富美實 (FMC) 2003 Q2 法說會逐字稿

Good morning and welcome to the 2003 second-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. (CALLER INSTRUCTIONS) I will now turn the conference over to Mr. Eric Norris, Director of Investor Relations for FMC. Mr. Norris, you may begin.

Thank you, Mandy, and good morning and welcome to FMC's second quarter 2003 conference call. As a reminder, our discussion today will encompass certain statements which are forward-looking and subject to various risks and uncertainties concerning specific factors summarized in FMC's 2002 Form 10-K and other SEC filings. Such information represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties. During the conference call today we may refer to none-GAAP financial terms. On our FMC investor relations website, available at ir.fmc.com, you will find a definition of all such terms under the heading entitled " Glossary of Financial Terms." In addition, we have provided a reconciliation of certain non-GAAP figures which we will use on this call to GAAP also available on our website.

Immediately following this call, we will be sending all conference call participants a brief request by e-mail for your feedback on the quality and scope of this conference call. I encourages you to give us your candid feedback and thank you in advance for your time. The agenda for the conference call today is as follows. Bill Walter, Chairman, President and CEO, will review highlights of the second quarter 2003. Then, consistent with the new format we introduced last quarter in which we'd feature one of our business, Bill will turn the call over to Milton Steele, Vice President and General Manager of Agricultural Products, for a review of that business. Following Milton, Kim Foster, Senior Vice President and CFO will review cash flow. Bill Walter will then discuss our view on the second half of the year and close the prepared portion of the call. Afterwards, of course, we'll take your questions. It is my pleasure to turn the callover now to Bill Walter. Bill.

Thanks, Eric, and good morning to everyone out there. I'm pleased to kick off the discussion today of what I think was a good quarter, one which we slightly exceeded our own expectations due to very strong performance in our Agricultural Products and Chemical Products groups. As you'll recall, one of our 2003 commitments was to focus on a higher value, higher growth opportunities in these businesses, and we're quite pleased with the results thus far in 2003.

The second commitment we made early this year was to take aggressive actions in our Industrial Chemical businesses. Despite the continuing commercial challenges during the second quarter, we reduced costs throughout the segment and have worked with Astaris as they have substantially completed a strategic review of their business. The next step at Astaris will be the assessment of restructuring alternatives, which we hope to have more to say on in the near future. The third commitment for 2003 was to continue to improve our cash flow. We remain on track to spend approximately $85 million on capital expenditures, flat with last year and well below D&A. Furthermore, we expect to exceed the working capital reduction target of 25 to $30 million we set earlier this year. While we are pleased with the progress we've made to date, we clearly have more work ahead of us and remain focused on these commitments.

Now for some of the financial highlights of the quarter. Net income in the second quarter was $21.7 million, or 61 cents per share, slightly higher than the prior year. Prior year results, however, included an after-tax restructuring charge of $4.6 million or 14 cents per share. Favorable currency translation in this year's quarter of 7 cents was partially offset by higher energy costs of 1 cent per share. Sales of $510 million were up 6 percent versus the second quarter of 2002. Ag Product sales were essentially flat, but as you'll see in a moment, the bottom line improved as a result of our increased focus and better cost control. And Milton will cover this in more detail shortly.

Specialty Chemicals had an outstanding quarter, its second in a row with sales up 11 percent, driven by both biopolymer and lithium. Continued study microcrystalline cellulose growth in the pharmaceutical formulation market, strong butyllithium demand in the pharmaceutical synthesis market, and growth in both the primary and secondary battery markets were the key drivers. Industrial Chemicals sales were up 7 percent, due to improvements at Foret, resulting primarily from favorable foreign currency translation, but also with improvements in their phosphorus phosphate volume and peroxygen price and volumes as well.

Foreign currency translation in aggregate, due principally to the strength of the euro, played a significant role in the quarter's sales performance, adding nearly $26 million to the sales line, most of which was at Foret. Income from operations before special items in the prior year rose $5.8 million, 11 percent. However, as a result of losses at our Eckelby (ph) affiliates, more specifically Astaris, operating profit before special items increased only $3.9 million or 8% (technical difficulty)…..And there have been no significant closure, merger or consolidation announcements made, despite overall capacity utilization rates in the mid 70 percent range. Operationally at Astaris, things are also similar to three months ago. There were no power resale benefits in the second quarter of this year, and there will be no further benefit for the balance of 2003 and beyond, as we have previously communicated. Potash Corporation's purified phosphoric acid supply ramped up late in this first quarter and has been consistent and on target since then. Finally, the PPA Conda plant, which faces continuing issues with the quality of its acid feed, is running at similar utilization rates currently as we experienced in the first quarter. Net-net, Astaris continues to operate at a loss and is expected to do so throughout 2003.

Full-year 2003 is now projected to show a year-over-year decline in operating profit exceeding $20 million on an FMC basis. of that 20 million, 12.5 million is due to the lack of the power resale benefit. On the strategic front, however, much has been done. As I mentioned, an in-depth review of the entire Astaris portfolio has been substantially completed and potential restructuring alternatives are now being assessed. Astaris will decide upon specific actions, if any, during the second half. Let me now turn the call over to Milton Steele for a discussion of our Ag Products business. Milton.

Thank you, Bill, for the introduction and good morning to you all. I look forward to profiling FMC's Agricultural Products business today, providing you some insights into what has made our focus business a consistent performer, and, of course, discussing the results of the second quarter as well as our expectations for the rest of the year.

First, let me provide a brief profile of the business. We are a focused player in the agriculture crop protection market with 2002 sales of $615 million, of which 78 percent is in insecticides and 22 percent in herbicides. We complete globally with a concentration in the Americas. We have also established key positions in Western Europe and Asia via successful market alliances. We compete in both the crop and non-crop markets with proprietary branded products as well as off-patent chemistries. We spend about 10 percent of sales on R&D, with our discovery efforts focused entirely on insecticides.

As many of you know, the conventional chemical crop protection industry generated global sales of about $25 billion last year, with a product segmentation of approximately 50 percent herbicides, 25 percent fungicides and 25 percent insecticides. The industry sales have declined at about a 2.4 percent annual rate since 1996, driven by a combination of factors including depressed crop prices; inroads of biotechnology, especially in the herbicide markets; increased government regulations; generic competition; and a series of global currency crisis, all of which have collectively eroded pricing and volumes. Over the same time, industry consolidation among ag chemical producers has accelerated, resulting in 6 competitors with revenues in excess of $2 billion each. These are Syngenta, Bio (ph), BASF, Monsanto, DuPont and Dow. We estimate that these six competitors now have a combined market share of about 80 percent.

Despite the difficult industry dynamics and rapid industry consolidation among competitors, FMC has performed at or above the industry average as a whole for many years now. I attribute our success to a strategy which includes a focus on key crops, products and regions; cost reductions by outsourcing or variablizing our manufacturing costs; forming alliances aimed at building competitive markets access in our focus markets; and a commitment to insecticide innovation. Let me discuss each of these elements in more detail, starting first with what we mean by focus.

We believe that competing successfully as a smaller player demands discipline and a focus on our strengths. For FMC, our strengths are largely in insecticides used in certain crops such as corn, cotton, cereals and vegetables, and the noncrop professional turf and ornamental markets, sold mostly in the Americas. This focus helps provide the market access we need to compete in our key markets. Furthermore, our strengths in key insecticide markets in the Americas have helped us gain the marketing and distribution rights to innovative new products like ISK's novel flonicamid insecticide for sucking pests.

The second element of our strategy is cost reduction. We are aggressively driving to reduce manufacturing costs largely by outsourcing production to China, India and Mexico. These efforts should ensure that we remain globally cost competitive for our key products. This outsourcing strategy began in 1999 and we have already realized substantial cost savings. And additional product cost reductions are expected over the next several years. In addition to manufacturing cost reductions, we have reduced our SG&A spending by more than $20 million since the beginning of 2002, as we further focus the business on key products and geographies.

The third component of our strategy is alliances. We leverage market access partnerships with others such as Belkin (ph) in western Europe, ISK in Japan, and U-Pharm (ph ) in eastern Europe and Australia. The Belkin alliance, which is focused primarily in key western European markets, has proven to be particularly successful, and we have exceeded our initial sales growth and profitability targets. The alliance with ISK allows us to effectively distribute our products in Japan and we continue to identify and implement opportunities to work with ISK in other parts of the world.

Now to the final component of our strategy -- that's our commitment to innovation. We believe that innovation is essential to long-term success in the crop protection industry. We currently spend about $65 million on R&D, or just over 10 percent of sales, most of which is focused on insecticides. Our nearer-term growth will come from new labels, or in lay terms, new uses for existing products, in three core products which have some form of current patent protection. These products include Becentron (ph), Ladecypametron (ph) and Prothentrazone (ph). Within the next two years, we expect to launch ISK's flonicamid insecticide, a novel chemistry with a unique mode of action for controlling sucking pests in several North and South American markets. We are excited about the potential for this chemistry, and the EPA has recently designated fernicimid for an accelerated registration review.

In the longer-term, we are increasingly optimistic about our world-class approach to discovering novel insect target sites and chemistries. This effort is supplemented by collaborative efforts with our Belgian partner, Devgen, a biotech target discovery company. Our current pipeline is most exciting with several new chemistries with novel mechanisms of action. We have more than 10 insect-active chemistries under evaluation and will be field testing a number of these novel insecticide chemistries this year. We expect to gain critical field knowledge over the next 12 months regarding just how valuable these chemistries could be. We are confident that our strategy of focus, cost reduction, alliances, and innovation will enable continued earnings growth of FMC Agricultural Products business into the future.

In 2003, our strategy is resulting in solid financial performance with first half ratings up 8 percent versus the prior year. Let me discuss what we have seen so far this year and what we expect to see in the second half of the year. As Bill indicated, we delivered second quarter sales of $175 million, up slightly versus last year, and earnings of $27 million, up more than 15 percent compared with last year's quarter, due to improved product margins and more efficient plant operations. Strong non-crop sales and improvement in our South American markets and slightly higher sales in Asia helped offset lower North American crop sales. Strength in our non-crop business was driven by continued growth in the turf and ornamental and other segments.

Early season strength in South America, primarily Brazil, was driven by a strategy of focusing on FMC's proprietary chemistries as we have stopped selling most lower margin third party products. More stable market conditions in Brazil also helped drive our performance. Our challenge in the North American crop segment during the second quarter was driven by lower pressure in row crops compared with last year, a shift of some herbicide sales to the third quarter, and continued reductions in distributor channel inventories.

While the shift in some herbicides sales will help the third quarter, we also expect that our strategy of focusing on new labels will be a key driver for our third quarter financial performance. We are focusing on new market segments, such as cotton post direct weed control, and cotton defoliation with our Cothentrazone (ph) herbicide product. Additionally, we are expecting relatively normal pest pressures with several corn, cotton and soybean insect market segments driving performance. Given our strong performance in Brazil in the second quarter, we are cautiously optimistic that we will experience continued earnings growth in this market in the second half of the year. Overall, we expect 2003 to be a year of modest sales growth and even stronger earnings growth, driven by our strategy of focus and continued drive for manufacturing efficiencies and cost reductions.

We expect that one of our most significant accomplishments, however, will be in the area of working capital working capital reduction, much of which will come from our efforts to reduce accounts receivable in Brazil and improve global supply chain performance, which is expected to lead to further inventory reductions.

In closing, I'm confident that our strategies of focus and cost reduction continue to position FMC for steady performance in the face of a difficult macro environment. Furthermore, our focused innovation and global alliance strategy, which we have been consistently implementing over the past five years, will deliver sales and earning growth over the coming years. I would now like to turn the call over to Kim Foster.

Thanks, Milton, and good morning, all. I would like to elaborate upon one of the key commitments which Bill earlier referenced, namely, continuing to improve cash flow. Operating cash flow for the second quarter was $16.5 million. This figure is better than prior year, due primarily to aggressive working capital management which we initiated last year, primarily in our Agricultural Products businesses. This results have been a lower first-half working capital build, as well as reduced investment in working capital on an annual basis.

Given the significant momentum we have generated in the first half of the year, we are confident that we can exceed the 25 to $30 million working capital reduction target which we set earlier this year. Capital spending for the second quarter was 21.9 million and for the first half was 39 million. We remain on track to spend approximately 85 million on capital expenditures, flat with last year, and well below D&A.

As we have mentioned in previous communications, FMC has adequate capacity in all major business areas and we do not foresee the need for significant expansion capital in the near future. Secondly, while we continue to spend on appropriate safety, environmental and maintenance capital, spending for most nonessential capital has been deferred. Legacy environmental spending was $4.6 million for the quarter and we maintain our previous full-year guidance of 25 million.

As we have discussed in the past, FMC's full year free cash flow and trough operating conditions is approximately $100 million. As I just mentioned, working capital improvements this year should add at least 25 to $30 million. However, as we have previously stated, in 2003 we expect to see very little free cash flow. This is due to three unusual calls on that free cash flow totaling approximately $115 million. While the total of these three items has not changed since our last communication, the size of each continues to shift modestly.

First, we now expect 2003 Pocatello shutdown and remediation spending to be only 20 million due to the timing of that spending. Second, Astaris' financing obligations, which we now expect to be about $60 million, higher than previously expected due to the prolonged weakness of that business that Bill earlier referenced. Third, an earnout payment associated with a 1999 soda ash acquisition that we now expect to be a maximum of 35 million. Let me provide an update on how these items will change in 2004.

While the Pocatello spending over the life of the product remains unchanged, we expect the annual cash spending to be pretty similar for the next few years, from 10 to $20 million per year and ending in approximately 2007. As of June 30th, Astaris' net debt level was $120 million, following our and Solutia's year-to-date keep well payments of approximately $26 million each. We will need to await the specifics of any restructuring actions at Astaris, which Bill earlier referenced, which could impact the continuing work on refinancing Astaris before commenting on the extinguishment of any keep well obligations in 2004. Lastly, there are no more acquisition-related liabilities or earnouts in 2004 and beyond. While we have much work ahead to meet our targets for 2003, we are pleased with our progress to date and believe that we are well positioned to significantly deleverage the balance sheet in 2004 and beyond. I will now turn the discussion back to Bill. Bill.

Thanks, Kim. To summarize, we had a good quarter and made steady progress on our 2003 commitments -- commitments to focus on higher value, higher growth opportunities in Specialty and Ag Chemicals, to take aggressive actions in our Industrial Chemical businesses and continue to improve our cash flow. Importantly, we remain on track to meet or exceed our cash flow targets and meet our full-year EPS target, with two caveats. Our outlook for the full year excludes any charges relating to our ongoing cost reduction programs in Industrial Chemicals, as well as any restructuring impairment or other special charge that could result from the potential strategic options now under consideration at Astaris. And second, and as usual, our outlook assumes that the North American crop protection market experiences a relatively normal pest pressures in the third quarter. Given that, we expect earnings to be in the range of $1.80 to $1.90 per share, a somewhat narrower range than we had previously provided to you.

The second half of the year will see stronger earnings than the first half, due to the seasonal nature of Ag Products, lower interest expense and improvements in Industrial Chemicals resulting largely from cost reduction and operating efficiencies. Specialty Chemicals' results will be lower in the second half of the year as the pharmaceutical campaigns which drove the first-half lithium growth have drawn to a close. When we add it all up, we expect third-quarter earnings to be between 45 and 50 cents per share and fourth-quarter earnings to be materially higher, thanks to sequential strengthening in Industrial.

Looking ahead to 2004, we should see more significant improvement in our Industrial Chemical businesses. In hydrogen peroxide, current industry capacity utilization rates are at or above 90 percent, and a broadly-supported 5 cent per pound price increase bodes well for improving profitability in 2004. In soda ash, the possible resolution of the sale of at least one of the existing suppliers, when combined with already high industry capacity utilization levels of about 90 percent, should lead to a nice recovery in prices and profitability. And at Astaris, we are confident that the new management team, with the benefit of the strategic review and actions which may come from that, will improve both the near-term and long-term outlook for the business. Clearly, maximizing and realizing the full operating leverage of our Industrial Chemical businesses is a long-term strategic objective for us.

Also looking ahead, investments made in our growth platforms are clearly paying off and are expected to continue to do so. Ag Products, biopolymer and lithium are all poised for strong earnings growth over the next several years. Focusing our portfolio on higher growth, higher value businesses continues to be a second long-term strategic objective for the Company. With this continued improvement in our operating profit and successful delivery of our cash flow objectives, we are well positioned to meet the third of our long-term strategic objectives, and that is to create greater financial flexibility. Specifically, we expect to reduce debt by at least $300 million by the end of 2006. With that, let me thank you for your time today. I remain very bullish about FMC's future and I now look forward to taking your questions. Operator.

Thank you, Mr. Walter. (CALLER INSTRUCTIONS) Kevin McCarthy (ph) of Banc of America Securities.

Good morning, everyone. Milton, that was a great rundown of the Ag business. I think you've done a great job there controlling costs. A couple of questions for you. You mentioned your outsourcing initiatives with China, India, and elsewhere. You started that three or four years ago. Can you talk a little bit about how much you've saved there and then how much might be left to save over the next three years? And then a separate question, you mentioned a shift to the third quarter. Can you talk about where you saw that shift and what the sequential effect might be 3Q versus 2Q?

Let me talk about outsourcing first. We started the process in 1999, and if we compare the costs of our products in '99 to the costs of our products in 2003 and multiply by 2003 volumes, we see cost reductions in the order of $40 million.

Is there more to extract there, or has that outsourcing program pretty much played itself out at this point?

There's certainly more to extract. We choose at this time not to give you a number for that, but it is significant. (indiscernible) to third quarter. We saw a delay of our herbicide sales into cotton -- and that's a cotton post direct. And we also saw a delay in insecticide treatments on cotton in the 2002. In the last three weeks of June, we had significant sprays in cotton. We've seen a pickup of that in July. So that is in the North American market.

Separate question on Specialty Chemicals. This is the second consecutive quarter you've posted terrific results there, Bill. Can you talk a little bit about how much of that is sustainable if we look at things on a year-over-year basis, and how much is due to order timing? I know you have some lumpiness there on some high purity (ph) with the carbamate (ph) and now it seems like butyllithium. How large are those orders and what is the underlying trend there? Is it as good as it seems?

Our outlook for the segment for the full year is for sales growth into the mid to high single digit, and earnings growth in the low to mid teens. So I mean, you can work backwards and conclude that we do not expect the performance that we've seen through the first two quarters to sustain itself through the second half. Having said that, that is still outstanding performance year-over-year for the entire segment. A large part of the reason for the relatively speaking lower performance in the second half is the increasing exposure that the lithium business has to the pharmaceutical industry and the nature of campaign production than a number of our customers engage in. And as a result, we are just going to see going forward from here, more lumpiness in lithium and therefore specialty sales and earnings from quarter to quarter.

That sounds pretty encouraging. Taking a step back, maybe a long-winded general question for you here moving off the beaten path a bit. If I take a look at your portfolio, Bill, it seems the specialty results are awfully strong. And maybe if this were a poker hand of businesses, this might be a pair of jacks, let's say, in five-card draw -- strong enough to open and maybe the foundation of an awfully good hand.

And if I look at your other businesses, Industrial Chemicals is still struggling -- there's not much there. Maybe you have a three of clubs and a five of diamonds, let's say, and maybe you have the beginnings of a straight if you get some economic improvement, but not a whole lot visible right now. And then you've got Milton's Ag business, which looks reasonable. Maybe there's some value there, so that could be an ace -- but only one ace, nothing to pair it with here or maybe there's some value if you divest it. You've been on the job now a year and half, we haven't seen much portfolio activity. At what point does it make sense to trade in some of these cards and try for three jacks or two pair, Bill?

Kevin, I enjoyed the analogy. I might take exception to your characterization (technical difficulty) to the businesses. I'd say Specialty is sitting with three jacks right now. ICG, you can't see all of the cards that are down. I mean, that's a hand that I'd love to play in a poker game. Kevin, there is nothing new to report on the strategic -- on the portfolio front. We have said that it is our objective longer-term to increase the focus and the growth prospects for the Company. Given current market conditions though, we don't have to sell anything, and aren't going to sell something just for the sake of selling it. We will continue to play the hand we've got. Again, back to your analogy, I think all three hands are playable. But if somebody's willing to step in and buy us out of a hand at a value greater than we think there is to us, we will sell it. But no timetable.

Fair enough. Thanks for indulging me.

Bill Young of Credit Suisse First Boston.

Really good quarter and very good call, by the way. With regard to some of the industrial areas, what kind of consolidation are you expecting in phosphates and soda ash and just why it this going to be such a positive thing -- they're a business with two competitors or three competitors which are pretty challenging, nonetheless, if there's a lot of excess capacity? Also, as you get into that, maybe you can give us your view on what's going to happen with American soda.

First, thanks for the positive comment on the call. In Industrial, I referenced potential consolidation. It largely larger relates to the phosphorous business. Although as I'll address your American soda question later, and there is an opportunity there as well. Why do we think that will be beneficial? The industry is operating combined capacity level of about 75 percent today, give plus or minus a few percentage points. There are effectively only two integrated producers in this market. I think it's obvious to us that restructuring, if by that we mean the shuttering in of capacity, has got to have a positive influence on the results of the business.

With respect to American Soda, there continue to be rumors, and they are rumors -- we are not involved in a process here, Bill -- about a pending sale of American Soda to an existing soda ash producer. What intents that producer has with respect to that business are unknown to us. Obviously, should American Soda be acquired by another producer and that producer shut down the property, it would have significant, fairly immediate positive benefits for us and the entire industry.

So essentially what you are saying is it's not just consolidation in each case; it's consolidation and closures which would be critical to the equation?

Correct. I don't think there can be really any significant consolidation in the sense of two existing competitors joining forces, at least not Astaris and Rhodia -- we tend to be too big right now. So consolidation does mean taking capacity off-line.

If it gets sold to a third party, I'm not sure that it's exactly obvious to me, but that remains to be seen. You see what I mean, it's not obvious to me that there'd be capacity shutdown in the situation you described. But we'll see.

We will, and we're optimistic.

Okay. Last but not least, I realize what you said about Astaris and restructuring and you don't know what this means for the keep well payments. Was it your original expectation that this would be the last year of keep well payments and do you still feel, at worst, that's the case?

To your first question, it was our original expectation, as we'd mentioned in previous calls. And we just need to await what the restructuring alternatives play out to be before we can comment upon whether or not there is any further refinancing into '04.

Okay. Thanks, Kim.

John Roberts of Buckingham Research.

Morning, guys. I just wanted to check, I think you talked about a delay in insecticides into the cotton market, but the press release talks about delayed herbicide application. So could you clarify that? What was delayed from second quarter to third quarter, herbicides or insecticides?

It's Milton. It's both. I said that we had our cotton post direct herbicide, cathentrazone (ph), which was delayed -- last year, we did some sales in the last part of June and now it's ongoing as we talk now. And also there were some insecticide sales put into the third quarter.

What percent of the Ag business is professional turf and ornamental?

John, we don't disclose this publicly.

I just don't remember it sort of being the primary driver of performance in some time.

It's just a significant part of our business, but we have never disclosed and do not disclose this number publicly.

Third, Bill, the sequentially weakening guidance seemed a little harsh and must be more than just the lithium pharmaceutical related business coming down, I would guess. And it seemed particularly strong sequential drop here, given that you've got the Ag business getting a benefit the third quarter from this delay. Could you comment on what else sequentially here is going to come down, or is the lithium business maybe a lot -- more important than I thought in the second quarter?

The lithium comment, John, was for the second half vis-a-vis the first half. And all we were trying to communicate was that we don't expect the strong performance in Specialty to continue -- the strong year-over-year performance, especially, to continue that strong in the second half. We still expect it to be positive, as I think I commented to Kevin. The other sequential factor, sequential quarter-over-quarter, is some scheduled plant shutdowns and mine moves in our alkali business in the second quarter, which will tend to depress -- third quarter, I'm sorry -- will tend to depress the earnings in that segment in the third quarter but will fully recover that during the fourth quarter.

Then lastly, Bill, you said the Astaris impact fiscal '03 over fiscal '04, your share I think would be about $20 million. You probably can't cut that by 4 to get quarterly, but it would say the quarterly impact would be around 5 million. And you also said Astaris accounts for more than the 2.1 billion decline in equity income. If Astaris was down somewhere between 2 and 5 million year-over-year, what is the other pickup in equity income? I don't recall you having any other substantial JVs to offset the decline in Astaris.

John, first of all, the comment about a $20 million year-over-year decline in Astaris was '02 to '03, not '03 to '04.

I'm sorry -- '02 to '03, right. So that would be 5 million, let's say 2Q '03 versus 2Q '04, or not exactly that, but something in that order of magnitude I guess.

And remember, John, in the first quarter of '03, the comparison of the first quarter of '03 to first quarter of '02, in '02, we had a power resale benefit that did not occur in '03. And so your dividing 20 by 4 and concluding it was 5 in the first probably understates (multiple speakers) fall off in Q1. But let me ask Kim to just address generally, John, the other things that might be in equity earnings of affiliates.

We've talked about this before, although not specifically disclosed the additional equity earnings of affiliates. But they are largely associated with our Foret business and our lithium business. And -- although not nearly on the order of magnitude of Astaris, still significant in the sense of their contribution or material in their sense of the contributions to earnings per share. So on any given quarter, it can have a modest contribution.

I'll get back in the queue for additional questions.

Andrew Cash of UBS.

My first question has to do with Ag. So, Milton, did you talk about -- you said nicamid (ph), the insecticide, will be effective in sucking pests? Is that the name of it, nicamid?

It's flonicamid, that's the common name.

What are the key (indiscernible) markets it's aimed toward?

It sits on many crops. Sucking pests is the target pest group, mainly aphids. It will sit on cotton, fruits and vegetables, and we expect it also to have a play in the noncrop market.

Is cotton going to be the most important one?

Cotton will be the largest volume, but also a lower price segment for us.

How will that play against Bogart 2 (ph)? Will growers use it in conjunction with Bogart 2, or will it be a substitute for Bogart 2?

Bogart 2, the BT technology works on worms. This is a sucking pest chemistry and why we like it so much are two reasons. One, sucking pests are really not susceptible to GMO technology as we know it today, and we haven't seen anything in the near term future that's going to work GMO technology on the sucking pest. The second reason we like it is that this chemistry is very compatible with our pyetheroids, and we will be also developing tank mixes, so this is really a good fit for our product line.

I was under the impression that Bogart 2 would be effective against some sucking pests, but maybe I'm wrong on that.

That is not our impression.

Another question for nicamid, sales of maturity, what do you think the market size is for this product?

We have targeted this to be a significant new product for FMC in the near term, but for confidentiality reasons at this stage, I cannot specifically give the targets, our sales target.

You couldn't (indiscernible) 100 million?

Yes, it's more than $40 million.

Going back to Astaris, there's been so many numbers talked about. Bill, could you remind me, what is the second half expected payment into Astaris?

Hang on a second -- we made 26 in the second quarter, but I can't remember if any was -- 35 million.

For the second half of the year?

Yes.

Then for '04, '05, '06, about 10 million a year?

No, we do have some confusion here. The current data as Kim said on Astaris books, current June 30th, is $120 million with (indiscernible) each parent is scheduled to make in the second half would draw down Astaris' debt, assuming all the keep wells were used to pay down debt, $50 million by next year. And our obligation ceases when that debt goes to zero. And I think, if I'm not mistaken, that obligation continues through the first half of '04. So at worst-case, we would have it extinguished by midyear next year.

So that money is really going to pay down debt.

Exactly.

It's not putting in for a lack of cash flow.

The obligation we have and the requirement Astaris has is for debt repayment.

What could be done in Astaris in terms of restructuring? What sort of -- I just thought the thing was already pretty mean and lean. What else could be done over there to restructure it?

Andy, your question is a little bit ahead of where Astaris stars is and, therefore, ahead of where we are. Astaris has not even presented to the board of management their conclusions and recommendations at this point. But the consolidation restructuring would have to include, among other things, plant shutdowns and a realignment of production in a much more efficient manner than exists today. Astaris operates 7 or 8 plants in the United States, some of which are operating at below 50 percent of capacity. I think given what little I know about the business, I mean you'd conclude that they just simply have to shut capacity, among other things.

The Wedasset (ph) plant would not be part of that?

I wouldn't think so.

Can you venture to give sort of a range of restructuring charges that might happen?

Andy, can't at this point. Again, Astaris management hasn't even presented to (multiple speakers) -- versus Board of Management.

Just thinking about the second half cash flow, just roughly, you're going to have about 25 to $30 million in cash from operations. Then you've got the Astaris payment, so that's going to put you -- you think you'll be roughly neutral in the second half of year or maybe a slight shortfall?

I think what we said, Andy, is that we would expect net debt at the end of the year to be as essentially unchanged from net debt at the end of last year.

Okay. And that includes your credit facility?

Yes, that includes everything.

Okay, very good. Thank you.

John Goetz (ph) of Penta Investment.

Bill, I've got a follow-up on the Astaris issue. If I had guessed -- last year this time, I would have guessed that it couldn't get too much worse. Obviously, we had the fall-off in the power sale, but that was known. But in the remaining fall-off, could you sort of characterize in the deterioration of income, what was sort of directly industry related -- meaning price effect and volume effect just for the industry versus what might be actually increased expense or cost at Astaris? Could you try (technical difficulty) product in there, I know, and I'm trying to separate deterioration into industry and sort of what's more directly in your control.

Sure, John. First of all, I would have agreed with your characterization sitting here maybe a year ago -- I would have thought that business had reached bottom, as well, particularly given the industry structure, i.e. of fundamentally two players and the actions we had previously taken to shut down elemental capacity and bring on the PPA plant. But that's not been the case. The deterioration is all price and volume, John. In fact, Astaris is operating at a lower cost level today than they were last year.

I said in my comments today that they've experienced -- or will experience a 4 to 5 percent year-over-year price decline this year, and I think Bob Harries, in his comments last quarter, talked about a 4 to 5 percent decline '01 to '02. So the business has seen a 10 percent decline or more in average pricing on a 4, 5, $600 million business. So even I can do the math to figure out what that means on the bottom line. Volumes continue to be a weak. But it's not increased costs. To the contrary, Astaris has been aggressive and successful in addressing those things that are directly under their control.

So to Andy's question earlier, in terms of what there is to do, it really is eliminating -- as you alluded to, eliminating a portion of that capacity, which must, when you look at it separately, be producing at a major loss, right, in terms of just how this math works at this price level? That's where I was going with that. Because if it is attributable to price and industry effect, then you have a system that a portion of which must be looked at as producing at a large loss. And then rather than ask for you comment on that, I asked you to comment on from a competitive standpoint, I presume you are not the only parties that have a portion of the system that must be way negative, way red. And I'm just trying to understand the competitive dynamic there.

John, obviously we're not the only one in the business. The other major producer in the U.S., Rhodia, I suspect, although I don't know it for a fact, is suffering from the same diseases that we are suffering from, which are industrywide diseases -- overcapacity, aggressive pricing actions leading to low prices and low if not negative profitability in some of the business segments. I would expect that whatever restructuring is going to go on in the industry will go on by more than Astaris. Again, we're only one player and I would hope the other major player steps up to his industry responsibilities as well.

Thank you.

Andrew O'Connor (ph) of Strong Capital.

Good morning, everyone. Congratulations on your quarter. I wanted to know, perhaps Kim, can you reveal your CAPEX for the second half of the year for us?

Yes, Andrew. As we mentioned, the full year estimate that we've given is 85 million. We talked about the first-half spending, which is just slightly less than half of that. So, on a calendarization basis, just up modestly in the second half of the year.

Can we break it out or -- ?

Break it out by quarter?

No, by business segment.

Andrew, I see what your question is. Sorry, no, we don't provide specific guidance in capital spending by business segment by quarter.

And then any update regarding the sale of your land out in Silicon Valley, California ? Any positive developments there?

Unfortunately, no.

Thanks very much.

Byron Lynn (ph) of Sikes Investment Advisers.

Hi. For the soda ash business, when you talk about the prices being down 4 percent or so this year, is that across the board or is that primarily domestic or primarily Asian?

Byron, it's primarily mix and driven by export. We have increased the level and therefore the mix of our shipments to Europe, and ANSAC primarily in markets where we face direct Chinese competition has seen some price degradation.

So then I can take it that the domestic market is fairly stable from last year?

As you know, that business pricing is pretty stable within any 12-month calendar period. Prices get set effective January 1 of each year and we bill at that level through the year. So domestically, any quarter-to-quarter change that we might see would largely be mix within the domestic market.

I guess for the Astaris business, it surprises me that there is such an overcapacity in the plants and that it's taken so long to address that issue. Does FMC have much, I guess I can say direct operational influence over the management at Astaris or do they tend to operate much more independently?

We are a 50-50 partner with Solutia in the venture, and we have three seats on the Board of Management, as Solutia does. We've got a professional management team in place. They run the business day day-to-day and review with the respective members of the Board of Management a strategic financial and broad policy issues. But I don't think we nor Solutia get involved in the day-to-day management of that business. Maybe unfortunately, but we don't -- and can't without Solutia's permission.

Great, thank you.

Kevin McCarthy of Banc of America Securities.

A couple of quick follow-up questions. Can you update us on your energy hedge status, please?

We continue to administer the energy hedging policy that we've communicated to you before, which is we hedge forward approximately 80 percent of our future energy requirements and we are continuing to administer that.

Do you have any hedges in place for '04, Kim?

Yes we do.

A minor question on your balance sheet, Kim. It looks like your balance in goodwill and other intangibles has tended to creep up over the last four or five quarters and normally I'd expect that to go the other way with amortization. Any insight on to what is going on on that line?

Yes, it is translation.

Oh, okay. Foreign currency hits you there?

That's right. It's associated with some of our biopolymers acquisitions.

Okay. And then finally, a question on soda ash. I had heard that IMC Global intends to depart ANSAC. Can you comment on that and can you also comment on (technical difficulty) trends and what you are seeing domestically versus export markets?

First of all, I'm not sure matters of ANSAC are something we ought to be discussing publicly. So I'm going to just avoid that question. My apologies. Second, with respect to what we are seeing in the way of demand. Total demand for soda ash on North American producers is still a GDP business and will follow GDP this year, slightly weaker in the first half than what is expected in the second. ANSAC continues to grow as the export markets and the cost efficiency of U.S. produced soda ash gain share globally. I mean that short-term, longer-term, I don't think we see any material change in that picture -- flat domestic demand, growing export, I'm not sure.

You would expect then to continue to sell your volumes through ANSAC for the foreseeable future?

Yes.

Thank you.

John Roberts of Buckingham Research.

You noted in the release that Foret is up year-over-year in volumes in the phosphate business. Have they fully recovered back the business that was lost a little over a year ago?

For all practical purposes, yes. The customer has been regained, but the volume of that customer is not what it was prior to a year ago. But they've picked up volume elsewhere as well.

Thank you.

With that, that's the end of the calls we have. Let me just recap. We feel good about our second-quarter results despite what I would characterize as the challenges of a weak economy and poor performance in our Astaris joint venture. We remain confident about the full year operating outlook, subject to the normal caveat that we always give you regarding pest pressure in our Ag business. We are pleased with the progress with respect to all three of our commitments this year, but recognize we've got more to do in all three areas. And we're bullish about the prospects for significantly improved results for the Company over the next several years. Both earnings and free cash flow we expect will increase significantly. With that, let me thank you for joining us and look forward to talking to you in the weeks and month ahead. Thanks, everybody.

Thank you for participating in today's 2003 second-quarter earnings release conference call for FMC Corporation. You may now disconnect.

(CONFERENCE CALL CONCLUDED)