BUSINESS
Newly Formed Albemarle Aims To Be A Premier Specialties Firm • President of Ethyl Corp. spin-Off company with old-line name looks for economic recovery to boost demand, profits Marc S. Reisch, C&EN Northeast News Bureau
T
he new Albemarle Corp., just spun off from Ethyl, is a study in contrasts. The newest kid on the block, the com pany was divested from its parent, Ethyl Corp., late last month, but its name and heritage are 107 years old. Its corporate headquarters are in Richmond, Va., where Ethyl, too, is based, but its adiriinistrative headquarters are in Baton Rouge, La. Op erating rates in some major businesses are low, but Albemarle continues to start up new capacity nevertheless. And although several analysts think management is out standing, they say the new president and chief operating officer, E. Gary Cook, still will have a difficult time with several slow-growth businesses. Nonetheless, ever the optimist, Cook believes that Albemarle is poised for growth. Explaining some of these contrasts in a recent interview with C&EN, Cook notes that Albemarle's name underlies a heri tage of entrepreneurship dating back to the original paper manufacturing compa ny that took over Ethyl and then assumed Ethyl's name in 1962. The reason Albe marle retains corporate headquarters in Richmond is the financial continuity and oversight provided by company officers it still shares with Ethyl, says Cook. Howev er, chemical operations with 3,800 em ployees have been administered out of Baton Rouge, close to the chemicals busi ness, for years. As for the emphasis on new production capacity, notes Cook, that will not only keep the company on the cutting edge of technology and quality 14
MARCH 28,1994 C&EN
tions include new capacity to supply brominated flame retardants, the bulk anal gesic ibuprofen, zeolite detergent builders, and paper sizing compounds. The com pany has also opened a new research lab oratory in Louvain-la-Neuve, Belgium. And in February of last year, it purchased the French bromine chemicals firm Po tasse et Produits Chimiques from RhônePoulenc for $122 million. That kind of spending has given the company more than $1 billion in assets. Expansion during the past four years did not stop with the construction of new capacity and research capability. While the economy sputtered worldwide, the businesses that were to become Albemarle prepared for an upturn with an expansion of their sales operations in Japan and Singapore. Albemarle Cook: we are coming on to good times has new terminal facilities in Australia and other parts of the Asia-Pacific region production, but also allow the company as well. It has also positioned itself to to take advantage of a coming economic take advantage of the growth in China when the time is right, with a recently resurgence. On becoming an independent public opened office in Beijing. With those investments behind it, Cook ly owned company now, Cook says, "the timing is good for Albemarle. There believes Albemarle is in a good position is no question about that. ... We think to make those ventures pay off. Although the nadir of our performance had we it relied on Ethyl to help with investments been a company in 1993 would have before, Albemarle will have to succeed on been the first half of 1993." Cook, who its own strengths now. The old Ethyl was has a Ph.D. degree in chemistry, joined a nearly $2 billion company with signifiEthyl from DuPont in 1992 to head the cant profits from the tetraethyl lead fuel additives business. (Lead additives supchemicals group. Indeed, Albemarle estimates that if it plied more than 50% of Ethyl's more than had been a stand-alone operation, its net $200 million operating profit in 1993.) But income would have dropped at a com as governments worldwide follow the pounded rate of 23% annually over the U.S. in phasing out use of the venerable past five years to $22 million by the end of antiknock compound for automotive en1993. Over the same period of time, its gines because of health concerns, the busisales would have increased at a modest nesses that are today Albemarle would rate of 4% to $903 million. But, says Cook, have had to manage one day without the "the second half [of 1993] was much lead additives profits. As an independent stronger. And we do not see any reason company, Albemarle now has to manage for that trend to stop. ... I think we are without the profits from those additives. "As an independent company, we are coming on to good times." Those good times will surely include an what we are," points out Cook. "Whateconomy that can absorb a significant ever shock absorbers were there before new $100 million linear α-olefins plant in do not exist now. It's up to us now." Charles LoCastro, vice president of reFeluy, Belgium. Other recent capital addi
search at New York brokerage house Donaldson, Lufkin & Jenrette, believes that Albemarle can withstand very little extra shock right now. With operating rates as low as they are in some of Albe marle's businesses, it is hard for the com pany to cover its fixed costs at this time, he says. However, the company has sig nificantly cut its costs, most recently with a personnel reduction program in October 1993. Any small improvement in current operating rates would mean a large profit improvement for Albemarle, he says. So although the payoff for the company's heavy capital expansions over the past few years is not yet readily apparent, im provements in the economy will increase demand and allow the company to fur ther bolster its profits with higher prices, says LoCastro.
Albemarle absorbed a new $100 million linear α-olefins plant in Feluy, Belgium.
Albemarle traces roots back 107 years The newly independent Albemarle Corp. can trace its name back to the Al bemarle Paper Manufacturing Co., founded in 1887 in Richmond, Va., to produce blotting paper and, later, kraft paper. The Gottwald family can trace its involvement in Albemarle to 1918. Since that time, Albemarle Paper, the companies it spawned, and the Gott wald family have been intimately inter twined. Floyd D. Gottwald Sr. joined Albe marle Paper on the bottom rung of the corporate ladder as a clerk in the export department in 1918. He be came the company president in 1941 and purchased the controlling inter est in the company in 1947. By the early 1960s, however, Albe marle Paper's blotting paper market had disappeared with the advent of the ballpoint pen and the demise of the fountain pen. The firm remained in the slow-growth kraft paper mar ket, and watched as plastics took over much of that market. In 1962, Albe marle Paper accomplished one of the first leveraged buyouts in U.S. history, borrowing $200 million to buy fuel additive manufacturer Ethyl Corp., a company 13 times the size of Albe marle Paper. Ethyl was out of the paper business by 1976, having sold its paper assets to forest products giant Boise Cascade and the James River Corp., a $5 billion business today and the heart of the old Albemarle Paper business. Evidently, though, the Gottwalds continued to have a soft spot in their hearts for the Albemarle name, and so
the new chemical group has revived it. However, Albemarle's only connec tion with the paper business today is its manufacture of the alkaline sizing agent alkenyl succinic anhydride. Over the years, Ethyl diversified, led not only by the elder Gottwald, the company patriarch who died in 1982, but also by family members who have continued to control and direct the fortunes of Ethyl to the present day. Since buying Ethyl, the Gottwalds have made a number of acquisitions under the Ethyl umbrel la, including an aluminum extruder, plastics manufacturer, and a life in surance company. Beginning in 1989, the Gottwalds spun off businesses in a move to keep family investments growing in the fu ture as they had done under the Ethyl umbrella. The first spin-off was the plastics and aluminum business, now dubbed Tredegar Industries. In 1993, Ethyl divested First Colony Life Insur ance to shareholders. In each case, a member of the Gottwald family di rects these companies. The latest spin-off, that of Albe marle, leaves Ethyl with its petro leum additives business, greatly en larged via its 1992 acquisition of Amoco fuel additives. Ethyl also re tains its original tetraethyl lead fuel additives business, and Whitby Inc., a small marketer of ethical drugs. Albemarle Corp. is made up of a number of chemicals operations in cluding the olefins and derivatives business, bromine chemicals, and specialty chemicals such as ibu-
profen, agricultural intermediates, polymer curatives, and polycrystalline silicon. Floyd D. Gottwald Jr. is chairman of the board and chief executive officer of Albermarle. He is also vice chair man of Ethyl. The Gottwald family holds five seats on Albemarle's board of directors. The nine remaining Albe marle board members are either active or former employees or directors of Ethyl. The Gottwalds now own 18% of Albemarle's stock, and they have an agreement with Albemarle to in crease their ownership through the purchase of an additional $100 mil lion in stock. Although it will lower Albemarle's debt-to-equity ratio, the cash infusion will boost the Gott walds' ownership in Albemarle to about 25% of shares outstanding, say analysts. Driving the spin-offs is the Gott walds' ambition to make as much money for themselves and sharehold ers in the 1990s as they made in the 1970s and 1980s, says Guy P. Chance, director of national research for re gional broker Scott & Stringfellow Financial Inc., based in Richmond, Va. "There is a human story here," says Chance of the Gottwalds' continuing management of Ethyl and its succes sor companies. "This is an accom plished family that has made enor mous money for stockholders," adds Chance, who points out that his firm's chairman, S. Buford Scott, serves on both Ethyl's and Albemarle's board of directors. MARCH 28,1994 C&EN
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BUSINESS
It is in the olefins and derivatives busi ness particularly, its largest business seg ment, that Albemarle will have a struggle to increase profits. Cook admits there is overcapacity in the α-olefins area. Analyst Paul Raman, with New York City invest ment banking concern S. G. Warburg Se curities, says Albemarle's operating rates in the α-olefins market (where Chevron and Shell are competitors) range from 60 to 70% of capacity. He also sees growth rates for that business of 4 to 5% annually. Raman believes the company needs oper ating rates of 80% and above to raise pric es, and that it will be a while before Albe marle sees that level of operations. Jeff Zekauskas, an analyst with New York brokerage house First Manhattan, sees annual growth of 8 to 10% for the α-olefins that are Albemarle's focus (C6, C8). He also envisages substantial im provement in both pricing and profits over the next three to five years. Thus he rates Albemarle a stock to buy (the recent closing price was $15%), but he cautions that α-olefin producers are in for some competition from South Africa-based Sasol, which is expected to enter the market in 1994 by siphoning off a stream of α-ole fins from its coal gasification units. Cook, however, sees no long-term threat from Sasol. Its entry will add con siderably to competition in hexene, he ad mits, but he has "a strong belief... that the growth in hexene usage over the next few years will absorb their capacity as well as others' capacity very nicely." Cook also adds that Albemarle has real strength in decene, an α-olefin in which Sasol will not compete, and for which Albemarle's other α-olefin competitors don't have the capacity Albemarle does. Decene has a bright future, Cook believes, in polyfaolefins) now growing in use in synthetic engine lubricants. However, analyst Ra man points out that Albemarle is not now making a profit in poly(a-olefins). A smaller business that Albemarle's management had high hopes for, but that analyst Raman believes is also losing money, is the polycrystalline silicon busi ness. Cook calls the business, which s u p plies manufacturers with raw materials for making electronic devices, a "nonperforming asset." Two years ago, Cook would not have entertained a sale or joint venture in that business, but now he says he is interested in those possibilities. 'The reality is we continue to be the only source of a new technology," he says. Whaf s more, "the bulk of consumers are in Japan," while Albemarle produces 16
MARCH 28,1994 C&EN
For Albemarle units, sales have risen ...
... but net profits have fallen over past five years
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polycrystalline silicon in Houston. Albe marle is also willing to license the tech nology now to guarantee customers a sec ond source of material. Among Albemarle's strongest busi nesses is making bulk ibuprofen. The business, which supplies the active com pound to analgesics makers, has been growing more than 20% a year, says Cook. The company's Orangeburg, S.C., ibuprofen plant has "expanded three times in the past two years, and we are expanding it again right now. If s a great business for us/7 Industry sources say ibuprofen use is growing faster than that of acetamin ophen, and that both have been gaining market share at the expense of aspirin. Britain-based Boots pic and its partner Hoechst Celanese are the only competi tion in the U.S. The two have a plant to manufacture ibuprofen in Bishop, Tex. Another potential growth area is the manganese-based engine antiknock com pound, methylcyclopentadienyl manga nese tricarbonyl (MMT). Although Ethyl retained the MMT business after the Al bemarle spin-off, Albemarle manufactures the product for Ethyl. In addition, Albe marle has the option to enter the market later on as a supplier of MMT. The use of MMT in gasoline has been approved in Canada, but the Environmental Protection Agency has thus far refused to grant Ethyl a waiver to sell the additive in the U.S. be cause of health concerns. The success of MMT for Ethyl and Albemarle depends on this waiver, and at this point, at least one analyst sees only about a 50% chance the additive will receive U.S. approval. Cook says Albemarle retained the abili ty to manufacture MMT, not only because
it is produced in the company's Orange burg, S.C., facility, but also because "much of the expertise, the process development, and the knowledge of the chemistry is a part of Albemarle/' It makes sense, says Cook, "to make sure for the benefit of the shareholders," that both companies retain the ability to profit in the event MMT is approved. Cook adds that if a waiver were ever granted and the market were to grow, he believes Ethyl would build its own plant to manufacture MMT. The ex isting contract to supply Ethyl with MMT lasts 10 years. Coming out of the recession at the end of 1993, the business that was to be come Albemarle had an after-tax profit margin just above 2%. Cook says he in tends to considerably improve that re turn in the future, but he will not set any absolute target. "I don't carry any hard and fast numbers," for what the various
Olefins and derivatives dominate Albemarle's sales Olefins & derivatives 43%
Bromine chemicals
\
25%
Specialty chemicals 32% A
1993 sales = $903 million Source: Company data
businesses will return. He does, however, set a target return on equity in excess of 20% for the company as a whole. (Equity is the value of stockholders7 investment in a company after subtracting company debt.) Cook acknowledges that the profitability of different businesses will vary depending on the nature of the business: from the slow-growing but steady agricultural intermediates business to the growing poly(a-olefins) and almost runaway growth of the ibuprofen business. Setting an absolute target for return would have different businesses overreaching, while others might be underachieving. 'If you say to somebody who has an extraordinarily good business that your goal is to achieve a 13% after-tax profit margin, it is extraordinary the amount of creativity and ingenuity that can go into managing a business down to 13%," says Cook. The idea, he says, is to constantly set sights higher and improve performance. To ensure that the various businesses can achieve good profit margins, Cook says the company will commit $100 million in each of the next few years to capital improvement projects. Albemarle, he explains, has a "fairly capital-intensive" business. The spending targets assume the addition of a number of small plants to service markets as needed in the "$10 million to $20 million range, which seems to be the increments that small plants come in now." That target for capital investments includes $10 million to $20 million annually for pollution abatement. Research and development targets are in the $45 million to $50 million range in 1994, or about 5% of projected revenues. In spinning off Albemarle to shareholders, Ethyl's board of directors found it had two clearly separate businesses existing side by side, Cook says. The directors decided that the spin-off would allow shareholders to realize full value of their shares as two separate and distinct businesses— businesses Wall Street analysts could see as either a pure specialty chemicals operation in one instance, or as a petroleum additives and pharmaceuticals operation in the other. Cook knows that Albemarle's shareholders will benefit only if the company's financial results improve as he believes they will. 'It will really boil down to [Albemarle's] performance," says Cook. And Albemarle, he believes, will "become one of the best-performing specialty chemical companies in the world." •
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