Confidence Man

AN INVESTOR who put $100 into a basket of 21 specialty chemical company stocks at the beginning of 2002 would have ended 2006 with about $169???a reasonable return. But an investor who put that same $100 in Albemarle stock would have ended last year with $326, more than three times the return.

Clearly, Albemarle is doing something right. At a time when specialty chemical companies such as Chemtura, Ciba Specialty Chemicals, and Clariant are cutting jobs and selling businesses, Albemarle continues to expand. Profits last year were triple what they were in 2003. The company doubled its annual sales in that period, and Mark C. Rohr, president and chief executive officer, believes he can double them again over the next five years.

Rohr, 55, makes this claim with some confidence, having run the company for the past five years. He left Occidental Chemical in 1999 to join Albemarle as head of operations. He became president in 2000 and CEO in 2002.

His confidence stems partly from what he sees as the almost limitless opportunities for a research-oriented specialty chemical company that can provide solutions to a customer's problems. "The value equation we bring to customers is much more profound than it used to be," Rohr says.

But he's also confident in Albemarle's ability to acquire businesses and successfully fold them into its corporate structure. In his view, the company pulled this off in 2004 with the purchase of Akzo Nobel's catalysts business and then again last year when it bought DSM's pharmaceutical chemicals plant in South Haven, Mich.

Albemarle was formed in 1994 when the Gottwald family decided to split Ethyl, a company it had long controlled, into separate fuel additives and specialty chemical companies.

Albemarle's first few years of life were cautious ones marked by modest sales gains and incremental acquisitions that augmented its two legs in polymer additives and fine chemicals. The $763 million deal with Akzo Nobel in 2004 changed all that. The purchase added a completely new business in refinery catalysts and increased Albemarle's annual sales by $680 million, roughly 50%.

Rohr tells C&EN that his executive team had actually identified the catalysts business as an acquisition candidate back in 2002. Akzo wasn't interested in selling at the time, but having done the initial legwork was to Albemarle's advantage when Akzo later made the decision to sell. "Because we had prospected before, we were confident we could make it work," Rohr says.

FOR EMPLOYEES of the former Akzo business, the transition from being a small part of a $17 billion-per-year company to fully a third of a much smaller firm wasn't easy, Rohr acknowledges. Yet he says Albemarle sought to draw on the new employees' expertise during the integration rather than impose its will on them. Today, he notes, several one-time Akzo executives hold top positions in the wider Albemarle organization. The former head of the hydroprocessing catalyst unit, Huub Cuijpers, for example, is now managing director for Europe, while Kees van der Wiele, former head of catalyst R&D, is now Albemarle's chief technology officer.

The DSM plant purchase was a $26 million deal more in keeping with the "bolt-on" acquisitions that Albemarle typically favors. DSM earlier had said it would close the South Haven plant in order to focus on custom pharmaceutical chemicals that offer better returns than the generic active pharmaceutical ingredients manufactured there.

The purchase represented a trading up of sorts for Albemarle, which had made a similar move just a few months earlier when it sold a barely profitable facility in Thann, France, that produces potassium-based fine chemicals. Together, the two transactions helped boost earnings in Albemarle's fine chemicals business by 40% last year to $62 million, before a divestiture charge.

Albemarle now stands out as one of the few large U.S. firms to have stuck with and succeeded at the notoriously up-and-down business of contract fine chemicals manufacturing (C&EN, Nov. 6, 2006, page 14). As Rohr says, "There are a lot of opportunities in fine chemicals, and we are good at managing them."

He says that the company receives as many as 50 inquiries per month from pharmaceutical and other companies looking for assistance with chemistry process development and manufacturing. Increasingly, the inquiries are about projects that may be too modest to appeal to a big company like DSM. "The market has moved from big opportunities to smaller opportunities," Rohr says. "But for Albemarle, a million dollars adds a penny a share to our earnings. So for us, small opportunities mean a lot."

Rohr sees opportunities across all of Albemarle's businesses, and to capitalize on them, he recently named veteran executive John G. Dabkowski as vice president of business development. Dabkowski started with Ethyl in R&D in 1973 and went with Albemarle when the two companies split. He has held numerous roles in top management and recently ran the firm's polymer additives business.

Rohr explains that Albemarle has had business development leaders before. "What had been missing is having somebody with very broad experience in chemical business management heading that effort," he says. "John can work with everyone from business leaders to R&D to create opportunities and then go prospect for them."

Dabkowski also sees growth opportunities across Albemarle, although they vary by division. In catalysts, he points out, Albemarle can strengthen its already strong refinery and polyolefins catalyst businesses, or it can acquire businesses in chemical catalysis and other market niches.

The polymer additives market is worth $15 billion worldwide and growing by 3% annually, "so there's a lot of new opportunity each year," Dabkowski says. In particular, he is targeting additives with a green sheen to them. Albemarle is a major supplier of brominated flame retardants, and while company managers consider them environmentally sound, they also know that some customers are turning to nonhalogenated alternatives. Apple Computer, for example, has pledged to phase out brominated flame retardants by the end of next year.

The Albemarle executives caution against high expectations on the deal-making front, in part because of growing competition from acquisitive private equity firms. "Private equity didn't really exist five years ago," Rohr says, "so the ability to acquire a business and have it be accretive to earnings is more difficult today." Moreover, Albemarle's past success at buying businesses and improving their profits has, ironically, raised the bar for future acquisition candidates.

Rohr is quick to point out that Albemarle's own research and product development capabilities provide ample opportunity for growth. "We have 500 people worldwide in R&D," he says. "That's the largest block of employees in the company." In part due to the Akzo Nobel acquisition, the firm has increased R&D spending by 45% over the past three years, and it is hiking spending again this year to promote organic growth.

IN FLAME RETARDANTS, for example, Albemarle is developing polymeric brominated compounds that, according to Rohr, aren't toxic, don't bioaccumulate, and don't face restrictions under the European Union's new Registration, Evaluation & Authorization of Chemicals (REACH) program. The firm also offers a growing portfolio of mineral-based flame retardants and, in fact, recently doubled capacity for aluminum and magnesium hydroxide retardants at plants in Europe.

In the catalysts division, Albemarle's fluid catalytic cracking catalysts are in demand by oil companies that use them to improve their refinery slates by shifting from, say, gasoline to propylene output. And its hydroprocessing catalysts, Rohr says, are critical for removing unwanted sulfur from heavy crude oils. "Desulfurization is limiting refinery throughput today," he explains.

Prospects are good in fine chemicals as well, according to Kevin W. McCarthy, a stock analyst who follows Albemarle for Banc of America Securities. He thinks profit margins in the business could rise from 11.3% in 2006 to more than 18% in 2008, thanks both to the plant swap and to a development pipeline that holds 175 new products, up from just 12 in 2004.

Interestingly, after more than three years of appreciation, Albemarle's stock price and product sales are slumping. The stock traded at less than $42 per share last week, down from its high of close to $45 in the spring. And although the firm's first-quarter earnings met expectations, sales fell by almost 3%.

McCarthy sees this situation as an aberration and last month raised his rating on the stock from neutral to buy. Likewise, Michael J. Sison, an analyst with KeyBanc Capital Markets, raised his rating on Albemarle earlier this month from buy to aggressive buy. "We see a strong ramp-up in earnings growth for Albemarle in 2008 fueled by fairly visible organic sales growth in catalysts, further margin expansion potential in fine chemicals, and a recovery in plastics additives volumes," Sison wrote in a note to clients.

For his part, Rohr says he doesn't like to see sales decline, but he argues that many of Albemarle's businesses expand in a stair-step pattern in which flat periods are followed by periods of strong growth. He is confident that, over the long haul, Albemarle can expand on its own at 6-7% per year, or double the growth rate of the U.S.'s gross domestic product (GDP), and then acquire additional business on top of that.

"There's so much growth in the world today, and specialty chemical companies like Albemarle are out there creating unique solutions," Rohr says. "We should be able to achieve growth that's at a good multiple of GDP and should be able to double our size in the next five years."