '04?

Hi, David. David, you need to take some Ibuprofen. You can help us there. It sounds like you're struggling with the seasonal --

I'll buy some. Thank you!

We've got some chicken soup (multiple speakers)

Good luck. Sorry you're not feeling well. David, chlorine -- I really don't want to get into the specifics about volumes and commitments that we've got. I will say that it is an extremely tight market. Our team got together and worked in the third quarter to make sure that we did not have disruptions to our supply chain. They worked with our suppliers through some difficult times, and they helped us out. We worked with some customers. We were able to procure some additional material, albeit at a premium, and that kept us running pretty nicely. And it was a really great team effort.

Going forward, there's no doubt the chlorine market is very tight, and I think there's no doubt that prices of chlorine will go up. So we're just really trying to work on the market side of that to get pricing through to cover it, not only in bromine, but the bromine derivatives, our bromine fine chemicals business, our bromine water treatment business, and last but not least, the bromine flame retardant business. So we're working hard to cover that. But it's a tight market, difficult situation, and there's continuing to be more consolidation in that from the supplier point of view.

That's great. Could we move over to F.R. tetrabrome pricing. There appears to be a new dawn in the industry over the last few months. Can you talk to that? And how much higher can tetrabrome pricing go, going forward?

We -- yes, it does seem to be a new dawn. I hope it's many new dawns. The pricing in the market has gone up. It's very tight. There's been a lot of volume growth. And we hope to continue that momentum. To what degree, we're not quite sure beyond the first of the year.

But one thing we do know for sure is that BPA has escalated rampantly. Just at the first of October, it went up another 30 percent from the September timeframe. And there doesn't appear to be any easing on that front. And we just talked about chlorine. So we've got to continue to really -- that's our first priority in the business, continue to drive pricing up.

Now how high can it go? Well it depends -- brominate epoxy oligomer has got to continue to go up. We're not in that business, but one would suggest that with bromine being tight and under a lot of raw material pressure, that it too would be increasing in price. So tetrabrome, we think from a pricing perspective, could have a lot of legs on it, but so do the raw materials, unfortunately.

David, when you look at a -- this is Mark -- when you look at it from an end-use point of view, broadly speaking, these additives are pretty inexpensive, even with a little bit of price improvement we've gotten. So you shouldn't have a view that it's going to materially change the end product cost with the inflation that's occurred. So our focus is on trying to get ahead -- and we're not yet ahead -- but trying to get ahead of raw materials, and at some point in time, hopefully spread a little bit of margin. I mean that's really what we're focused on right now.

Thanks a lot.

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

Hi. Good afternoon. By my calculations, the acquisition was accretive by 8 cents in the quarter. Is that right?

Jeff, this is Paul. Certainly, the acquisition was accretive in the quarter. I think -- I'd prefer not comment specifically on the calculations. I think the data is all there for you to come up with a good estimate. But you're broadly in that right direction.

Okay. So in terms of pricing in brominated chemicals, is -- how can I put it? Is pricing now really determined more by supply and demand? Or is it more by raw material cost inflation, in terms of upward pricing right now?

Jeff, this is Mark. I think it is really supply and demand. The dramatic inflation of raw material pricing has given folks, broadly, across the world, a lot more constitution than they had in the past. And so, you're seeing the fringe players in the developing world are falling by the wayside. They can't continue to sell products at the prices they've been able to; that's tightened up the market. You're seeing the major players really go to customers in a polite but firm way and say take it or leave it. We've got to get these prices or we're happy not to sell. So we've become more indifferent in the marketplace. So it is more supply/demand in my point of view.

Yes. In terms of, if capacity is ever expanded in bromine, is Israel -- or Israel/Jordan the only place that it's rationally done? Or are there other places where it's even possible?

Yes, practically speaking, the choices that you have out there are pretty limited today. And you need to think in terms of the Dead Sea being the future source of bromine as we've talked about in the past.

Well, look, you guys have done such a nice job in polymer chemicals, both structurally and competitively. You've done such a nice job in making this acquisition. But what about fine chemicals? What is it that sort of turns fine chemicals' profits and profitability over a longer period of time? How do you revitalize that business?

Jeff, let me start that and I'll have John give you some specifics in just a minute. But if you look at the trend there, which has had a negative slope, we've been pretty open about, really, about what's caused that, which has been the maturing of a number of our products. One that you always brought up is zeolites. Those things were very painful, we lived through.

But if you -- if you not only look at the numbers today, what you'll see is, I think we're performing as we said we would in the past, which is that this year is our, we think, our bottoming year, our recovery year. And we've looked, with the Fine Chemistry Services area, the new products we're bringing in there in bromine and stuff, we expect that trend to reverse itself. So let me ask John to give you a few examples of areas.

Yes, Jeff, you're exactly right. We've been through a very difficult, challenging, call it three years in Fine Chemicals, primarily due to our position, I'd say, in more one customer, one supply situation -- one supplier situations in primarily commoditized type products. And that offered us very little leverage. So what we're trying to do is if you look at Fine Chemicals, I divide it into three areas where we're really trying to focus our emphasis.

One is our whole model of Fine Chemistry Services. One that's generating an outstanding pipeline for us of new products, but it's also making money for us. And we're really pleased with that. Second is in bromine. Our whole bromine franchise. We want to continue to really build that franchise from a high value-added point of view., and using our strong position in bromine to do that. And we’re seeing a lot of success this year in driving pricing improvement across the whole portfolio. And the last I deem is life sciences. Specifically, as a result of the pipeline we've generated, we're looking at some really, I'd say, unique investments in the pharmaceutical and ag market that really would set us apart from our competition.

And I don't want to go into much more detail about that because we're building some what I'd call very nominal capital expenditures to get ourselves in position to take advantages of this opportunity in the marketplace. But you tend to be very small volume, very high value added products that primarily the pharmaceutical market is really looking for. So we've got these three legs, and we really looking forward to building that in the future.

So if you looked at the life sciences part of Fine Chemicals through the first nine months, how did it do in terms of sales and operating income versus the previous year?

Well, our sales are, I'd say, flat in total. Primarily because our Ibuprofen business, year-on-year, is flat.

Has been flat?

Yes. Our Naproxen business, volumes are up, but pricing is down; so that's been a tough market for us. There's some other specialty products, though, that are much smaller dosage levels and very, I'd say, unique that have done quite well. So our profit is, I'd say, up, not double-digit range, but up year-on-year, and our sales are probably flat.

Okay. Thank you very much.

(Operator Instructions). Your next question comes from Mark Gulley with Banc of America Securities.

Good afternoon, guys. It's Marshall Reid filling in for Mark. Back to catalysts, a question on margins. They appear to be down year-over-year. Is that a reflection of mix betweenFCC and HPC versus polyolefin? Or is that raws?

Well, Marshall, this is Paul. Can you give us some direction as to where you're comparison is at? Because what we've published is really only on the legacy polyolefin catalyst business.

Yes, I was looking at the 20 million in revenue you had from polyolefin last year. Margins on that versus the margins --

Yes, the weighted average margin on that business on a weighted average basis is higher than the margin on refinery catalyst business.

Okay.

So you've got a huge mix effect in there. But directionally, the business is down some just due to raw material inflation, like so many of our other businesses out there.

Okay. That's what I was driving at. And as far as the financing is concerned, once you guys take out the bridge, how much is going to be floating? You mentioned 100 percent is floating today. And are you guys worried about rising rates here as we go into '05?

Marshalll, I think we've indicated that we do want to look at a capital structure that has a combination of fixed as well as floating. We haven't brought any specifics going forward, and that will be the subject of a future announcement.

Okay. Final question. The 1.5 million in research credit, was that excluding the 48 cents?

No, that was part of the operating profit.

Okay. Thank you.

Your next question comes from Mike Sison of Key / McDonald.

Good afternoon, guys. Could you help me understand a little bit the supply balance in FR? Could you sort of give us a feel of how tight the industry utilization is? Is there sort of a metric you can give us, and how does that compare to the last peak? Are we sort of there?

Yes, Mike, John Steitz. I think you almost have to go into a product-by-product basis on that. Tetrabrome began very tight. I think the whole market is oversold, so very tight supply and demand balance there. Decabrome not so tight. There is some leeway there in terms of capacity overall in the marketplace. But a lot of that will be driven by consumer spending on televisions.

A lot of the other businesses in our Brominate flame retardant area are quite tight, and running generally at full capacity. So that's why the real priority here has to be to get prices up, as we mentioned, to get in a sweet spot where there's some reinvestment economics. But the other markets that we operated in, in ATH, that market is also very tight. So we're trying to drive price improvement there in light of a very rapidly escalating raw material environment as well.

I'm sorry. Did you have another comment?

No. So hopefully that will give you some idea of where we are on a product-by-product basis.

Right. If you do close the gap here in the fourth quarter in terms of selling prices and raw materials, raw materials hopefully -- let's say they stabilize going to 2005. Will you actually start to have a surplus?

Well, we certainly -- we don't have any intention of giving price back, if that what your question is. I mean, we found a very difficult market out there the last five years. And we've had to give up a lot of price dollars over the last five years. And if there's an opportunity to hold onto it, we're going to do that.

If raw materials fall and the supply/demand environment maintains as it, you can keep your prices probably?

Well, that's going to be our first and foremost effort. I guarantee that. But with that, our opening view towards next year is that raw materials are going to be very tight and escalating in terms of price.

Right. Shifting gears a little bit, in catalyst, could you just give us a little better feel of the year-over-year sales growth by FCC and hydroprocessing catalyst in the quarter?

Yes, I sure can. I'll give you some directional numbers. Year-on-year, we believe the FCC volumes are up in the 7 to 8 percent range, year-on-year. HPC is still not up that much. We're really trying to work on getting prices up there, even at the risk of losing some volume. because the molybdenum has a much higher driver in that cost, of course. And molybdenum has absolutely skyrocketed. So we're really working hard to get prices up in HPC. But hopefully that will give you some idea on volumes. Trends in the market are very strong. I mean, a reduction of sulfur, SOx and NOx reduction, sulfur oxides and nitrogen oxides is a very strong driver from a regulatory perspective. So we've got -- there are a lot of legs here.

Are you walking away from business that isn't as profitable?

No, I can't say we've done that. We always look at the customer mix of things and try to balance that thought process out as we price new bids and contracts. But I can't say we've walked away from any existing business that we've had.

Mike, I'd just add on that. That's in regard to catalysts, I think that in, really with some of our other fringe businesses, like in the bromine area for instance, we have truly walked away from some business that was way too thin to support -- to be supported at today's value. So we are walking away from some marginal business in other areas.

Okay. And the supporting materials you gave us in the third quarter, looks like you have a minus 6 in price mix for catalyst chemicals. Is that more mix versus price or --?

Yes. Yes, Mike, John Steitz. Yes, there's a big mix issue in our polyolefin catalyst business. I mean there's many, many different products in that whole portfolio, so there's always a big mix issue there.

Okay. And final question -- when you think about the potential margin for this business -- for catalyst in total -- I know you've only had it sort of put together at a month, about 13 percent now. Do you have any feel, Mark, where you think you can take that margin over time?

No, Mike, I really can't talk to that point just yet. So if you'll be patient with us, and let us finish the financing and take care of these other issues, we'll be happy to talk about that next year.

Alright, thanks, Mark.

You have a follow-up question from Jeffrey Zekauskas.

Just two quick questions. Is there any seasonality to the acquired Akzo catalyst business? You know, is this in general a particularly good time to sell catalysts? Or are there better times during the year?

Jeff, this is Mark. No, there's no seasonality to the business. There is lumpiness though. The FCC business is very ratable. But the HPC business, this is fixed bed catalysts, the single order is a big dollar amount. And those come in based on when the catalyst has expired and it's been rebid. So I would characterize it as lumpy. And so you could well see some quarter-to-quarter variations here that are more profound than in our base business.

And what's the rough timing of your various financings?

Jeff, as you know, we have published the S3. As we said in our press release, we're really contingent upon review by the SEC, and also contingent upon market conditions. We do have the bridge loan out there that goes down through the middle of next year. And I think that that probably brackets the timeframe that we're looking at.

Do you hope to get any of this done by the end of the year?

A lot of it is out of our hands to even give comment on that.

I was just asking about the hope, not the reality!

Did you hope the Yankees would win?

Thanks very much.

You have a follow-up question from Mark Gulley.

Just one quick follow-up. I just wanted to get a sense -- you mentioned a lot of new products. What's the percentage of sales today from new products versus say last year?

Is this Marshall?

Yes, it is.

Yes, Marshall, it's John Steitz. Hi. We're still running what we believe is a pretty healthy 15 plus percentage of products commercialized in the last five years as a percent of our total sales. So we want to continue to drive that. Our catalyst business is higher than that because technology is so important. So, it's good stuff. I mean it's really the lifeblood of everything we do.

Can you maybe indicate a goal over the next couple of years where you're trying to get to?

Overall in the Company, we'd love to get to as high as 20 percent for the whole Corporation. But that will be a challenge, but we're really working on it.

Okay. Thanks.

There are no further questions at this time.

Okay. I'd like to thank everybody for participating today on the call. And this concludes the discussions and Q&A session for today. If there are any follow-up questions, my number is posted on the website, and you can feel free to contact me there. Thank you very much.

This concludes today's third-quarter earnings conference call. Thank you for your participation. You may now disconnect.