富美實 (FMC) 2002 Q4 法說會逐字稿

Good morning, and welcome to the 2002, fourth quarter earnings release conference call for FMC corporation. Phone lines will be placed on a listen only mode through the conference. After the speaker's presentation there will be a question and answer period. If you would like a ask a question during this time, please press * plus the 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 the handset before asking your question. If you would like to withdraw your question, press the # key. Thank you. I will now turn the conference over to Mr. Eric Norris, Director of Investor Relations for FMC. Mr. Norris, you may begin.

Good morning, and welcome everybody, to FMC's fourth quarter 20020 conference call. I 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 corporation's form 10K and other SEC filings. Such information represents our best judgment, based on information available today. Actual results may vary based upon the risks and uncertainties. The agenda for the conference call is as follows: Bill Walter, Chairman, President, and CEO, will provide a review of the fourth quarter and full year 2002 performance, then Kim Foster, Senior Vice President and CFO will provide a review of financial, corporate and related items. Afterwards, Bill will discuss our view 2003 and start the q & a session. It is my pleasure to turn the call over now to Bill Walter. Bill? walter: Thanks Eric, and good morning to all of you. The new FMC closed its first full year as independent chemical company on a strong note. We delivered 62 cents per share before special items, which exceeded our own guidance. Our refocused strategy and products is working, with operating profit in the segment up 2 and a half times from last year's fourth quarter level. And our overall segment operating profit in the quarter grew 9% year over year due to outstanding cost discipline the corporation. Let me start by describing the major drivers of our fourth quarter performance. Sales were down in total 6%, driven largely by a decline in Asian insecticide demand and ag products, and weaker alkali and phosphorus sales in industrial chemicals. This was offset in part by the steady growth we continue to see in our specialty chemical segment. Gross margins for the quarter improved 160 basis points to 28.3%, due primarily to a more profitable sales mix in ag products and manufacturing cost reductions in industrial chemicals. SA&R spending was down 13 million dollars due to our restructuring efforts implemented during the year in both ag products and industrial chemicals. Equity earnings and affiliates were down significantly as a result of continued price pressure on Astaris, our phosphorus chemicals joint venture, as well as a smaller benefit from power resale agreement with . Interest expense increased substantially, as a result higher debt levels and interest expense following our October refinance. A catch up provision in our book to tax rate was taken in the fourth quarter to move our annual rate from 24 to 25%.

The catch up lowered fourth quarter earnings by approximately 2 cents a share. After tax income, excluding special items was down 1.8 million dollars or 7%, with stronger operating profit offset by lower equity and earnings of affiliates, higher interest expense and a higher book tax rate. During the quarter, we booked several charges, totaling 36 cents per share. Charges to continuing operations of 9.6 million dollars after tax, included restructuring and other one-time items throughout the corporation. Charges to discontinued operations of 3.3 million dollars after tax, included an incremental contribution to our environmental reserves for continued ops. Let me now go into some more detail on the results in each of the segments. First, ag. Despite weakness and lower margin Asian markets, and the resulting sales decline of 9%, ag delivered strong operating results due to improved productivity, lower costs and a more profitable mix. Sales in Asia were impacted by the ongoing drought in Australia and inventory reductions in the distribution channel. Asia's weakness was partially offset by sales growth in higher margin regions, by insecticides in North America experienced particularly strong demand during the quarter. Latin America was flat in the midst of a very turbulent Brazilian economy. Steady growth in insecticide sales in the region was offset by a decline in due to our refocusing out of grow crops. Finally, as a result of its yearlong restructuring activities, the business realized over 5 million dollars in lower SA&R costs during the quarter. In what was another depressed year for the farm economy, ag's four-year performance has been nothing short of impressive. The business started the year with a 20 million dollar year over year EBIT hole as a result of the absence of the DuPont profit protection payments for , which occurred in 2001. During the year the business made up nearly all of that decline on a substantially streamlined cost structure, label expansions and to a lessor extent, a more profitable sales mix. We look forward to higher earnings in this segment in 2003. Specialty chemicals reported a quarter of continuing steady sales growth. Earnings, while sequentially in line with the third quarter, were depressed versus last year, due to the absence of a large, high margin lithium sale, which had occurred in the fourth quarter of 2001. Our polymer sales were driven by high cellulo sales into the pharmaceutical industry and increased demand for in the food ingredients market. Weaker alginate sales in industrial markets only slightly offset the business's otherwise strong growth. Within the lithium business, strengthening organo--lithium sales in the specialty polymer and synthesis markets and increased cathode material sales into the battery market were offset by the absence of the previously mentioned sale into the pharmaceutical market. Specialty chemicals performance for the year reflected the continuing under lying growth in biopolymer. We expect that bio polymer will again demonstrate growth in 2003, given its strong franchise in the pharmaceutical formulation and food ingredients markets. We also expect to see a resumption of top line growth in lithium as its strategic exit from commodity markets is finally behind it. Within industrial chemicals, solid earnings performance in the fourth quarter resulting from our cost reduction efforts was more than offset by margin erosion in phosphorus chemicals deuce to competitive pressures. In alkali, the ongoing volume effects and sodash substitution by caustic, which occurred early in 2002, lower sodash export prices and softer downstream product demand drove sales and earnings lower year over year. Lower sales were somewhat offset by our significant overhead structuring under way throughout the business. In , improved demand for hydrogen peroxide in both the pulp and nonpulp markets offset the unfavorable impact, the lower selling prices and declining specialty peroxygen volumes in the printed circuit board market. Higher earning results from good progress in over head reduction. In our sales were lower due to continued pressure and selling pricing, particular for phosphates, where competitive rivalry remains high and lower phosphates volumes into the detergent market. Lower phosphorus sales were slightly offset by growth in peroxygen demand and a stronger euro. Low sales drove lower earnings mitigated somewhat by improved raw material costs. Earning at Astaris, which are consolidated in the industrial chemical segment were impacted by the same factors driving 's phosphorus chemicals results. Global selling prices for phosphorus chemicals continue to move backwards, impacting both sales and earnings for the joint venture. Finally the absence of any FMC consent to pre-spending at , spending which had occurred in the fourth quarter of 2001, somewhat offset Astaris's under-performance. Overall, 2002 was another tough year for industrial chemicals businesses. Looking forward to 2003, we have several issues of concern. First we have had mixed success in our selling price increases in the segment. On the positive side, we realized about half of the announced 3 cent a pound increase in hydrogen--peroxide. Should industry fundamentals continue to improve, we think they will, we believe additional increases are possible during 2003, although at the moment, we are not counting on them.

Thus far, unfortunately, we appear to have realized no net increase in domestic selling prices for sodash in 2003, despite what we would consider to be favorable overall market conditions. Those include the past utilization rates in the industry of 90%, rising caustic prices and early broad based support of the price increase. We believe the failure to get a price increase is a result of the temporary instability caused by having two of the six industry player reported to be for sale, leading to some suppliers choosing to gain market share during the contract negotiations as opposed to supporting a price increase. Obviously, we are frustrated and believe strongly that sodash continues to be undervalued in the market.

Secondly, the instability of the phosphorus market, while not sustainable in the long term, will likely continue well into this current year. While we have made great strides in improving our cost position, both within our consolidated industrial chemical operations and within Astaris, we expect industry and market conditions in 2003 to be every bit as challenging as we experienced in 2002. Before I get into more specific guidance about this current year, let me turn the call over to Kim for a discussion of the quarter's corporate and financial items. Kim.

Thanks, Bill and good morning everyone. Let me first address the topic of our debt levels and interest expense in the quarter and expectations for 2003. As we discussed in our third quarter conference call, we completed the final step in the capitalization of FMC early in the quarter. This refinancing addressed all our projected liquidity needs for the next five years, but also increased our gross debt levels and our interest. While the refinancing changed the gross debt and the cash balances on the balance sheet, changes in our net debt levels continue to define the free cash flow of our company. And these net debt levels declined during the past quarter. On December 31, 2001, our net debt was 902.8 million, on September 30, our net debt was 852.6 million.

However, we separated an additional 65 million of accounts receivable financing, which was funded with on the balance sheet debt as a part of our refinancing plan. Therefore, on a comparable basis, our debt was 14.8 million lower at the end of the fourth quarter. Interest expense for the quarter was 25.2 million, compared to the fourth quarter guidance I provided in the last conference call of 26 million. The favorable result was primarily due to lower than anticipated debt levels. Our outlook for interest costs in 2003 incorporates tighter controls on quarterly cash flows, swapping a limited percentage of our fixed rate debt to floating and other prudent liability management initiatives. Consequently, despite the higher debt levels in the first half of 2003, due to the normal seasonal builds caused by ag's working capital, we are projecting annual interest expense of approximately 100 million. Now let me turn to corporate items for the quarter and expectations for 2003. Depreciation and amortization were 29.8 million for quarter and 118.8 million for the year. Capital expenditures were $33 million and 83.9 million for the year. For 2003, we expect D&A of about 120 million and capital expenditures of approximately 90 million. Corporate expense of 7.7 million for the quarter was lower than the prior year's 9.9 million, which had higher costs associated with FMC split. We view a typical 2003 run rate for corporate expenses of eight to $9 million per quarter.

Other income of 5.2 million was higher than last year's 4.1 million as a result of lower expense. You should not, however, extrapolate the fourth quarter run rate into 2003 projections. Higher pension and other retirement benefits will impact this line item in 2003. We expect the run rate of $2 million of expense per quarter in 2003. As Bill mentioned, our tax rate increased as a catch-up provision for the full year in the fourth quarter. This is predominantly a result of higher U.S. versus foreign-sourced income than our original expectations.

Now let me give you a brief rundown on some of the unusual cash spending which will impact free cash flow in 2003. First, Pocatello and related phosphorus spending. We continue to spend on plan for the Pocatello shutdown and remediation, with approximately 35 million spent for the full year 2002. Our spending estimates for 2003 are also approximately 35 million. payments to Astaris were about 30 million for the full year 2002. These payments, an equal amount of which our partner also contributes, are effectively deleveraging Astaris, whose current debt stood at about $160 million at year-end 2002. With the continuing problems at Astaris, which Bill mentioned, we are uncertain as to when Astaris can refinance and eliminate these payments. If Astaris is unable to refinance in 2003, the projected full year payments will be greater than those we experienced in 2002.

Second, the acquisition earn-out payment, a second payment of this 1999 soda ash acquisition, we expect to pay 40 to $45 million in the fourth quarter of 2003. In terms of 2003 free cash flow, we expect strong free cash flow from the three operating segments after capital spending and routine corporate environmental spending. After the Pocatello remediation activities and the payment, we expect slightly positive free cash flow for the corporation. However, should we have to make a full payment to Astaris, we would expect slightly negative free cash flow for 2003.

I will now turn the discussion back over to Bill.

Thanks, Kim. Let me now address our outlook for the 2003. We expect that, actually, the year for a significant portion of our businesses to be a good one. Especially chemicals, agricultural products and our domestic consolidated industrial chemical businesses will all see year-over-year growth in operating profit. Growth which will come from a mix of strong top-line performance in some businesses and outstanding cost discipline throughout the corporation.

However, given the current problems in phosphorus chemicals, we believe that poor star's performance will offset all of the expected improvement in operating profit for the corporation. Furthermore, higher interest expense, which Kim described will lead to a down earnings year for the corporation. As announced in last night's press release, we expect earnings this year to be in the range of $1.75 to $2.00 per share. Before I turn the call over to questions, let me walk you through the first quarter, seasonally, our weakest of the year as well as the full year.

Q1 will be the toughest quarter, both sequentially and year over year. First, the quarter is the weakest for ag, due to the seasonal nature of the business. Second, Q1 of 2002 was a relatively good quarter for our phosphorus businesses, as a competitive activity, which is now affecting both Foret and Astaris, had not yet picked up. Third, our first quarter interest expense will be significantly higher, year over year, as a result of our refinancing and slighter higher sequentially as we begin our seasonal build of working capital within ag products. The result in Q1 will be lower operating profit and much higher interest expense, netting to an EPS of only a couple of cents per share.

While earnings will be lower for each of the remaining quarters of 2003 on a year over year basis, we expect to see much improved performance from the first quarter due to a number of factors - the seasonal recovery and new labels in ag products, particularly in the second quarter, strong grown in specialty chemicals, easier comparisons versus phosphorus chemicals which started to decline in the second quarter of last year and disciplined cost reduction throughout the corporation.

Clearly, 2002 was a difficult year. The economic environment was weak, the competitive environment more challenging than expected and, finally, the financial environment, as least during the period in which we were doing our refinancing was extremely tight. Despite all of these things, we had good operating results in the most recent quarter and for the year and we put the issues of liquidity behind us. As we look at 2003, however, many of the same challenges remain in front of us. We are operating under the assumption that the external environment is not going to improve, at least not in the first half of the year. And while we can't control that external environment, we can and are aggressively managing those things that we can affect. A focus throughout the corporation is on cost improvement, working capital reduction and cap ex minimization.

Despite our disappointing outlook for 2003, I remain confident about the company and its future. The earnings leverage is still there. The operating leverage of $2.00 a share mid-cycle and $4.00 a share peak cycle we still believe are realistic. We have the opportunity through financial deleveraging to add another 50 cents to a dollar per share to our earnings. Again, we're disappointed with the near-term, but confident longer term. Finally, while we have nothing new to report on our focusing efforts, we continue to believe there is significant value to be created by further focusing the portfolio and are committed to doing so. The issue is only one of timing.

At this point, I'd like to open the call to your questions. Operator?

Thank you, Mr. Walter. Again, if you would like to ask a question, please press the star, then the number one on your telephone keypad. Our first question comes from William Young of CSFB. You may begin your question.

Good morning, Bill and Eric, Kim. My question is on soda ash. You said the domestic conditions were pretty good. You might have mentioned a 90 percent operating rate. I just wondered how you came to that particular number, you know, given what we see out there with American Soda and some of the other operations. And if things were so good, you know, why isn't your price going up? That's - I'll follow up after the answer.

Bill, Bill Walter. Let me try - and is in the room with us and I will ask him to add color, if he so desires, to my response. First, to your question of how do we get to a 90 percent industry capacity utilization rate? We've taken out of the denominator mothball capacity and that's how you get from total industry capacity - I don't know what that number is - but it's probably 80 percent - to a current operating rate of 90 percent plus. What happened? Obviously, I hope you could tell from both my words and my tone that we were disappointed with what happened. We thought the conditions in the industry were more conducive to a price increase this contract season than they were last. And last year, as you'll recall, we got a $5 a ton price increase.

What happened, I think can be, in our opinion, is attributed to the instability around at least two, if not three players and their pursuit for volume and share gain rather than the support of the price. I don't, , if you've got anything further to add.

Yes. I think on top of that, Bill, some of the competitors believe that at least one of the existing players that's for sale may not be able to produce. In other words, could be shut down and took aggressive action. So on that assumption and clearly if that happened, that would be very positive for the industry.

Now, the export prices aren't doing very well either. How much do you attribute expansion in China for that or what other factors would you say?

I think the Chinese are a factor. Their exports out of China really haven't increased much over the last few years so, on the other hand, the demand in Asia hasn't improved as much as we expected. And internal demand in China continues to absorb a lot of the Chinese capacity. But I would site it more in terms of demanding less than expectations in Asia.

OK, but did I catch you right, Bill? You said you expected up for domestic industrials in - from consolidated in '03?

You did, Bill. We expect the operating results from the consolidated domestic industrial chemical businesses to be up '03 over '02. The shortfall in the segment is going to be in Astaris.

Yes. Right. Right. Well, you know, I hope you're right on the - particularly on the soda ash side. Plus I realize you've got your cost controls, which are going to be a help as well. Thanks very much.

Your next question come from Andrew Cash with UBS Warburg. Caller, you may begin your question.

Hi, Bill. Just a few questions here, if I could. Could you just remind us, for 2004, what some of the legacy costs will be? I think you - some of these payments - Pocatello might be declining. Could you review those with us, please?

Sure, Andy. In '04, we expect the one-time, non-operating cash demands on our cash flow to drop significantly. The soda ash payment will be behind us. Assuming we're able to - or assuming Astaris is able to successfully refinance their debt, our obligations will all be behind us. And the remaining Pocatello environmental spending will fall in half from the level of guidance that Kim gave you for '03. It'll probably drop to about $20 million.

OK. The second question I had has to do with the phosphorus business. Why is that business having such a difficult time?

I'll give you the curt, cynical answer. It's irresponsible behavior on the part of a competitor to - again, I'll let add flavor and probably the facts.

OK. I mean, you lost - you lost one customer early in '02, I recall and your - the plan was to make up for that with some other business. Is that a recurring problem?

Andy, the customer we lost that you're referring to is in our Spanish subsidiary, Foret. I would not characterize that as a recurring problem. We have been largely successful as we thought we were going to be able to in replacing - in either replacing that volume, selectively, in certain export markets and/or by cost reductions in the business. But we're not - we're not losing share globally beyond that one significant customer.

Andy, just in broad terms, there is excess capacity in the industry. We believe that some of that capacity will come out. It hasn't come out yet, but we expect it to. And several European competitors basically shipped into the U.S. during the period that the euro was fairly weak. And we believe some of that effort will begin to slow up, both with changes of currency and shutdowns in Europe.

You next question comes from Kevin McCarthy of Banc of America Securities. Caller, you may begin your question.

Good morning. A few follow-up questions on phosphorus. Bill, if I look at your guidance for '03, it implies that earnings would be down from 50 to 75 cents. How much of that, in your judgment, is attributable to phosphorus and how much would be attributable to the discontinuation of the power resale?

Kevin, let me answer it with a little bit more than you asked. First, you can take our interest expense year to year with the guidance Kim gave you and calculate that in that. That impact, year to year, is 45 to 50 cents a share. We gave guidance on all of the businesses, phosphorus, to be up year over year. So you can - you can back into - well, and I've also stated that Astaris is responsible for all the rest of the decline and you can back into what that number is. How much of that is split between the ongoing phosphorus operations and a power resale is a more difficult question to answer.

We have said that the power resale value in '02 was approximately $12 million and is expected to be essentially zero in '03. But we also have said that we anticipate a portion of the loss of that power resale value to be offset by improving cost structure within the business. Improving cost structure is a result of continuing improvement in our plant as well as the new supply contract from . So it's really difficult Kevin, to answer quantitatively the question the way you asked it.

So the cost improvement program then, via the sourcing from sounds like it's still on track. Is that fair to say?

The contract is on schedule.

And then finally how large would you keep well payment be in the event that Astaris can't independently refinance its debt in '03?

Kevin, it's a question that can't be answered, because it's a function of what Astaris' EBITDA will actually be in '03, and right now, we're just operating off a set of projections, which I'm, we are optimistic we can improve upon.

Thanks. I'll get back in queue.

Your next question comes from John Roberts of Buckingham Research. Caller, you may begin your question.

Oh, I wish it were the palace here, but good morning guys. Can you hear me?

We can, John, good morning to you. We caught your note already this morning.

Bill, the lateness of the shortfall announcement, I mean our expectations, myself and others were substantially above the new '03 guidance. Would it at least indicate to me that things were deteriorating pretty rapidly in late December, going into January here? You're giving guidance now that sounds like you're fairly comfortable with it or have some degree of certainty with it. If things, did they drop quickly and then stabilized again?

I wouldn't characterize it as that John. I think it is better to say that we came to have a more, a fuller appreciation for the seriousness of the problems with Astaris. We talked about the competitive pressures that were underway in the phosphorous business in the third quarter. But those may have, well in fact, they did continue all the way through the fourth quarter. We thought they would abate somewhat.

OK. Can I, two other areas that have shown up as problems before, but you didn't cite them here, so I just want to check them. Is there any energy issues around Foret's cogen facility in Europe that are part of this earning's shortfall?

None John.

OK, and then I know at least IP, International Paper has shut down a pulp unit, I think around year-end. I don't know whether Great Northern shut down their pulp unit. I know they took most of the paper plant assets down there at least temporarily. Do you have any volume issues in hydrogen peroxide around pulp industry, pulp shutdowns?

We do John, they're incorporated into our guidance. We were in a sole supply situation to one of the pulp mills most recently announced to be shut down. I'll be honest with you, , I can't remember who's plant it was offhand. But again, we have fully reflected that in our guidance for the peroxide business and the company in total.

OK. Thank you.

Your next question comes from of Strom Capital. Sir, you may begin your question.

Morning gentlemen. I wanted to know Bill or Kim, can you add any more color or detail to your forecast, your earnings expectation of $1.75 to $2. What overall top line or revenue growth is commensurate with your forecast, and then likewise, what operating income margin would be commensurate with your EPS expectation again of $1.75 to $2 for '03? Thanks.

, Bill, I caught only the first half of that, so you're going to have to re-ask the second. Top line we expect to be flat to up slightly for the year in aggregate, and it's the second half that I missed.

Yes, and then Bill likewise for operating income. What operating income margin is incorporated into your earnings outlook for $1.75 to $2 for '03? Thanks.

walter , to the second question, that we expect will be flat year to year.

OK, and then Bill, any detail regarding your revenue growth by segments?

Specialty should be up. Ag should be up. Industrial will be down.

OK, thank you.

Your next question comes from of Monarch. Caller, you may begin your question.

Thank you. I may have missed it on the call, but could you tell me, tell us where you anticipate EBITDA being for the year?

, for '03, you're talking about?

Yes.

Kim gave guidance I think of 120 million on DA and EBIT I just said would be flat, operating EBIT will be flat year-to-year. So the two of them together will be flat.

So we should be looking, I guess off the top of my head, somewhere around the 300 million level?

Yes, 300 plus, 300, three-and-a-quarter.

So, at current levels are trading just around five times.

Correct.

OK, all right, thank you very much.

Your next question comes from of Salomon Smith. Caller, you may begin your question.

Thank you and good morning everyone. Question here to . Could you talk to us a little bit about what the strategy would be for trying to lower your interest expense going forward? I think if I understand your free cash flow situation correctly, you really don't have any, in '03, and so consequentially there doesn't look like there's much you can do if the businesses all stay in tact. However, you know, is the plan that if you're able to sell you know, one of the business lines that you would use the substantial portion of those proceeds to reduce debt and/or refinance and get much better rates than what you got in '02?

Hi , this is Kim. Well there's a couple implied questions in your statement. Let me address the outlook without a sale of a major business, first. And as you know, when we issued the ten-and-a-quarter, seven-year notes, if you look at what the swap rates are, you can swap those back at about 220 to 230 basis points below that fixed rate. Of course the play there is around expectations of what short-term rates would do and with the uncertainty of what's happening in the world, we're a little bit more cautious about that.

But the first, the first answer would be to do some management of our fixed and floating rate debt. The second opportunity is we have a $160 million of debt due in the, in September of '03. From a liability management standpoint, we are actively out trying to bring that in where it's economic. And thirdly, of course, we are focusing very tightly on managing cash flow on a daily, weekly, monthly, quarterly basis to minimize our debt levels and therefore interest expense.

Within our credit agreement, any asset sales are required to go first to pay down debt and the term loan would be the first debt that would be paid down, and our long-term objective would be medium to long-term objective, return to investment grade, and the refinancing at that time would clearly result, depending on what the outlook, general economic outlook is to lower interest rates.

All right, so then the clear follow-up and I know Bill, you mentioned that you, I don't think you had too much to say about it, but let me just try a different tactic. Can you give us any kind of sense here for you know, what the refocusing effort has done so far, i.e. whether you're talking about market conditions, in terms of what the buyers are, you know, have you engaged in conversations? Are we anywhere on this process, or does it really look like we're going to be here for a long time trying to get a good price for the asset that you're thinking about selling?

, good try. The process continues. The process continues much slower than we had hoped, largely as a result of what I would say are market conditions. This is not exactly a seller's market. How quickly they're going to come to conclusion, fruition is just too speculative at this point. It could, if all the stars align, occur relatively soon, but we may in fact be in a position where we need to wait a while.

Just a follow-up on sales of assets. You do have some significant land holdings in California that we talked about for quite some time. Can you give us an update on where they are and if there is any expectations of receiving any proceeds in '03?

David we are not, we still own the properties. They are still very valuable in Silicon Valley. We are not including and not assuming that we're successful in concluding those asset sales in '03. That doesn't mean we have given up. It doesn't mean there's not a possibility, but we've, for planning purposes have just decided to assume that they're not complete at this calendar year.

Final question here. Going over to the industrial segment. If I understand correctly, in '02, Astaris at the level had something like $30 million of income from power contracts or benefits from the power contract? And then we just take half of that for FMC, you know, in terms of what your portion is? Is, that's correct, so it would be 17. I know you said a minute ago, but I didn't hear.

, it was, our half was about $12 million.

OK, also the Plant in Idaho, I know you mentioned the potash plant, you said that that was on track. It was my understanding that on track meant that first quarter of '03 was when that plant is to start, i.e., now, so what you said is that is that plant actually in operation and you're receiving product from the North Carolina potash plant?

And then the second question is did you get in complete the full start-up of the Plant in Idaho, is it running at capacity?

The contract starts in the second quarter of '03. Our understanding is that that's on track, and we certainly haven't agreed to supply contract problem.

In terms of the plant in , Idaho, our plant, the Astaris plant, we expect to see continued improvement in terms of its operating rates. We expect during the course of '03 to be operating full out, but not at the beginning of '03.

Am I correct in assuming that when both of those plants are in full operation, you'll have something like 20 cents a share, 20 cents a pound reduction in raw material costs in your phosphate operations? Is that a reasonable benchmark?

I'm sorry, apparently I didn't push a button here. Did you hear any of that response?

I did hear your response and then I'm sorry, I asked if when all said and done, these plants are running at full capacity, does that effectively reduce your raw material costs by roughly 20 cents a pound. Is that, I'm just looking, is that a reasonable kind of assumption?

Yes, 15 to 20 cents per pound of phosphorous is the value we expect to have.

Very good. Thank you very much.

Your next question comes from of . Caller, you may begin your question.

Yes, just two quick ones, at least one is quick. You know in lithium ...

, I'm sorry, could you speak up. We're having some difficulty hearing you.

OK, in the lithium business, fourth quarter 2001 you had a large pharmaceutical customer, did that customer go away or do you expect that you will get at that order again in 2003?

, it's a customer that we have served for over 20 years and expect to continue to serve over the next 20 years. It is an unusual customer in the sense that his buying habits tend to change with some frequency and get lumpy at times. And that's what we experienced in '01 and didn't experience anything in '02. It's quite conceivable and maybe even likely we'll see the order in '03, but again, given his unpredictable nature, we have not included it in our outlook.

OK, and then I, on chemicals, I'm really amazed at the increase in profitability with the decrease in sales from Asia-Pacific. You talked about a low margin business. That's not a product problem really, is a geographic problem isn't it, in that there was not geographic breakout in your report, but I wonder, should you be doing business in Asia-Pacific. Wouldn't that be a way to boost profitably of the ag business and raise the value of that business?

, your observation is a good one. Asia is our lowest margin region of the world. It is not a product problem per say. It is a, an, I'll call it an environmental problem, a competitive environmental problem, generic competition is much more intense in Asia than it is any place else in the world. Should we continue to do business in Asia? The answer, without a doubt in my mind, is yes. This remains profitable business to us, just not at the same level as we're enjoy elsewhere in the world.

OK, thank you.

Your next question comes from Dennis Delafield of Delafield Asset Management. Caller, you may begin your question.

Thank you. I'm still just a little bit puzzled particularly on the EBITDA, or the EBIT line. If your earnings guidance is $1.75 to 215, or $2 I guess it was, it seems to be that the interest cost differential is about $0.40. Maybe it is a little more, maybe I've calculated the wrong. But that must mean that despite the in minority costs from the pension fund and everything else, that the income from operations will have to be down in 2003 against 187 that you reported in 2002. Am I doing something wrong mathematically?

Dennis or Denise?

I will try either one, I guess.

OK, go either way. Increased expense is $0.45 to $0.50 year-over-year. Two other things that are at play would be lower corporate other income as a result of higher OPEPs and pension expense which is not in our Eva Dow rate. I am now struggling, Dennis. I had a couple of others here that were at play.

Maybe I am doing something wrong. What is the tax rate, Bill?

Tax rate - 23%.

Maybe that is where I was coming up wrong. I was using a little higher tax rate.

At any event, you are confirming that you expect income from operations after all of the issues to be equal to, or slightly greater than, the 2002 income from operations.

You are right, Dennis. That is the guidance we are giving at this point.

OK. I will go back and work on it. Thanks, Bill, I just - I will figure out what I was doing wrong.

OK.

Next question comes from . Caller, you may begin your question.

Good morning. Is there an opportunity for Astaris created by the parent long position that Monsanto has in elemental phosphorus? Is there anything for Astaris to realize on there, or is the opportunity just the court plant and in your own plant?

harris. Hi, this is . Paul, Astaris has it's supply contract with Monsanto, which was the old contract that Solutia had with Monsanto, such that Astaris takes all of the phosphorus out of that plant excluding the volume that Monsanto needs for its own internal needs for . So when you say it's an opportunity, it all depends on the cost trailings...

I think it is true that Round Up has taken a lot less phosphorus than anybody thought it was going to the last couple of years, but doesn't that create a more supply from them and - I guess what I am getting at is Astaris and the for some time now, and I thought that in 2003 you have a benefit of $20 or $30 million EBIT just from a kind of long supply in the market for either - or for both elemental phosphorus and for purified acid. I thought you'd have a real up year in Astaris this year, and I am wondering if I just overestimated that or that's true, but it's being offset by all this price competition.

Paul, your expectations for Astaris was not too dissimilar to ours probably, at this point last year. What all of us have underestimated and failed, therefore reflect in our models, is the level of competitive activity that's underway in the industry. I'd described, I think in my comments, that pricing continues to move backward, and that is exactly what's happening. The gains that we have realized through better supply situation have been offset by a combination of the absence of a - an absence of Idaho Power resale contract and more so, by clients.

Thank you. That's helpful.

Your next question comes from Jim Stanley of SAC Capital. Caller, you may begin your question.

Thanks. A little bit more on that subject. If - so if we could just - if you could maybe give a little bit more color than on what your expectations are, or your assumptions are, for pricing within Astaris throughout the year. Are you saying that you assume that it continues to move down through the entire year of 2003? And sort of, maybe related - I mean what is the pricing difference that you are assuming year-over-year for Astaris, and how does that differ from what it is today?

This is again. We are assuming that the prices that are set now for the beginning of the year, are by-and-large with some further deterioration but not a lot, the prices that exist for the full year. And those prices obviously depend upon the individual product lines. But there is a year-over-year decline in pricing particularly on the commodity end of the businesses, like phosphate and phosphoric acid. But...

So what is that on the year-over-year basis. What is the - if it were to hold here, relative to the average for 2002? What is the decline in price?

Oh, yes. I mean, we don't get to that level of detail, but it is significant in those two areas.

OK, and just a little bit more quantification, Bill, or whoever. The cost cutting, or the cost realizations that you have been talking about related to the new plants and other things. Are you getting all of that still, or is there some disappointment there as well? And what is that - just if you can quantify - I can't remember, what, you said it's $0.15 -$0.20 a pound when it is all said and done hopefully. What should that equate to on a absolute number of savings realized relative to three of the plants?

Jim, I am not sure I have got enough facts in front of me to answer the second half of the question, but the first half - we are seeing the cost improvements that we had expected from the sourcing plan that we indicated here, now almost two years ago. As said, the supply will come on in the second quarter of this year, so, so far we've seen none of that. We have been, as we've talked from several previous conference calls, disappointed with the rate of ramp-up of the Astaris PPA plant in . That continues to improve, although we are still not today seeing the full benefit of that, but anticipate that we will in the course of 2003. Again, I can't - I don't have the facts, Jim. I am just sorry to try to answer the second half of the question.

As far as an absolute number?

Right.

But of the total savings that you envision, how much were - is the bulk still to come, or did you realize - I mean, the second plant isn't even on yet. The first plant you had issues for most of the middle of the year, so my assumption is the bulk of the savings are sort of still to come - to be realized, I should say, versus what you saw in 2002. Is that a correct assumption?

Boy, I...

Even on the first plant?

Yes, I am going to have to sit here and do the math. I would say the bulk of the cost savings has been realized, the Astaris EPA plant, but certainly not all of it. The cost savings that would accrue from the PCS supply obviously has not been realized yet, because they haven't started to supply us. But that cost savings from PCS is less on a per-pound basis than it is in the PPA plant.

Right. OK. Alright. But you don't have a total number of what you were - you are expecting, and how that is offset by pricing an volumes, I guess? Right? The combination of the two?

Right.

Alright. I think that's it for now. I guess I did have one question on Lithium. Are you there?

We're still here.

OK. I didn't know if I was cut off. But Lithium, was - I don't know if you gave this, but was EBIT up or down in 2002? And what are your expectations for 2003?

We did not address either of those explicitly, Jim. EBIT in Lithium was down slightly year-over-year as a result of the absence of that large high-margin pharmaceutical sale that we experienced in the fourth quarter of 2001. Guidance for 2003...

In the fourth quarter of 2002, you mean? Or...

No. The large sale occurred in the fourth quarter of 2001.

OK.

And that is why the year-to-year EBIT in Lithium was down slightly.

Right.

In terms of guidance for 2003, we haven't given it. We did talk about Lithium having completed its exit from the commodity business that we should begin to see a resumption of top-line growth and the corresponding bottom-line growth.

OK. But did you say for the year in 2002, you didn't - you haven't said - I mean, the Lithium...

No, I think I just did say, Jim, that in the year 2003, EBIT from Lithium was below the EBIT 2001 as a result of the fact that in 2001, we had a large shipment that did not repeat itself in 2002.

Got it. Alright, thank you.

Your next question comes from of UBS Warburg. Caller, you may begin your question.

if I can finish my question. Actually, Astaris, can you say how much money Astaris made in 2002, or lost in 2002, from - at the EBIT level, or net income level? Just as a first question/

, we don't disclose profitability by business. We do, Astaris is in the equity earnings of affiliate line in our consolidated income statement. It's not the only entity in that line. You can probably see the year-to-year change in the Astaris profitability, but you're not going to be able to get at the absolute number.

OK, so let me ask you, going back to some of the questions was you know, probing around for. Is Astaris, do they experience constrained output right now. Are you buying, if they are, perhaps part of the problem is you're buying product from your competitor. Is that part of the deal?

We're not constrained by product , as I was saying before in answer to another question, we get all the Monsanto output that doesn't go to and because been weak. We've got relatively more of their product. That's not an inexpensive product, but we're committed to take that.

OK, so output is not a supply constrained is not, your own internal, you can produce what your customers want?

Exactly.

OK. As far as the operating rate on the new plant, if I recall correctly in the summer there was some problems and then a couple of things were going to get back by year-end, now we got a delay to that. I mean how, can you measure it in terms of operating rate, is operating rate 25 percent of where it should be, is it 50 percent. Can you talk in those terms?

, this is Bill. We have talked about it and have had a series of start-up problems with that facility. We sit today well above 50 percent but we're not at the 100, which we need to get to. As said in an answer to a questions earlier, we expect to be there during the course of '03.

Let me also apologize. I was just told you somehow got cut off earlier. That was not us doing it. It was the phones.

I know it was the operator, it wasn't your phone.

OK. Good.

OK. But my concern is here about the operating rate is that we thought we had the problem, or you thought you had the problem figured out, or your engineers thought you had it figured out last summer, it was xyz would take place and you know, the plant's running fine. Is the problem not well understood, is that part of the issue?

, I don't think, it's not the problem's understood. I think we talked about on the either second or third quarter conference call, but we believe we knew how to fix it. We were, it was not a simple one-step fix, that some of those fixes were going to take a little more time than others. I would characterize where we are to be on or only slightly behind where we thought we were going to be and where we committed that we were going to be, some there to six months ago.

OK. My final question has to do with agriculture. Without being too quantitative here, if you could just, you know, you've indicated you think profit to be up in '03 versus '02, could you just talk about the positives and the negatives you see in '03 compared to '02, and to the degree that you can be specific about individual products or markets, you know, please feel free.

, this is Kim.

Hi Kim.

We expect to see very modest top line growth in ag year-over-year, which is one of the drivers of profitability. We had a very depressing year in Asia, and particularly the markets of Australia, China, and clearly also in Japan. There was a clearly drought, weather problems as there seems to always be in ag. And there was channel inventory reductions, so part of the recovery we expect to see next year will be in our the top line and some commiserate bottom line growth will be in our ag business, but as talked about, that's our lowest margin business. At the same time, we continue to refocus our business to our newer insecticides and experience some top line growth from our two new herbicides, but particularly , which would experience most of his growth in the Americas. And we continue to get some modest annualized benefits from our cost reductions, so year-over-year.

So those are the basically the three sources or four sources of our profit growth.

And what would be the risk do, are there any potential risks against these positives that you see?

Kim, again . There is always the risk of pressure. On the other hand, most of the fundamentals seem to look favorable to us, as far as crop prices, farm bills, and so at this point in time, the risk would normally be as you would expect, with an insecticide company like us, pressure.

OK, thank you.

thank you. With that, we've come to the end of the call. Let me conclude here. I hope you sense from our comments that we're clearly disappointed about our outlook for '03, but at the same time we remain bullish on the corporation longer term. The free cash flow that's being generated by our businesses today is in excess of $100 million. Unfortunately in '03, we continue to have a couple of non-operating demands on that cash, but at the end of '03, those are going to be behind us and that $100 million at current profitability levels can be used, will be used to pay down debt.

There remains significant operating leverage in the portfolio and we realize. And finally, although, we have not made the progress that I'd hope for, through greater focus we believe we can still unlock greater value for the shareholders.

With that, let me say thank you all for joining us.

This concludes today's conference call. You may now disconnect.