富美實 (FMC) 2002 Q3 法說會逐字稿

Good morning and welcome to the third quarter earnings release conference call for FMC Corporation. Phone lines will be placed on listen-only mode through the conference. After the speakers' presentation there will be a question and answer period. If you would like to ask a question during this time, please press the star plus number 1 on your telephone keypad. Questions will be taken in the order they are received. If you are on a speakerphone, please pick up your handset before asking a question. If you would like to withdraw your question press star then the number 2. Thank you. I will now turn the conference over to Mr. Eric Norris, Director of Investor Relations for FMC. Mr. Norris you may now begin.

Good morning and welcome everyone to FMC's third quarter 2002 conference call. I'd would like to remind everyone that our discussion today will encompass certain statements, which are forward looking and subject to various risks and uncertainties concerning specific factors summarized in the Corporations 2001 Form 10-K and other SEC filings. Such information represents our best judgment based upon information available today. Actual results may vary based upon these risks and uncertainties. The agenda for the conference call is as follows. Bill Walter, Chairman, President, and CEO will provide highlights of our consolidated financial performance and a detailed review of segment performance. Then Kim Foster, Senior Vice President and CFO will provide a review of our refinancing and a brief run down on key corporate and financial items. Afterwards, Bill Walter will follow to provide some summary comments and start Q&A session. It's my pleasure to turn the call over to Bill.

Thanks Eric, and good morning to all of you. The new FMC has successfully completed, in my judgment the most important quarter in it's brief history as an independent company -- chemical company. As you saw the announcement last night we delivered strong earnings performance. After tax income was up significantly versus the prior quarter -- prior year quarter and exceeded the streets expectations despite a higher book tax rate. Higher sales in Ag products, steady growth in specially chemicals and generally lower operating costs across the portfolio were the key drivers of this performance. We successfully completed a refinancing in what has been characterized as one of the most difficult debt markets in people's history -- in people's memories. And finally we stand on even more solid ground today operationally and financially to grow earnings and unlock value in the years ahead. Let me begin by discussing a strong Q3 performance. First the highlights. Sales were essentially flat versus the year ago quarter as a result of several off setting drivers at the segment level.

In Ag products, shifts and demand in the second quarter, new labels and insecticides, and higher North American insect infestations resulted in an 8 percent sales growth, an increase of 12 million dollars versus last year. In Specialty Chemicals, good growth in both BioPolymer and Lithium drove specialty chemical segment sales up 7 percent or 8 million dollars year-over-year. A sales decline in industrial chemicals of 27 million dollars, largely in our alkaline foret businesses offset the strong Ag products and Specialty Chemicals performance. Gross margin for the quarter improved 250 basis points from 24 percent to 26.5 percent, intensively to a more profitable sales mix particularly in Ag products and manufacturing cost reductions, most noticeably in industrial chemical. SANR spending was down nearly 6 million dollars due to our restructuring program in Ag products which was implemented earlier this year as well as lower cost in industrial chemical. Equity earnings and affiliates which included Astaris were down slightly and minority interests were flat.

Third quarter net earnings per share were 79 cents, up 39 percent versus last year on a pro forma basis for special items and discontinued operations. Net earnings were driven by the strong Ag products performance and steady growth in Specialty. All of this despite a catch-up provision in the third quarter in our book tax rate to move the annual tax rate from 22 to 24 percent. The catch-up lowered our Q3 earnings by 3 cents per share.

Now, I will provide some more detail on the results by segment. First on Ag, strong Ag products performance this quarter reflects the successful implementation of our new focus strategy with some additional help from higher infestation levels in North America. Ag's quarterly sales performance was driven by strong Pyrethroid insecticide sales. New labels for Biphenthrin and Zetacypremethin contributed to our results. The inventory de-stocking, which occurred earlier in the year has moved distributor purchases closer with growing season and resulted in the shift of our sales from the second quarter to the third.

The balance of the insecticide increase was driven by higher demand resulting from greater insect infestations in North America most particularly in the cotton budworm in the delta region. Offsetting the increased insecticide sales were lower herbicide results particularly for sulfentrazone and carfentrazone. The decline in sulfentrazone sales was expected and it was due to our ongoing strategy to focus on higher value crops and de-emphasize soybeans. Atypical weather conditions affected carfentrazone demand. In the Midwest drought conditions unfavorably impacted the corn market and in the delta wet conditions delayed the cotton defoliation market. Ag product earnings increased significantly in the quarter due to the higher sales, a better sales mix and continued progress in our SANR cost reduction program, which yielded approximately 5 million dollars benefit in the quarter.

The story, especially chemical segment quarterly performance, is a very familiar and a positive one. The sales increase for the quarter was split evenly between BioPolymer and lithium as our strong franchises and attractive end markets continue to experience solid growth. The BioPolymer increase was driven by higher microcrystalline cellulose sales into the pharmaceutical industry and good sales growth for both carrageenan and microcrystalline cellulose into the food ingredients market.

The lithium increase resulted from a strong organolithium performance in both the pharmaceutical synthesis and specialty polymer markets and strong demand in the primary and secondary battery market. Segment earnings increased on the strong sales performance and lower lithium manufacturing cost due to the devaluation of the Argentine peso.

Within industrial chemicals, our cost reduction efforts offset the dual impact of lower volumes in soda ash and lower prices across most product lines. Lower prices, which have largely resulted from the difficult competitive conditions in our major product lines. Majority of segment sales decline was in our alkali business. Weaker soda ash volumes resulting largely from the caustic soda substitution which occurred earlier this year, and lower average soda ash prices in the export market, contributed to the decline. The balance of the decline came in our downstream alkali markets due to weaker caustic and bicarbonate sales and the absence of sodium cyanide sales, a business which we sold earlier this year.

The remainder of the segment sales decline was in Foret, our European industrial chemical business. Generally lower selling prices in phosphates and peroxygen products and lower volumes in the export markets filled the decline. Peroxygen sales were roughly flat for the quarter, higher hydrogen peroxide volumes into both the pulp and non-pulp markets were offset by lower hydrogen peroxide selling prices and weaker specialty peroxygen sales into the printed circuit board market. Despite the effects of weaker volumes and selling prices, Industrial Chemicals earnings remained flat for the prior year period and offsetting largely from our significant cost reductions. Lower headcount throughout the segment, lower environmental spending at Pocatello, and lower manufacturing cost of Foret were key factors for the quarter's performance.

Earnings at Astaris, which are consolidated in the Industrial Chemicals operating profit, were slightly lower in the quarter as a result of lower selling prices and a smaller benefit from the power resale. This was largely offset, however, by higher profits on strong fire safety sales and lower sourcing costs due to improved operations at our PPA plant.

Let me switch now to the refinancing. Our recently completed refinancing represents a major milestone and a significant accomplishment and one can only be described as a very difficult credit market. With it, we believe we have addressed all of our projected maturities for the next five years and put in place committed credit facilities, that provide both adequate liquidity to fund our operations and a reserve for unforeseen and contingent needs. In completing this important refinancing, we are now able to focus on improving business operations and implementing our strategy. For a more in depth discussion on this and the other financial items, let me now turn the microphone over to Kim.

Thanks Bill and good morning everyone. On October 21st, we completed the final step in our recapitalization of FMC by closing on the 540 million dollar bank facility and 355 million of seven-year notes. We accomplish this in a very difficult credit market and closed the financing in time to address the upcoming fourth quarter maturities, which included approximately a 100 million of public debt as well as our expiring credit facility.

Response from the debt market was very positive. In fact, reception of our notes offering was strong enough that we upsized the issue by approximately 50 million. With the refinancing now behind us, our focus will be on maximizing our interest expense, sorry, managing our interest expense, maximizing our cash flow, and reducing debt. Let me first discuss interest expense. From the 17.6 million of interest expense recorded in the third quarter, we expect an increase in future periods because of higher rates on the notes and the term loan portion of our credit facility and higher debt levels from free funding maturing debt and cash collateralizing certain contingent obligation. Specifically, we estimate net interest expense of 26 million dollars for the fourth quarter.

We are in the process of finalizing our estimates of interest expense for 2003. One element involves determining which liability management tactics will best manage our exposure to the fluctuating US and foreign interest rates. A second element relates to optimizing the interest expense for specific debt issues in our portfolio. You should be somewhat cautious in extrapolating the fourth quarter numbers and to an annual estimate for 2003, until we are further along in the selection and implementation of these measures. We will provide you with more guidance on net interest expense by the next conference call. Now let me comment on our efforts to maximize cash flow. We will spend below D&A levels for the foreseeable future, while having ample capacities to grow with a recovery through mothball capacity in industrial, de-bottlenecking in Specialty and outsourcing in our Ags products business.

Year-to-date depreciation and amortization amounted to 89 million while capital expenditures were only 50.9 million. For 2002, we expect full year D&A of 120 million versus capital expenditures in the range of 80 to 90 million. We continued to spend on a plan for Pocatello shutdown and remediation. With 24 million dollars spent year-to-date and a full year estimated spending of 33 million.

The payments to Astaris were 28 million dollars year to date and we continue to project full year keep-well payments to Astaris of roughly 30 million dollars. Now before I turn the call back to Will, let me provide you with a summary of other corporate and financial data for the third quarter, which I've not already had the opportunity to address.

Net debt of 852.6 million dollars at quarter-end compared to 908 million dollars at the end of the second quarter. The lower debt reflects the impact of normal seasonal reductions in working capital, primarily accounts receivable and inventory. Corporate expense of 8.6 million for the quarter was essentially in line with 9 million dollar quarterly run rate that I indicated in prior conference calls this year. Other expense of 0.2 million was lower than the year earlier 1.7 million.

For the year, we now expect a tax rate of 24 percent on income from continuing operations before special items. This higher rate reflects a mix of lower profit from foreign operations particularly Ag products in Asia. As a result, the third quarter, which had a tax rate of 26 percent, includes a catch-up provision to take our rate from our projected 22 percent to 24 percent for the full year. Now I'd like to turn the discussion back to Bill.

Thanks, Kim. With a strong quarter under our belt and a successful refinancing behind us, it's my opinion that we're even better positioned than ever before. We expect continued quarter-over-year earlier quarter improvement in FMC's operating profit for the fourth quarter 2002. Driving this improvement will be lower overhead costs throughout the portfolio, a stronger sales and better margin mix in Ag products, and continued growth in BioPolymer.

Furthermore, as we approach 2003 and start to see some signs of a demand pick up in our more cyclical businesses, we believe there is good momentum and strong rational for price increases in many of our businesses particularly in industrial chemicals. We've been operating at trough price levels through the 2001 and 2002 period. To date, North American price increase announcements include seven dollars per ton per soda ash, three cents per pounds for hydrogen peroxide, and a four-cent per pound for sulphates.

There have also been selective worldwide price increase announcements in certain BioPolymer and Lithium product lines. In completing our refinancing, we have comprehensively addressed any liquidity concerns some may have had about the company. And lastly, we remain committed in managing our portfolio to achieve greater focus in growth.

Before I turn the call over to questions, let me offer our thoughts on earnings guidance for the fourth quarter. At the segment operating level, we expect the quarter to evolve much like I described to you in July, with industrial and agricultural products as the drivers. Industrial Chemicals will have a stronger quarter than the third quarter due to lower costs and improving volumes in peroxygens. Ag products should show quarter-over-quarter improvement versus the fourth quarter of 2001 due to a combination of cost savings, the benefit of the delayed sales and continued improved mix. The difference in our guidance versus earlier conversations will be in net interest expense. As a result of what Kim just described, we expect fourth quarter earnings per share for four special items to be in the range of 55 to 60 cents per share. At this point -- point, I'll turn it over to the operator who will remind you how to ask questions.

Thank you Mr. Walter. Again, if you would like to ask a question, please press the star and number one on your keypad. Our first question comes from Kevin McCarty of Banc of America.

Good morning all. Will, now that you have the refinance, refinancing behind you, can you talk a little bit in very broad terms about what your top priorities are now for FMC?

Kevin, will be happy to. I hope I am consistent with what I have said in the past. We've got several priorities, Kevin, operational, financial, and strategic. Operationally, our priorities are to realize the operating leverage that exists in the portfolio, and I think we are taking a number of steps to accomplish that, both on the revenue and on the cost side. We've got to continue to drive both. On the financial side our priorities will be to pay down debt. This is a company that still has significant positive free cash flow generating characteristics, and we're going to use free cash flow short term at least to improve the balance sheet even further. And thirdly, on a strategic priority is to further focus the portfolio and build growth in our more attractive segments.

Okay. Kim I think your Ag team deserves a lot of credit for having avoided Argentina, lately though Brazil has become a much riskier place. Can you talk a little bit about selling terms there, any hedging you may have in place, inventory in the channel, and other trends that could affect your Ag sales in Brazil in the future?

Yes Kevin. This is Kim. You ask a number of questions. Let me just say that we certainly understand there is an awful lot of uncertainty in Brazil and with the recent election, we have hedged our sales with -- as they exist going forward and this has -- as you know while costly this has proved to be a benefit to us from a risk management standpoint going forward. We had early signs of a good season in the late part of the third quarter, which is of course the beginning of their spring planting season, which gave us encouraging signs. We have not seen delays in payments from our customers. As you know, the crops in Brazil are largely dollar denominated and support their export markets and foreign currency needs that they have. So, we are on one hand cautiously optimistic, on the other hand we're realistic and that we understand that there is a significant amount of uncertainty in Brazil and very difficult to predict and we are taking what we believe are appropriate risk management decisions about our outlook. The fourth quarter is important to Ag - that Brazil's performance in the fourth quarter is important to Ag and we -- we still remain at this point of time cautiously optimistic.

Okay. And finally on Soda ash. You know, it seems to me that with very strong auto markets and housing, 2 major consumers of glass, we should be seeing better volumes there. Was the caustic substitution effect greater than you've seen in the past and perhaps you can just give us a little bit more color on new markets there and geographic markets?

Kevin, Bill, I am not sure I characterize the reversion phenomenon that we experienced earlier this year to be anymore significant that it has been in the past. We may have slightly more exposure to those markets than the industry in general. Having said that, the soft volumes in Soda ash are not just at the caustic reversion but also as a result of the ANSAC Formula. As you know, I think ANSAC volume is allocated back to its members based upon capacity share and with the emergence of American Soda here several years ago, the original founders of ANSAC have had diluted allocations as a result of their entrance. As we sit here today we remain moderately bullish about the volume outlook for the business. We're going to continue to suffer the caustic impact until caustic prices recover a little bit further, but we don't see any further inroads being made by caustic. Domestic demand continues to grow albeit very slowly and export demand we expect we'll continue to grow at attractive rates.

Thank you. I'll get back in queue.

Your next question comes from David Driscoll of Salomon Smith Barney.

Hi good morning everyone. I wanted to ask about the, your expected volume rebound in the industrial segment in '03. In terms of what I am just trying to do is to get a feel for what you're seeing in the economy and if you think that, you know a fair, a fair number to look for is something on the order of like a 10 percent volume rebound in '03 relative to '02 volumes in industrial and I would sort of be lumping (ph) soda ash and peroxide together, is that a reasonable ballpark to be looking at?

David, Bill. I think you're on a high side, as I just commented that soda ash continues to see reasonable growth, but it's in low single digits. We are seeing, enhancing now for about the last four months, improved demand in the both pulp and the non pulp segments of hydrogen peroxide, but improvement in demand in the order of magnitude that you've described, but given the dominance of alkali in the portfolio over peroxide the weighted average volume growth will be significantly less than the 10 percent you mentioned.

Okay, moving over to your Ag business, you have a nice deal with ISK, I'm interested in trying to understand, what kind profit contribution, we can expect from that insecticide portfolio in 2003?

Yeah David. The arrangement with ISK is 2 fold. One is they have become our distributor in Japan and I would expect that we are going to see some marginal benefit from having shifted our distribution there, but it will be marginal in '03. The access to the new compounds and molecules that we have should have no impact in '03, volume impact. We may in fact incur marginally higher development cost to get the product registered in the US.

So, it's more of an '04-'05 impact?

Yes it's an '04-'05, with minor sales in '03, but not enough to talk to.

Okay, lastly on Astaris. If I remember correctly, we were expecting something on the order of a 3 percent price increase across the phosphate portfolio in Astaris, it seems from the press release today that we not only didn't get a price increase, but we've seen prices decline, can you give us some more details there on pricing trends, where you think those things are going and then lastly, I know you mentioned the capital contributions that are current up to '02, in your prepared remarks, but can you comment on do you expect capital contributions to Astaris in '03?

David, Bill again, the 3 percent average price you're referring to is the price increase announced now almost a year ago and we had anticipated that on a year-to-year basis, we would see an average of about a 2.5 percent price improvement, unfortunately the level of competitive activity in that business since that price increase has increased and we've lost not just, not only that increase but more. Where is it going from here? The industry is fairly well structured, I mean between ourselves and Rodea we are represent a lions share of the phosphorus business in North America, that kind of a structure should lead itself more positive pricing disciplne than what we've seen. I am optimistic that the repositioning the both companies, Astaris and Rodea has gone through since their respective acquisitions and joint ventures will stabilize here soon, we'll begin to see some rationality in market pricing. With respect to the keepwells, David we continue to believe that Astaris is refinancible. We expect to begin a process here with our partners fairly soon to address, when and how we ought to refinance that business Astaris is profitable. Astaris is significant positive EBITDA generator and should be able to refinance it's debt on it's own, on it's own cash flow. As a result our, and assuming we're successful, we don't anticipate that there should keep wells going forward.

Great thank you very much.

Your next question comes from Dimitry Silversteyn of Midwest Research.

If I may, first of all when you look at the industrial business in the sodium carbonate market, I am sorry, in the peroxide markets, excluding the divestitures that you made earlier in the year, what was the sales trend in that business like in the third quarter?

Dimitry, the sales -- the divestiture was in the alkali business.

Okay I'm sorry in the alkali business.

Okay, the non-soda ash business has represented about half of the sales decline in the quarter. So, the other half is obviously soda ash.

Right. Okay, all right, I guess I understand that. And did I hear you right, that your guidance was 55 to 60 cents for the quarter, for the fourth quarter?

Correct.

Alright and the tax rate going forward in 2003, do you expect it to be at 24 percent given the same kind of mix of foreign to domestic profits?

Yeah Dmitry, we are not through our budgeting process for 03 yet, but as we sit here today, I think it is probably a reasonable assumption to make.

Okay, and the price increases you talked about the three cents in hydrogen peroxide and the four cents in persulphates have those been pretty much excepted and do you plan, is there enough demand from pulp & paper and from other end markets to justify another price increase going forward?

We are in process of implementing those price increases in both businesses Dimitry so it is premature to comment at the lease activity that is out there. We have had support by the other competitors; we've now got to negotiate it with our customers.

Is there more going out in pulp & paper than just the seasonal demand offset for like catalog shipping during holiday season, do you see a more fundamental improvement in the businesses?

Yeah, I -- we see an underlying improvement in the Pulp industry, it's not reflected back to the paper yet and I think what we are seeing is the US Pulp industry being able to export more than they had historically. So, no I don't think it is seasonal, I think it is a recovery or be it a weak one.

Okay, all right, thank you very much.

Your next question comes from John Roberts of Buckingham Research.

Good morning guys. Can you hear me?

Yes, we can John. Good morning to you.

As you know, it's been a while since we had, what we could call a normal year for the agricultural product segment, would you now, given your fourth quarter outlook for the full year 2002, a relatively normal year for us to set expectations going forward?

John, this is Kim. Yes I would.

Okay, I know the quarter, each individual quarter sort of had its own ups and downs but it collectively I'd call this a base year to go forward from.

I agree.

Secondarily, on -- you reported equity income, I think, for first time as a line item and I went back I didn't see it broken out as a line item in previous quarter report. Is that Astaris or is there something else in there?

John, you're right, except for the cue that we filed here recently it's the first time we included Astaris in equity earnings that are affiliates. However, that line item is not just Astaris it contains several other joint ventures in, one in our industrial chemical business and a couple of them in our Specialty Chemicals.

Astaris would be the largest or would that be a way for us to track Astaris exact from your verbal comments and footnotes from time to time?

Yes, at least directionally.

Also, just two follow up questions on Astaris, I may have my memory wrong here, but I thought Solutia's keep well payments were less than 28 million although that's just from memory. Would there be any reason why the keepwell amounts would be different between the two companies, if in fact they were?

Absolutely not, they ought to be identical.

Okay, I may be just remembering that wrong. And then, lastly you indicated that lower environmental spending at Pocatello impacted your earnings. I thought the spending was going against reserve that had been previously taken and not going through the income statement. I probably understand something wrong there.

No, we've got environmental spending in two different places, John. One goes direct to the balance sheet and that is the consent decree spending that is going in Pocatello. We also have significant organizational costs, within FMC to oversee and manage that. And those administrative supervisory costs go directly to our P&L, and not against the reserve.

Okay. Thank you very much.

Your next question comes from John Days of Grantham Mayo.

Good Morning all, I noted that BASF bought Bayer's household insecticide business, now I realiz you haven't been on a shopping binge, but I wondered if you had a look at it, what you might think of that business as an erstwhile competitor for that part of your Ag business.

John, this is Kim. We are familiar with that Strypinyl the chemical name you are referring to and it's a good product, but we would rather not comment on the success of a competitor and their strategies in that segment.

Fair enough. We will let it go at that.