富美實 (FMC) 2004 Q2 法說會逐字稿

Good morning and welcome to the 2004 second quarter earnings release conference call for FMC Corporation. All lines will be opened -- will be placed on listen only mode throughout the conference. After the speakers' presentation, there will be a question and answer period. [Operator Instructions] Thank you, I would now like to turn the conference over to Eric Norris, Director of Investor Relations for FMC. Mr. Norris, you may begin.

Thank you, and good morning or good afternoon, everyone. Welcome to FMC's second quarter 2004 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 2003 Form 10-K and other SEC filings. Such information represents our best judgment based upon today's information. Actual results may vary based upon these risks and uncertainties.

During the conference call, we may refer to non GAAP financial terms. On our FMC investor relations web site available at IR.FMC.com, you'll find the definition of all such terms under the heading "Glossary of Financial Terms". In addition we provided a reconciliation of certain non GAAP figures which we will use on this call to GAAP also available on our web site.

The agenda for the conference call is as follows. Bill Walter, Chairman, President and CEO, will review highlights of the quarter then Bill will turn the call over to Michael Wilson, Vice President of our Industrial Chemicals Group for an update on the Astaris restructuring as well as selling price trends and industrial chemicals.

Following Michael, Kim Foster, Senior Vice President and CFO, will review cash flow and debt, and then Bill Walter will discuss outlook for 2004 and close the prepared portion of the call. Afterwards we will take your questions. My pleasure to turn the call over now to Bill Walter. Bill.

Thanks, Eric, and good afternoon to all of you. Once again we had a strong quarter significantly exceeding expectations we set during our conference last conference call, exceeding expectations largely as a result of another outstanding quarter in our Ag Products segment with a balance of the portfolio delivering largely as expected. To summarize we earned $1.14 per share nearly double last year's second quarter of 61 cents per share and well above our expectations.

Ag had another great quarter with strong sales growth in addition to significant expansion in its operating margins. And, finally, the Astaris restructuring has now been completed with the business well positioned to deliver $40 million in annualized earnings improvement and no debt on its books.

Let me start with some of the highlights. After-tax income for the quarter, before restructuring and on the continuing operations basis was $42.6 million or $1.14 per share nearly double last year's 61 cents. Favorable currency translation accounted for $2.8 million or 7 cents per share of the quarter's results. On a GAAP basis we reported net income of $30.7 million or 82 cents per diluted share, an increase of 34 percent versus prior year.

GAAP earnings in the quarter were lower for two reasons. First, restructuring and other charges of $1.8 million after-tax or 5 cents per share relating mainly to restructuring and Astaris and agricultural products. And second, an environmental charge to discontinued operations of $10.1 million after-tax or 27 cents per share.

Sales were 534.3 million, were up 5 percent versus the second quarter of 2003. Once again, Ag Products was a key driver with segment sales increasing 10 percent versus the prior year quarter. The increase was broad-based with all regions and all product lines experiencing good growth. Stronger insecticide sales were driven by growth in the corn, cotton, and noncrop markets in North America, and continued strength in Brazil. Increase of herbicides resulted from several new labels in Europe for high-value crops and early season demand in North America due to favorable weather conditions.

Specialty chemicals growth at 2 percent was driven entirely by the BioPolymer business. Strong microcrystalline cellulose and Alginate sales in the pharmaceutical and food ingredients markets drove BioPolymer sales. Growth in the lithium business in most product lines and end-use markets was offset by the continuing impact of the production campaign schedules of several of our larger pharmaceutical customers.

Industrial chemicals sales were up 2 percent from the prior year quarter driven entirely by higher alkali sales on the strength of worldwide volume growth in higher domestic selling prices offset in part by lower export prices.

Higher domestic hydrogen peroxide volumes and selling prices were offset by unfavorable mix. Foret sales were slightly lower in the quarter due to raw material related (indiscernible) problems, impacting mainly their phosphorus business. These problems have since been corrected. Higher selling prices in peroxygens and phosphates and favorable foreign currency rates continue to benefit Foret.

Operating profit before restructuring and other charges of $76.6 million was up 45 percent. Again ag products drove the strong performance and I will discuss their performance in greater detail in a moment. Specialty chemicals earnings were flat due to the ongoing impact of higher raw material costs and slightly unfavorable mix.

Industrial chemical earnings were up, due to an improvement in the Astaris joint venture which Michael will detail shortly. The impact of higher sales was largely offset by increased energy and transportation costs. And, finally, corporate expense and other income and expense were relatively flat.

Let me now get into some of the details on our ag products segment

In addition to the benefits of favorable market conditions ag achieved significant bottom-line improvement with an expansion of operating margins from 16 to 25 percent during the quarter. And from 11 percent to 18 percent, year-to-date. We have discussed on prior calls the details of our strategies that are driving this improvement, but they're worth repeating here.

First ag products is reducing cost by sourcing manufacturing of several of its key products and intermediates to lower-cost regions of the world. This effort has yielded $40 million of savings since inception in 1999 and has significantly reduced our CapEx requirements in the business.

Second ag is upgrading its products mix, upgrading its product mix by focusing its sales efforts on newer labels and high-value crops such as vine and vegetables as well as new products in noncrop applications. They're also doing it by accessing high-value products from our alliance partners and launching them in markets in which FMC has both the technical strength and distribution access. And, finally, they're doing this by eliminating sales of lower margin third party products.

Lastly the ag business team has completed a redesign of its global supply chain and a restructuring of its North American commercial organization. Both efforts are now generating additional efficiencies and cost savings.

While it is difficult for us to predict what may happen with the broader ag economy over time, we believe that the improvements we have made in the business to our cost structure and product mix will provide a sustainable base in the business going forward.

For a discussion on Astaris industrial chemicals let me now turn the call over to Michael Wilson. Michael.

Thank you, Bill, and good afternoon everyone. As promised during our January conference call I'd like to provide an update on the successful restructuring and deleveraging of Astaris, our 50-50 joint venture in phosphorus chemical. In addition, I will provide an overview of the very favorable price environments that is developing across our industrial chemicals businesses. While most of the benefit of higher selling prices lies ahead in 2005 due to annual contract nature of these businesses, we are very optimistic that the current market environment will lead to higher selling prices across the group.

I will get into the details in a moment. First let me review what has been achieved in Astaris. The Astaris restructuring is complete and has already had a positive impact to industrial chemical segment profitability. As I described to you in January the restructuring plan called for the closure of three plants and one distribution facility, the exit of the commodity grade sodium tripolyphosphate product line, and the consolidation of all remaining product lines into the remaining three Astaris production facilities. In total, more than 100 million pounds of reduction had to be transitioned between sites to requalify with customers.

I'm pleased to report all of these actions have been executed according to plan.

During the transaction the targeted products were transferred through the remaining Astaris plants and requalified with more than 300 effective customers. Most importantly, customer relationships were maintained throughout the process and the transitions were completed with no unintended share loss. As a result of the restructuring, the three remaining Astaris plants are now all operating at virtually sold out rates.

The successful restructurings result in an earnings improvement at Astaris in excess of $40 million on an annualized run rate basis. Some of this benefit was realized in fourth quarter 2003 and first quarter 2004 Astaris results as the first plant shutdown was executed in October of 2003.

Due to faster than anticipated progress, Astaris realized the full amount of this increase during the second quarter of 2004, providing a favorable impact to FMC on the 50 percent basis of roughly $5 million. We expect the third quarter of 2004 to show us similar year-over-year increase while year-over-year comparisons in the fourth quarter will be less dramatic.

As a result of the capacity reduction at Astaris in conjunction with other industry reductions that have occurred simultaneously, the market environment for phosphorus chemicals has changed significantly from 12 months ago. Reduced capacity along with demand growth of 1 to 2 percent has substantially tightened industry capacity utilization which for phosphate salts is now in the low 90 percent range. High capacity utilization in turn laid the foundation for product increase announcements of 4 to 7 percent during the first half of 2004.

While the price increases will not materially impact earnings until 2005, as the majority of the volume is contractually price protected, these developments are encouraging.

Other competitive actions have also shaped a more favorable environment for the industry. For example, (indiscernible) North American business roughly comparable in size to Astaris, was recently sold to Bayne Capital for $550 million. We expect this healthy purchase price by a financial buyer result in a more stable competitive dynamic and higher profitability across the industry.

The situation in China has also turned more favorable for Western producers. Chinese imports to North America, which represented less than 5 percent market share in 2003, have since contracted to a negligible level. The Chinese have historically participated in the elemental phosphorus feedstock in the commodity grade portions of market. With the energy shortages and escalating energy cost in China many elemental phosphorus plants there have been forced to shut down. From the balance of the producers, we saw domestic price increases that after a peak were up as much as 80 percent. Recent data suggests that selling prices are now about 50 percent higher than during the 2002 to 2003 time frame. The current situation in China is expected to persist for another 2 to 3 years which will help sustain the positive commercial outlook.

Before I move on to the market outlook for our other industrial chemical businesses, I want to comment on an equally important component of the Astaris story. It is deleveraging. Our goal for Astaris has been not only to return the venture to profitability but also to deleverage the business completely in order to eliminate the cash drain it has been to its parents for the past three years.

During the second quarter FMC and Solutia each made a final $36 million keep well payment that eliminated Astaris's remaining bank debt. As of June 30, 2004, Astaris is debt free.

Now with positive free cash flow, and no debt, Astaris is in opposition to refinance itself independent of parental assurances. We expect that the business will be refinanced in the next 6 to 9 months, market conditions permitting.

I'll now turn to a discussion on the favorable price environment for soda ash and hydrogen peroxide. North American soda ash industry is operating at 98 percent effective capacity utilization. Sold out market for all practical purposes. This situation has resulted from the combination of already high industry utilization rates and significant increases in 2004 export demand. Which represents about 40 percent of total volume. The situation will be further exacerbated as Sava (ph) completes the shutdown of its American soda facility during the second half of the year.

In response to industry conditions, in May, week announced a $15 per ton price increase for offlist prices which represents the bulk of our volume and a $5 per ton increase to list prices effective July 1, 2004.

Shortly afterwards, our 4 domestic competitors followed. This price action and competitive response is larger and has come earlier than in prior years and reflects the very favorable price environment while providing time for our customers to budget for higher raw material costs in 2005. In addition to the price increase, FMC and three other producers have instituted an energy surcharge policy to offset rising energy costs.

In an effort to mitigate our ongoing exposure to rising transportation costs, we also announced a move to FOB freight terms or freight prepaid and added at a customer's request for service charge.

Lastly we have gone on record, stating that Granger, our 1.3 million ton mothball facility which we believe is the lowest cost and most logical mix capacity increment to come on stream will not be brought back online until improfitability improves. Even then it'll be done so in smaller increments to meet export growth.

Given the favorable industry conditions, we are confident that domestic selling prices will rise significantly in 2005. Success, however, will depend on competitive resolve (ph) and again in 2005 will be tempered by the presence of legacy contractual price restrictions in prior years.

The picture outside the U.S. while not quite as certain is also improving. In regions served by Ansach (ph) namely Asia and Latin America market improvement has been driven by Chinese production challenges. As in phosphorus chemicals, a shortage of power has resulted in the curtailment of existing capacity. In addition price increases for key raw materials for synthetic soda ash production have driven up production costs and led some Chinese suppliers to recently announce selective increases in offshore markets.

Looking forward, Chinese government efforts to restrain growth via credit restrictions and reductions to export related VAT drawbacks have delayed capacity expansion. We believe these actions -- coupled with continued growth and Chinese domestic demand --will result in a balanced Chinese soda ash market over the next several years providing the opportunity for continued profitable growth for Ansach in the Asian market.

In Europe Brunermond (ph) has recently announced a 15-year-old per metric ton price increase and at least one eastern European producer has announced a 7-year-old per metric ton increase in response to the rising cost of coke -- a key ingredient to synthetic soda ash production. We have recently communicated a non euro per metric ton transportation surcharge for European accounts.

Now turning briefly to hydrogen peroxide. In North America, industry capacity utilization is running between 91 and 94 percent depending on seasonal demand with year-over-year volume growth of about 3 percent. Hagoosa (ph) recently announced a 5 cent per pound increase for all offlist accounts. We followed with 5 cent per pound increase and reiterated our energy and transportation surcharges. While it's still early we expect others will follow.

Like soda ash, much of this increase will not have a real financial impact until the 2005 contract year and, again, success ultimately will depend on competitive resolve and will be tempered by the presence of contractual price restrictions from prior years.

In Europe at our Foret subsidiary the outlook for hydrogen peroxide is even more promising. Past utilization is at 95 percent; the band growth is at 5 percent and 2004 pricing is expected to rise at close to double-digit rates versus last year.

In summary, I'm sure you can see why we are enthusiastic about the prospect for substantial earnings improvement in industrial chemicals. The Astaris venture will no longer be a drain on FMC. It's restructuring is complete, the balance sheet is deleveraged and the venture is poised to start contributing to earnings and ultimately to cash flow. Meanwhile, momentum is building for higher selling prices across the entire industrial chemical portfolio.

That said, it is difficult at this juncture to dimension the full benefit of higher prices will bring in 2005. As we have typically done we will back with an update for you in January after the conclusion of the contract season. I would now like to turn the call over to Kim Foster. Kim.

Thanks, Michael, and good afternoon all. The focus of my comments will be on FMC's debt reduction initiative. As you know, our continuing objective is to restore financial flexibility to the Company. Our goal is to reduce net debt by $300 million between 2003 and 2006. During the first year, 2003, we reduced net debt by 47 million achieving a year-end net debt of 856 million. At the beginning of the year we had expected to reduce net debt by an additional $20 to $40 million during 2004.

Our 2004 net debt reduction would have been greater except for 2 unusual demands on our cash flow that will largely disappear in 2005. Specifically we projected Astaris keep wells of approximately 40 million and Popatello's (ph) shutdown and remediation spending of approximately 35 million. We are now raising our net debt reduction target for the year to 40 to 60 million driven largely by our improved earnings outlook.

For the first six months of 2004 FMC's net debt was reduced by $16 million. Strong operating earnings combined with tight working capital controls contributed to this solid performance. By comparison, FMC's net debt increased by $32 million during the first six months of 2003.

As Michael discussed, during the second quarter, Astaris achieved several milestones. First, the restructuring plan was completed; second, the combined keep wells of $72 million by FMC and Solutia were $36 million by FMC. Astaris is now debt free. We continue to believe that Astaris is well positioned to refinance itself independent of parental assurance. Any benefit from an Astaris refinancing this year will be an upside to the net debt reduction targets.

Let me now comment on several other unusual cash flow items. Capital spending on Pocatello's shutdown and remediation was $7.6 million for the quarter. We still expect full year cash spending to be approximately $35 million. Cash spending for other legacy environmental liabilities was $8.6 million for the quarter. We also still project full year legacy environmental cash spending to be approximately $25 million. Capital spending for the quarter was 17.5 million, while depreciation and amortization was 33.5 million. We continue to expect total 2003 capital spending to be in line I'm sorry 2004 capital spending to be in line with 2003 or about $90 million compared with roughly $130 million in depreciation and amortization.

As we have recounted on prior calls, we have ample capacity to meet the demand growth within our businesses for the next several years and, therefore, continue to spend only that capital necessary for maintenance, profit improvement and regulatory purposes. Net interest expense of 20.6 million was significantly reduced in the second quarter compared to a year ago. The approximately $3 million in lower interest expense was driven by lower net debt levels and the December repricing of the term loan.

We expect full year interest expense to be between $80 and $82 million. As I indicated previously, FMC will refinance its existing credit facility before the end of 2004. I will provide additional details at a later time but the benefits of the refinancing will be consistent with our longer-term goals of restoring financial flexibility.

Tax rate on operating profit from continuing operations before restructuring charges was 23 percent. We continue to believe that this tax rate is a good estimate for the full year.

In summary, with another solid quarter of operating performance, we remain on track to regain our financial flexibility and remain committed to reducing net debt by $300 million by the end of 2006.

I will now turn the discussion back to you, Bill.

Thanks Kim. In summary we continue to build on the very strong momentum we established in the first quarter. First, we exceeded our second quarter earnings estimate by a wide margin. Second, ag products delivered the third consecutive quarter of outstanding performance, driven by higher sales and significantly higher margins. And, finally, the Astaris restructuring handled deleveraging are now complete. Equally important we are delivering very well against our longer-term objectives and remain on track in 2004 for strong year-over-year earnings growth, greater debt reduction than originally anticipated, continued growth in our high margin businesses, and improved returns on our capital.

Furthermore with the pricing environment that Michael earlier described for industrial chemicals, the prospects for 2005 look encouraging. Based on the strength of our first half performance we are revising our guidance for full year 2004 earnings before restructuring and other charges to $3.10 to $3.25 per diluted share. Where we ultimately fall within that range will depend largely on North American pest infestation levels during the third quarter and the health of the Brazilian agricultural economy during the fourth.

Specialty chemicals. Earnings in the second half should be higher due to continued growth in our BioPolymer business and improved raw material costs. We continue to expect second half industrial chemical earnings to be substantially higher than the first half due mainly to the full benefit of the Astaris restructuring and improved results from Foret.

For the third quarter of 2004 we expect earnings in the range of 70 to 80 cents per share. We expect ag product earnings to be flat to slightly up vs. the third quarter 2003. Specialty chemicals earnings to growth at rates higher than at sales growth and industrial chemicals to be about double the prior year results.

And of course as Kim indicated, the improvement on our operating outlook has resulted in our increasing our debt reduction guidance to $40 to $60 million. This will bring cumulative net debt reduction to $100 million vs. our target of 300 well ahead of where we had planned to be at this point.

With that I thank you for your time and interest. And I would now like to turn the call over to your questions. Operator.

(OPERATOR INSTRUCTIONS) Andrew Cash with USB.

Just call and say if it's wide ship it is that true?

I'm sorry Andy?

I heard that some of your soda ash customers are calling in the purchasing department the order department and saying if it's white go-ahead and ship it.

Yes they are.

All kidding aside, I was just wondering if you could talk strategically a little bit. When you first took over as CEO you talked about the portfolio and how the businesses didn't fit together. The three different divisions didn't necessarily fit together all that well so I was just wondering if you could give us an update on that? How do you think about the portfolio going forward?

Andy, first, you're right. We undertook a major effort to understand our portfolio, how it fit together, didn't fit together, what the prospects and outlook were for each of the businesses were made up of. And that study has long since been concluded. Our vision and I think this is consistent with things that we have tried to communicate is to develop a more focused, higher growth Company and portfolio strategies that we laid out 2003 annual report, I think, give guidances as to exactly how that is going to happen. With respect to the businesses in the portfolio today I am happy. I am content with all of them. They either are currently or are expected soon to be earning at or about the cost capital. So again I am comfortable with the portfolio. As I have said many times before and I will continue to say however there is no part of the portfolio that we are wedded to forever. If there is someone out there who believes there is a greater value in a piece of our portfolio and is willing to pay that in a price to us of value greater than what we think the business is worth to our shareholders, we will sell it.

Dmitry Silversteyn with Longbow Research.

Congratulations on a solid quarter. Can you explain a little bit what you mean by a negative mix effect in hydrogen peroxide? Were you selling more into the bleach market than the electronics and the water treatment market? Is that what you mean?

Exactly Dmitry. What we've seen is some slowdown in the growth and more specialty niche markets like Tronics, environmental, industrial and good growth in our lower margin pulp and paper business. That's the unfavorable mix.

Is there any signs that this is reversing or what were the reasons that that happened in the quarter? I mean the electronics business look to be fairly solid on year over year sequential basis.

Yes. I think, Dmitry, that it is a one quarter phenomenon. We don't see anything that would suggest that there is a general slowdown in the electronics and our middle industrial markets. In fact -- just the opposite. We may however continue to see unfavorable mix in the third and fourth quarter as that pulp and paper recovery continues and the rate of growth in the pulp and paper volumes exceed that of the rest of our business.

I understand. You talked about for a couple of quarters now lithium being somewhat of a drag on the profitability of the specialty chemicals business and now you are expecting higher revenues or higher earnings I should say in the specialty chemicals in the second half of the year. Is that because lithium has been anniversaried or at least lithium to Pharma or are there other drivers like raw material getting better, I guess seaweed is more plentiful now for the biopolymers?

First of all, Dmitry, I take exception to your characterization of lithium's being a drag.

The Pharma, the Pharma part of it -- I apologize.

Even that I wouldn't say a drag. As we tried to explain a number of our pharmaceutical customers in the lithium business campaign produced their drugs and we are susceptible to the vagaries of those production schedules. And as a result, we should expect and have experienced lumpiness quarter to quarter year over year in the pharmaceutical lithium sales. I don't think there is anything -- I don't think, I know -- there's nothing wrong with that part of the business and I would expect that we will see some improvement in that in the second half vs. the first. With respect more broadly to the segment, though, we do anticipate continued topline growth in BioPolymer, we see an easing of the raw material costs problems we experienced in seaweed through the first two quarters of this year, and we are hoping some of the mix issues that we had been facing during the first half will also begin moving more in our favor.

Excellent and in the soda ash I -- did I hear correctly that there are still going to be some caps on 2005 contracts and do you have any idea or can you give us some idea of the magnitude in terms of contracts that will have caps vs. those that won't?

Dmitry, this is Michael Wilson and you're right that there will be some ongoing caps as we go into 2005. It is a very difficult to quantify at this point, however. We have worked very hard in the process of establishing contracts for 2004 to be sure that we minimized any contractual restrictions that are out there but what we can't predict is what our competitors have done. That will ultimately have an impact on everyone.

Okay but I mean in the environments you are describing there's really no opportunity for anybody to go after market share since there is no capacity to supply. So what would the dynamic be for your competitors to put in new caps in 2005?

Well, the caps that would be in place for 2005 I don't think would be put in place now but our legacy caps from multiyear contracts.

So you're just referring to how aggressive that will be in trying to renegotiate those up or to eliminate them altogether?

Well I would think that in a rising price environment, most customers who have secured prices via long-term contracts are going to want those contracts honored as opposed to renegotiating in a rising price environment. So to some degree we have to wait until those contracts roll off. I can tell you that it is our expectation that the amount, the number of customers that will have contractual limitations in '05 will be substantially less than '04 and I think by '06, given the environment we have been in that that will be somewhat negligible.

Fair enough. And finally on releveraging the Astaris when you talked about the Company refinancing itself without support from the parents, is there any cash that can flow back to the parents from that refinancing?

Dmitry, this is Kim. There would be cash that would flow back to the parents as a result of that refinancing. The cash could be used to address the deferrals which are outstanding and depending upon the size of the financing could offer an opportunity for either parent to have addendum (ph).

And just a question to follow-up on an earlier portfolio management question. You know with the Solutia in bankruptcy and Astaris now being -- looks like being able to stand on its own two feet as an independent company and given that better than $.5 billion that (indiscernible) business got from being is there an exit strategy for you with Astaris?

Dmitry, Bill again. First of all I don't think I would comment on it even if there was. Our focus is on the continued turnaround of the business and we are going to remain committed to that and address whatever portfolio issues might arise with Astaris at some point in the future.

Let me ask the question differently. Would Solutia be able to negotiate its part of the business separately from you or do you have to go into negotiation with a third party to go into it together? Or would they be able to sell their stake without any input from you?

I'm looking around the table and getting little confused signals. We have either the right of first offer, the right of first refusals. Both partners do so that one cannot go out independently unilaterally and begin marketing their half interest in the business. I would expect that if Solutia were interested in monetizing their investment in the business, they would approach us first.

John Roberts, Buckingham Research.

Bill, it seemed like you raised the guidance for the full year only by the amount of upsize you had in the quarter. I was wondering obviously ag is maybe not sustainable. You didn't want to go out and say that the back end of ag would be strong or maybe you are already incorporating your earlier guidance, the feeling of recovery. You are in the industrial business so you don't feel any stronger about it right now?

John, both those statements are true. The guidance we provided for the full year now represents essentially the improvement we saw in the second quarter. Our outlook for all three businesses in the Company is unchanged from the view that we had three months ago. Industrial continues to recover; specialty continues to perform well and we expect a more normal ag performance in the third and fourth quarter than what we had experienced last year.

And the Granger restart whenever that occurs, indicated it to come back in small increments and if I remember right it didn't shut down in small increments and I thought that was a somewhat unusual statement. I thought when it comes back it will come back as a fully operating unit.

John, this is Michael Wilson. Because the Granger operation is a solution mining operation, we have that ability to bring it back on an incremental basis whereas most other operations in the industry would not have that ability. It did shut down all at one time but we would bring it back slowly.

Does it come back in a sort of a linear fashion or does it come back 50 percent and then another second 50 percent?

Most process businesses even if it's solution mining I just don't think (indiscernible) you just kind of variably bring it up.

That's right. It would not be linear but it could be done in increments, in small steps. For example, out of a 1.3 million ton capacity the first increment will be 250,000 tons.

Okay and then is this something you can bring it back and unless we were doing flyovers or something wouldn't even know it until after the fact when you told us?

I guess that would be true yes, I don't know how you would know.

It isn't something you have to make an announcement that you -- bringing it up in advance?

No, we wouldn't have to. We probably would, John, I think as we've said in the past the restart is not without some costs. We try to give you a heads up as to when that would be and what and when it would hit the Corporation's results. We've got $1 to $3 million worth of capital and $3 to $5 million worth of startup costs and, again, I would think that we would give you a heads up on that.

Kevin Mccarthy with Bank of America Securities.

Good morning and congratulations on an exceptional quarter here. Bill at what point in time might it make sense for you to start paying a dividend given the inflection point and free cash flow and the fact it looks like it's going to be significantly stronger next year?

Thanks for the congratulations. A dividend is not in the cards right now. The restrictions we've got in both our term loan and in our notes prohibit us from paying a dividend until those restrictions fall away it's premature to even begin to speculate as to whether we would and if we would when we'd start paying a dividend.

Okay, you talked a lot about your efforts to reduce debt I guess by $300 million. Do you see acquisition opportunities that looked interesting at this point in addition to the debt reduction efforts?

We continue, Kevin, to look at acquisition opportunities primarily in our specialty chemical business and to a certain but lesser extent in our ag products business. There's nothing on the horizon right now that is deserving to speak of. One thing I can say about acquisitions is that they will be bold onto businesses we currently have. In other words we are not going to add a fourth leg to the stool. They are going to be synergistic to our -- by definition to our existing businesses and we are going to execute on any of those in a way such that they are accretive within 12 months of completion of anything. But, again, there's nothing on the horizon right now, Kevin, to speak about.

And finally I have a question on soda ash volumes. It looks like spot caustic is crossing the 160 threshold and I think PPG put another $65 a ton on the table for the fourth quarter. Can you talk about how quickly you could see the soda ash volumes increase? Maybe later this year and into '05 via that substitution effect and how much that could be?

This is Michael Wilson again. I think first of all you're right in that we are seeing recovery caustic prices and $160 a ton is typically the level for switchover. I think the issue is going to be for those who are trying to switchover is the availability of soda ash. The market is going to be very tight and I think going into '05 is essentially going to be a sold out situation. So to some degree that opportunity may not exist, particularly if we continue to see the export growth that we are seeing.

If you did have availability how much could switch? Is it more than 5 percent of the soda ash market that would want to switch if they could?

Kevin I think what we said -- Bill again -- what we said in the past is that there is about 5 percent of global demand for soda ash that has the ability to switch between soda ash and caustic soda for its alkali values. A significant percentage of that 5 percent switched from soda ash to caustic in the first quarter of '03 I think was the last second quarter of '04 first quarter of '03 and none of that has switched back to date. So you are looking at, globally, somewhere between 3 and 5 percent of worldwide demand that could potentially switch to soda ash.

John Gest (ph) with Zena (ph).

I had the same question as John Roberts actually with respect to guidance. I would just follow-up with this question. Bill, I may have lost track but I thought that the peroxide part was shifting more positively relative to what you had originally thought. That's the only area that I still had in my mind for the second part of the year. I know soda ash has this lag effect.

John you're right. We still remain bullish on the peroxide business, we are seeing growth in the pulp and paper part of the market, the portion of the market that has been soft over the last two or three years. The issues we had in electronics, environmental, and industrial peroxide as I think I said we believe our one quarter phenomenon and would expect growth to return there. And we have been successful each of the last two years in realizing a price increase in hydrogen peroxide and expect to achieve another one as we go into the '05 contract season. We will continue to have some unfavorable mix impact through the balance of the year again as growth in pulp and paper outstrips that in our more higher valued markets. And we will continue to be burden by increasing energy and transportation costs. But all told we expect to see a better second half in peroxide than we did the first and even better 2005.

A question on your debt reduction target. In thinking forward to the portion that is going to come in '05 just two-part question. One. Is there any capital significance if you did end up increasing soda ash production? Is that a drag to cash flow. And, secondly, is there anything else other than acquisitions which you previously talked about that you could say we'd better watch out for more capital because obviously you have the keep well and the Pocatello coming off so those are huge additions to cash flow for '05, I am just wondering if there's anything to offset it?

Yes, John, I think the answer to your question is, no, I don't think there's anything out there that we have not already talked about. As I said a few minutes ago the restart capital cost for Granger are nominal $1 to $3 million. Other than acquisitions I can't think of anything else that could be an unknown call on cash. I guess speculating with you, depending upon pension fund performance this year if the equity markets generally tanked over the balance of the year could have an impact that neither one of us anticipate right now.

Andrew O'Connor with Strong Capital.

Congratulations on your quarter. Bill, I might be playing catch-up here. Was there a actual announcement by Solvay (ph) to shatter American soda ash in the second half? Second half of '04? Or is that your speculation?

No Andy, this is Michael Wilson. Solvay actually announced that shutdown of the American soda plant back in January, back in the first quarter. And they indicated that they would be shutting it down in midyear.

Okay so I am just wondering might the strength of the soda ash market reverse their decision here, prevent that from happening?

No I don't believe so. The American soda facility that they date are looking to shutdown is the high-cost facility and we would estimate even today that it's not profitable and I think for it to be profitable pricing would have to go up significantly and there are just as we said there are other capacity that are more economic.

Okay so you're still expecting the production to go away here shortly?

Yes, we are still anticipating that. We'd believe the the effective capacity that was on line has been scaled back to about 50 percent of where it was and we would expect that to continue.

John Bindle with Heritage Capital.

Good morning. What is the status of the Solutia lawsuit and how is their bankruptcy impacting Astaris?

John, Bill Walter. First to the lawsuit. There is really nothing new to report. Back in December, Solutia was successful in transferring the suit from Circuit Court in St. Louis to a bankruptcy court in New York. We petitioned to have that reversed. We were successful in the second quarter in having that reversed and the suit is now sitting in the Southern district court in New York. But there has been no new development on that front. With respect to the solution bankruptcy and the impact on Astaris other than the issues we have with them as fellow board members and potentially different views on how Astaris ought to be managed, there really is no impact, John. The key (indiscernible) have all been paid off so their bankruptcy or -- and/or emergence from bankruptcy is going to have no impact on Astaris's financial condition. So again we just struggle with occasionally with two partners seem issues with respect to the operations of Solutia a little bit differently.

(OPERATOR INSTRUCTIONS) John Roberts, Buckingham Research.

Kind of similar to Kevin's question on the dividends. The share count has crept up about 5 percent now from a year ago. Are you precluded from just a small amount of buyback just to offset creep?

John, we are. Again the restrictions imposed on us in October 2002 refinancing prohibit dividend stock repurchase and a number of other things.

Any thoughts or commitment on the part of management that once those restrictions come off to get the shares back to where they were?

No commitment. No public commitment. Once those restrictions fall off, John, and assuming we continue to generate the amount of free cash that I expect that we will in 2005, 2006 we are going to have to figure out what the most efficient way to return that capital to our shareholders is and whether that's dividend stock repurchase. I just don't know at this point.

At this time there are no further questions. I will now turn the conference over to Mr. Eric Norris.

First of all let me thank all of you for joining the call and your continued interest in FMC. I'm going to repeat myself. We had another great quarter in what is shaping up to be a very good year. We remain bullish about the outlook for the full year and increasingly confident about our ability to realize strong earnings growth and significant free cash flow generation over the next two years. We have fixed the problems of Astaris; industry conditions in virtually all of our industrial chemicals businesses are the best they have been in years. Ag's performance is a testament to the success of the focus strategies we are pursuing in the businesses. And specialty chemicals has and will continue to demonstrate good growth and outstanding earnings generation. Again I thank you for joining us and to those of you on the phone who are shareholders I thank you for your vote of confidence in us.

With that, we will sign off and I look forward to seeing many of you over the course of the next few months. Thank you.

Thank you for participating in today's 2004 second quarter earnings release conference call. You may now disconnect.