富美實 (FMC) 2004 Q3 法說會逐字稿

Good morning. Welcome to the 2004 third quarter earnings release conference call for FMC Corporation. Phone lines will be placed on listen-only mode throughout the conference. After the speaker's presentation, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. I will now turn the conference over to Mr. Eric Norris, Director of Investor Relations for FMC. Mr. Norris, you may begin.

Thank you. Good afternoon and welcome, everyone to FMC's third 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 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 this call, we may refer to non-GAAP financial terms, available on our website at IR.FMC.com, you'll find the definition of all such terms under the heading 'Glossary of financial terms'. We've provided a reconciliation of certain non-GAAP figures which we'll use on this call to GAAP, also available on our website. The agenda for this conference call is as follows. Bill Walter, Chairman, President and CEO will review highlights of the quarter, then Bill will turn over the call over to Milton Steele, Vice President , Agricultural Products Group for an update on performance and outlook in that business. Following Milton, W. Kim Foster, Senior Vice President and CFO, will review cash flow and debt. Bill Walter will discuss outlook for 2004 and close the prepared portion of the call. Afterwards, we'll take your questions. It is my pleasure to turn the call over now to Bill Walter. Bill?

Thanks, Eric. Good afternoon to all of you. Once again, we had a great quarter. Exceeding our expectations and we remain on track to deliver significant earnings growth for the year. Let me summarize for you, first, the quarter's performance. We earned 87 cents per share before restructuring and other charges versus 47 cents last year on the same basis.

This strong performance was led once again by agricultural products business which experienced continued strength in Brazil, and improved product mix. Industrial chemicals delivered very strong year-over-year earnings results as well due to improved market and operating conditions as well as several one-time benefits. Then finally, our especially chemicals business was down in the quarter due mainly to spending on BioPolymer growth initiatives and the unfavorable timing of plant outages. Let me now get into some details.

After tax income for the quarter before restructuring charges and on a continuing operations basis was $32.7 million versus $16.8 million in the year earlier quarter. Favorable foreign currency translation accounted for $1.5 million after tax, or 5 cents per share of the quarter's results.

On a GAAP basis, prior year earnings were a loss of $3.4 million. Earnings in the prior year quarter included restructuring and other charges that totaled $20.2 million after tax. Related primarily to the Ascaris restructuring. Sales in the quarter of $498 million, increased 6% versus the third quarter of 2003, with each of the three operating segments experiencing good growth. Agricultural product sales increased 6% versus the third quarter at 2003 and Milton will go into more detail on the reasons why in a moment. Specially chemicals grew 7% versus the prior year quarter.

In BioPolymer, stronger microcrystalline cellulose volume in the pharmaceutical market improved product and customer mix in the food ingredients market and favorable foreign currency translation drove most of the segment sales increase. Increased lithium sales benefited from improved industrial demand in North America and stronger battery demand in Asia. Industrial chemical sales rose 4% from the prior year quarter as a result of strong Foret and alkali performance. Foret sales benefited from improved pricing in both phosphorus chemicals and hydrogen peroxide as well as favorable foreign currency translation. The European sodium tripolyphosphate market is now sold out, and the hydrogen peroxide market is getting tight as well. Alkali sales experienced strong growth in export volumes and higher domestic selling prices. Soda ash is essentially sold out of the United States, resulting in announced industry price increases totaling $22 per short ton.

Export selling prices have also improved on a sequential basis versus the second quarter of 2004. As Ansach increased Asian prices by $15 per metric ton this past August. Sales in domestic peroxygens were relatively flat, as a benefit of continued hydrogen peroxide recovery in the pulp and paper market. And improved domestic peroxide prices were offset by unfavorable product mix. The domestic hydrogen peroxide market is also quite tight, a situation which has resulted in price increase announcements of 5 cents per pound.

Third quarter 2004 operating profit before restructuring and other charges of $62.6 million, was up a full 37% over the same period last year. Ag products was an important driver of this strong performance and once again, Milton will discuss this in greater detail in a moment. Specialty chemicals earnings were down 15%. As a result primarily of one-time items including a slower than expected plant turnaround following routine maintenance, and spending related to growth initiatives in BioPolymer. Both of these issues are now behind us.

Higher seaweed and pulp prices also continue to impact BioPolymer unfavorably. While this situation is expected to continue into 2005, we are diversifying our supply sources and selectively increasing selling prices in an effort to mitigate the effect of these increases. [Bestel] chemical -- chemical was another key driver, of stronger than expectance performance in the quarter. Higher sales, the timing of a mine outage at Green River and improved performances at Ascaris, all contributed to the near tripling of prior year's quarter's earnings. At Ascaris, the benefits of the restructuring, and the favorable impact of a contract settlement resulted in higher earnings of the venture.

Finally, corporate expense and other income and expense were relatively flat. That's the summary for discussion on AG products. Let me now turn the call over to Milton Steele. Milton?

Thanks, Bill. Good afternoon. It is a pleasure to be here again to discuss the significant accomplishments of our Ag products business over the past 12 months. And share our earliest testament of business conditions for the next year. Specifically, I would like to highlight the success of our strategies to build alliances for market access, innovate new products and continue to reduce costs.

Before I go into more detail, let me provide you with an update of our financial performance during the third quarter, and over the last 12 months. Third quarter sales were up $10 million, or 6.5% driven by continued strong performance in Brazil. North America was relatively flat versus the prior year due to weak test pressures in rescue markets for the second year in a row. Pretax earnings grew $7.1 million, or 30% due to the impact of higher sales and continued fixed cost reductions, driven mainly by a global manufacturing strategy.

This solid third quarter caps off a phenomenal 12 month performance for our business. In the last 12 month basis for the period ended September 30, 2004, sales were $713 million, and earnings were $124 million. This is compared to sales of $598 million and earnings of $75 million for the 12-month period ended September 30, 2003. And earnings improvement of nearly 65%. Our performance was driven by several factors including; an improving global farm economy, manifested by higher commodity crop prices and rising farm incomes, result of high market growth and strong pest (pressures) particularly cotton pests during the first quarter.

Significant growth in our European operations driven predominantly by our western and eastern European market access JVs, as well as new FMC labels and key high value crops, such as potatoes and vines. Improvements in FMC's manufacturing cost structure, and product mix have also contributed significantly to the increase in earnings. And significant progress in advancing our discovery pipeline with new product pre-development decisions, slated for the first half of 2005. While we are pleased with our business performance over the past 12 months, there are there are some headwinds going into 2005.

First, we cannot necessarily plan on the sort of peak conditions we've seen over the past year in the global farm economy. Already crop prices for cotton, soybeans and corn have come off their highs, and while still healthy are not as attractive as they were earlier in 2004. Second, part of our strength this past year came from strong pressures in Brazil. We cannot plan on this condition repeating either but rather we are planning on normal pest pressures. Third, from a manufacturing perspective, we are beginning to be impacted by high energy and raw material prices. Lastly, we anticipate that the competitive landscape will remain challenging in parts of our business.

To be specific, increased generic competition will continue to put pressure on selling prices in 2005, particularly for (Bifenterin) in North America. As a result of all of these factors, our challenge will be to sustain the kind of financial performance that we've enjoyed over the past 12 months.

That said, I believe our plans to grow our alliances in license new products and improve costs and productivity, position us well. Innovation remains an essential pillar for our growth both in the near and longer term. Near term, debt growth will result from products in license from our network of alliance partners. Longer term, growth will come from our own discovery pipeline. First, I'll deal with the near term. As many of you know, our partnership with Ishii Harrah (Sangiocasha) known as ISK has resulted in an agreement to inlicense [flonicamid] exclusively for the Americas. flonicamid is a unique insecticide with a novel mode of action for controlling sucking pests, such as aphids, and a broad range of crops as well as noncrop uses. This chemistry is currently under review by the E.P.A.

We expect first registration in key agricultural crops during 2005, and commercial sales to commence in late 2005 or early 2006. We already have an E.P.A. registration for noncrop uses such as in nurseries and greenhouses. Additionally, in the past few months, we've completed in licensing negotiations for the nonexclusive development and distribution rights to a novel ISK fungicide. The product will initially be targeted for crop and non-crop uses in the United States and other key markets in the Americas.

We expect initial sales in the first half of 2005 in several crops, with noncrop labels to be obtained over the next 18-24 months. As another example, we recently signed development and distribution agreements with (Nippon Soda) for exclusive access to (acetamiprid) in the U.S., termite and general household pest segments. acetamiprid (ph) has demonstrated outstanding activity against an array of pests including termites, ants and roaches. FMC's actively developing new product concepts for all of the segments and registration and launch of these products is anticipated in the first half of 2005. Access to acetamiprid is a key element of our strategic growth initiatives to expand our leadership positions in the termite, general household pest, and turf & ornamental pest market segments.

We'll continue to look for opportunities to expand existing alliances and to access new chemistries and technologies.

In aggregate, we expect that the in license new chemistrys could reach maturity sales in the 2008-2009 timeframe of $15 to $19 million. We expect a steady ramp up toward that target beginning in 2005.

Lastly, to continue to compete effectively in the face of generic price pressure in North America, we are exploring distributor alliances and new product concepts such as premixes of [vipenterin] with propriety FMC and/or nonFMC chemistries.

For the longer term, we remain enthusiastic about the strength of our discovery pipeline. Today we have a robust insecticide pipeline that comprises highly active novel chemistry from early leads to advanced molecules. A recent external evaluation of our discovery strategy and pipeline, concerned that indeed these are among the most competitive in the industry. We now have more than 20 insect active chemistrys under review and 4 compounds undergoing global field trials. Our expectations are to develop 2 to 4 insecticides over the next 10 years. Each one with potential maturity sales in the range of $50 to $120 million. Early next year we expect to move at least one of these perspective new insecticide chemistrys from discovery into predevelopment. A very positive step which will have the near term side effect of higher development spending in the coming years.

While growth is essential for our future success, margin improvement has also been a key component of our strategy. For the 12 months ended September 30, 2004, our operating margin, defined as EBIT(DA) as a percentage of sales was 17.4%, versus 12.5% in the previous period. Improved product mix and wide ranging cost reductions have both been important components of this improvement, and we hope to maintain the significantly improved operating margin in 2005. Let me elaborate on our margin improvement. Improved product mix during 2004 has resulted from my efforts to exit the sale of lower margin third party products, and our strategy of focusing on target markets, customers, crops and products.

Five years ago, we decided to globalize our manufacturing operations in order to derive global cost competitiveness. Today we manufacture final products and intermediates with partners around the world that have lower costs, and these efforts have now resulted in annual cost savings of approximately $15 million (ph$) since inception of this program in 1999. We expect additional savings from this effort in 2005 in the manufacturing area.

In addition, there are ancillary benefits to be derived in R & D, as we conduct process development and sample preparation in these global cost locations. With this new sourcing paradigm have come opportunities to streamline work flow in our global supply chain organization. Over the past 12 months, we've redesigned our supply chain in Mexico and North America, which have reduced distribution costs and improved working capital performance. Going forward, we expect additional savings and efficiencies as we integrate other parts of our global supply chain. And finally, we continue to drive efficiencies in our global selling, administrative and development organizations.

In summary, the benefits of our growth strategies and cost reduction efforts have somewhat helped mitigate the potential macro impacts of low uncertain global crop prices, more normal pest pressure conditions particularly in Brazil, higher energy and raw material costs, and the impact of generic competition on selling prices. From a quarterly earnings perspective, we expect timing of demand to change somewhat from prior years. In connection with continued changes in the North American distribution system, which the past several years has focused on reducing channel inventory, we expect much of what distributors have purchased previously in the fourth quarter, will now shift to the first half. Closer to the time of use by the farmer.

This sales shift will result in lower fourth quarter earnings of $3 million to $5 million, and a corresponding shift of those sales and earnings into the first half of 2005. We will provide more guidance in 2005 during the January conference call. Thank you for your time. I look forward to taking your questions during the question-and-answer session. And now I'll turn the call over to Kim Foster.

Thanks, Milton. Good morning, all. The focus of my comments will be on FMC's debt reduction initiative. This initiative is a key component of our continuing objective to restore financial flexibility to the Company. Our goal is to reduce net debt to $600 million by the end of 2006. During 2003, the first year of our initiative, we reduced net debt by $47 million. Achieving a year ending net debt of $856 million. At our August conference call, we were projecting an additional reduction of between $40 to $60 million during 2004.

We now expect the full year reduction in net debt to be about $100 million. The improved outlook is based on a higher earnings outlook, lower Cap Ex, lower spending at Pocatello, and higher vendor financing in Brazil. This projection does not include an $81.5 million proceed from the potential sale of our San Jose property. Discussions with the city of San Jose continue, however, several contingencies must be resolved before we have the confidence to include any proceeds from the sale in our financial outlook.

Bill reviewed the major drivers of the improved earnings performance earlier in the call. My additional comment would be that most of the improved earnings were converted to free cash flow, due to our continued tight control of working capital, and our access to increased vendor financing in Brazil with our Ag business. Capital spending for the quarter was $19.1 million, and $49.9 million on a year-to-date basis.

Our previous guidance was $90 million for the full year, which we are now revising downward to $80 million. Once again, I would reiterate we have ample capacity, including mothballed 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. Our total projective spending on Pocatello and remediation remains unchanged since the last call. However, some spending has shifted from 2004 into 2005. We now expect full year cash spending at Pocatello to be approximately $25 million, down from the full year estimate of $35 million we communicated earlier.

Net interest expense for the quarter was $19.9 million, which was down significantly from the $23 million of expense in the third quarter of 2003. The lower interest expense was driven from lower debt levels and the benefits from the repricings of our term loan. As I indicated in our last conference call, we expect to refinance our existing credit facility, and barring any unusual events in the financial market, expect to complete this refinancing by the end of this week.

We expect that the terms and pricing of the new credit facility will reflect FMC's significantly improved credit profile, as well as the improved credit markets of the past two years. Based on FMC's improved financial profile and the proposed structure of the financing, both Moody's and Standard and Poors have responded favorably. Moody's maintained FMC's BA1 credit rating and raised the outlook to positive. Standard & Poors maintained FMC's BBB- rating, and raised the outlook to stable. We'll provide additional details within a week's time, but the benefits of the refinancing are consistent with our longer term goals of restoring greater financial flexibility to the Company.

In summary, with another quarter of solid operating performance, we remain on track to regain our financial flexibility and remain committed to reducing net debt to $600 million by the end of 2006. I will now turn the discussion back to you, Bill.

Thanks, Kim. With another strong quarter driven by outstanding performance in agricultural products, coupled with the improved market conditions in industrial chemicals, we remain on track to deliver our earnings expectations. Additionally, as Kim just described, we're now ahead of our debt reduction target we set in early 2003, with about half of the $300 million target already achieved. We've also tightened somewhat the range for our full year earnings before restructuring other charges to $3.15 to $3.25 per diluted share. Which with a strong third quarter we've reported, implies a slightly weaker Q4 than we originally thought. Let me elaborate here.

As Milton described, we expect agricultural products earnings to be down in the fourth quarter versus the prior year, as North American sales that had historically occurred in the fourth quarter will shift into 2005. Specialty chemicals is expected to show strong year-over-year earnings growth in the fourth quarter, and significant sequential improvement in earnings as the plant turnaround and one-time spending on growth initiatives are behind us. Lastly, we expect a more profitable mix in the quarter resulting from increased sales in the pharmaceutical market.

Finally, earnings in the industrial chemical segment are expected to be down on a sequential basis, though still about 25% higher than the fourth quarter 2003 for several reasons. First, the timing of several plant outages will have an unfavorable impact. At Green River, mine maintenance that last year occurred during the third quarter, will take place year in the fourth quarter. Second, the recent spike in natural gas and oil prices is expected to lead to higher energy costs for our unhedged purchases. And lastly, we expect increased raw material costs for Ascaris, as a result of a very tight global market for phosphorus chemical inputs, the situation that we expect should continue into 2005.

Our outlook for the industrial chemical sector, however, remains unchanged and is very bullish. Tight and in some cases, sold out supply situations have led to -- have led to very strong momentum for higher selling prices, particularly in soda ash. Market conditions such as these, are conducive to a sustained rise in selling prices over the next several years as expiring contracts are renegotiated at higher prices. Furthermore, the most rational capacity that should come on in the U.S. within the next several years, in both the soda ash and hydrogen peroxide markets is in our hands. And we have no intention of bringing it back until profitability improves.

During our January conference call, we'll share the outcome of pricing negotiations across the industrial chemical segment, and provide you with full year 2005 earnings guidance as well. With that, I thank you for your time and interest. And would now like to turn the call over to your questions. Operator?

Thank you, Mr. Walter. Again, if you would like to ask a question, please press star then the number 1 on your telephone key pad. We'll pause for a moment to compile the Q & A roster. Our first question comes from John Roberts with Buckingham Research.

Good afternoon, guys.

Good afternoon, John.

Bill, in the soda ash area, in your industrial chemicals broadly, do you have any multiyear contracts that would have price caps in them that would limit your increases to less than what the spot prices might be going up in some of the industrial products?

John, Bill, yes, we do. They're relatively diminimus. The issue with respect to limiting price improvement in the segment is competitive caps. As we've said all along, and until we get through this process we're probably about halfway through right now, we don't know how significant those competitive caps are going to be. Clearly, some exist out there and will limit the amount of overall price increase we get but again, at this point, it is just impossible to call how limiting they will be.

And secondly, could you maybe just elaborate again for us on what (Ascaris)' raw material contract situation is. When they entered into their contracts, I thought they were relatively fixed price in nature but maybe I misunderstood that.

John, be happy to. Ascaris has two long-term supply contracts. One with Monsanto for elemental phosphorus and one with PCS for PPA. Those two contracts cover a significant majority but not 100% of Ascaris' raw material requirements. Those long-term contracts do have pricing formula in them, but it is not those two contracts that are driving the raw material price escalation that Ascaris is seeing. It is in the remaining relatively small but remaining part of their purchases, and the global phosphorus industry is -- if not sold out, very close to sold out. They're seeing escalation in that uncontracted portion of their purchases.

Got it. Thank you.

Your next question comes from Michael Judd of Greenwich Consultants. You may begin your question.

Yes, good afternoon. My question is about the Green River maintenance that you're doing in the fourth quarter. Can you just elaborate on that and you know, is this something that you do every year or is this something special, and what sort of -- once you get this done, do you need to do further maintenance in the mine next year?

Yeah, Mike. Bill here. First of all, this relates to the moving of our Longwall operation underground. We have -- we moved that Longwall about every 15 months, depending upon the rate of production through a particular area of the mine. Last year, that move occurred in the third quarter. This year, it is going to occur in the fourth quarter. And the quarter in which that move occurs, we experience about $2.5 million to $3 million of volume variances on absorbed overhead on the loss of production. And so it is not unusual. It is not annual. Rather about every 15 months. We expect no ongoing effects of the move. In fact, they should be positive. But quarter-to-quarter sequentially, you can add the pieces together -- yeah, not sequentially but from one quarter to the next, it should have a $2.5 million to $3 million impact on the segment's earnings.

Okay. And then also on -- for moving forward, I understand that you now expect CapEx to be around $80 million for this year. Do you have an estimate of what CapEx could be next year because you're generating a lot of nice free cash flow here. We're just trying to get a sense of what kind of ramp you could have for CapEx.

Mike, we're not far enough into the budget cycle to see the detail of CapEx by business. But if I was building my model, I would drop the $90 million back in it. What we have been able to do this year is to find lower cost capital fixes to certain things that we thought we needed to do and that's why the spending is lower than we had originally expected.

And switching gears here to AG, Milton mentioned that with moving one of the insecticide compound candidates from -- to potentially to predevelopment, there could be some -- obviously there would be a ramp up in terms of spending there. Have you looked at -- potentially partnering with somebody in order to sort of share the cost of doing that? Or give us at least some sense of what that additional expense could look like on maybe a year-over-year basis?

Hi, Michael. No, on this product that we have planned for next year, we're not planning on partnering with anyone on the development of the product. Perhaps when we launch the product in the marketplace, that is obviously an opportunity for us in certain markets.

All right. Would you care to elaborate a little bit? So we have a sense -- typically when something goes into more of a development and out of research, there is generally a pretty big pickup in terms of the overall spending for that. Can you give us a sense of what kind of impact could we be looking at?

Next year, we're looking at $2 to $3 million. Obviously that's just the first year. It is not the full cost of developing the product.

I'll get back in queue. Thank you.

Your next question comes from Jay Harris of Goldsmith and Harris. Caller, you may begin your question.

I have a -- a few questions. Why are the international prices of soda ash under pressure? I thought last year there was some shutting capacity in China which afforded some price increases.

Yeah, Jay, I thought you were going to give me all of the questions at once. Thank you, you're doing me a favor. First of all, Jay, it is Bill. Soda ash prices in the export markets primarily Asia and Latin America have been under pressure now for a couple of years. In Asia, it was largely as a result of excess capacity. Having been brought on in China, and that excess capacity finding its way into the export market. The situation in Latin America is a little different. (Sorrel) Valley minerals, the former IMC, soda ash operation left Ansach about a year ago now. As they were leaving Ansach and entering the market independently, they did so in South America and that put pricing pressure in South America as well. So we've seen an 12 to 18 month period of time, Jay, where the prices have been under pressure. Fortunately, as we sit here today, at least that pressure in Asia seems to be easing a bit. And with Ansach having announced here just this past August a couple of months ago, a $15 a metric ton price increase.

Okay. Second question is, why are the raw materials for BioPolymers costs up?

First of all, let me clarify what we're talking about here. We're talking about both seaweed and pulp. The reasons are similar but different. Seaweed, it is two seaweeds, primary Cottony and something called Rajala, both warm water seaweeds, traditionally harvested out of the Philippines. Earlier this year, the Philippines had experienced a poor growing season for seaweed. A wet season and that limited the supply and drove pricing up. Increasingly, today, that issue is behind us. What we're seeing today is just an increase in global demand for seaweed as the world economies continue to improve and demand for products that are based upon seaweed as a raw material improve. We're seeing that in our carageneen business. The other raw material price increase we're experiencing has begun in the -- in our microcrystalline business, hardwood pulp, again with the strength of the North American pulp and paper industry, and the pricing formula we have in our contract, we're seeing some upward pressure price, some upward price pressures there as well. Whether or not that will sustain itself is more a function of your view of whether or not that end use market, pulp and paper will remain strong.

Can you quantify the impact of these higher raw material costs?

Jay, we don't go to that level of granularity.

Last question has to do with hydrogen peroxide. As the chemical industry gears up for direct oxidation of propylene to propylene oxide, will the scale of the hydrogen peroxide facilities for that change the competitive landscape for you?

Yeah, Jay, I think you're talking about the one announced BASF JV in Europe. First of all, the scale of those plants relative to a traditional hydrogen peroxide plant is about 4X. Second, it is different technology that produces a different product, a different product at least of both physical and chemical properties in the peroxide that we produce and sell into our end use markets. Those facility -- that facility that has been announced, our judgment is -- will be largely if not exclusively dedicated to the propylene oxide market, and if that judgment is wrong, whatever surplus capacity results from it, will go into the European market and won't find its way back into North America. And even if it does find it's way into the European market, you're talking about 40 to 50 million pounds additional capacity in about a 1.5 million pound market. So, the net impact on the market, the industry and industry pricing, we think will be negligible.

If you look beyond next year but look out four or five years and if this is a successful process, one could expect similar investment in North America. Is the peroxide that will be produced in these support plants equivalent in end use profile to the peroxide that you produce?

Yeah, a couple of things. First, a clarification, Jay. This BASF plant won't come on until 2008 or 2009 so this is not a next year phenomenon.

Okay. All right.

The technology has not yet been fully developed as far as we're concerned. It will take them two to four years to construct the plant so we're talking about something that may happen but if it happens -- at least in North America, it is not going to happen until the next decade. Will it -- assuming success, have some impact? Yes. But again, the product as we understand that will be produced in these facilities is not of the same purity levels as that that we produce, and has a potential of introducing a whole host of other problems in our traditional customer base. It is something we're just going to have to address though in the next four to eight years if this technology does develop.

Thank you.

Your next question comes from Andrew Cash of UBS.

I have three questions. First question is for Milton. You indicated that '05 looks like it is going to be a more challenging year relative to the previous year than '04 was to '03. Yet you mentioned or somebody mentioned that the fourth quarter may not be as robust as normal because there may be some shift in the first quarter of next year. So, I know the fourth quarter is usually not a big quarter. What's causing the shift?

Andrew, as I mentioned, when I talked earlier on, over the last few years, the North American distribution system has been working on reducing working capital very significantly. And purchases are taking place much closer now to the time that the product is used. Inventory levels are down almost an order of magnitude in the pipeline and I guess this is the final year of transition, and so that's really what's driven the change in sales in the fourth quarter for us.

Okay. So, is there any change in the time of payments that you get paid for your shipments of agricultural chemicals through the distribution system?

Our terms haven't changed, no. I'm not sure where your question --

Like rebates and things like that.

Let me try to answer that, Andy. I think it will have an impact. Historically, whatever we would have sold in the fourth quarter of a calendar year for use in the following year, we would have extended terms to the customers. Not selling that, we will not extend terms. Therefore, we'll shorten our receivables considerably. I think the move, while it will have a negative impact, obviously on us in the fourth quarter, is a positive move for the industry in total and for us. Distribution is able to reduce their investment of working capital. We're able to reduce our investment of working capital. We're better able to manage supply to actual demand. Again, except for the effect this quarter -- this current quarter, it is a real plus.

I guess the question -- this is all part of the same question. Distribution is lowering its inventory, I'm just guessing that there is going to be less material available on hand therefore, farmers -- farmers will ultimately end up with less choice in terms of which products to use, or the timing that they're shipping and maybe have to give greater lead time for ordering. I mean do you think customer service is actually going down in all this?

Andrew, no, I don't believe that customer service is going down. We will anticipate the demand. We talk with our distributors and customers all the time. We know what the demand is. We'll just ship the product a few months later. But well in time before it is needed in the -- on the farm.

Okay. Interesting development given how farmer income is doing better than it has. I have two more questions. One, Bill, maybe you can address this in terms of the China situation. In phosphorus, you know, you mentioned earlier -- not earlier today I don't think but previous calls, how there has been some tightness in China, electric power shortage and things like that. What is your assessment of the Chinese ability to get production back up to where it was let's say two years ago?

First of all, Andy, the tightness remains. Our view is that there -- the issues that their industry is facing should sustain themselves at least through '05. They're largely although not entirely power-based and the additional generating capacity that is under construction in China we don't think is going to come on before 2006.

Okay. And then finally, I know you guys are paying down debt. Is there some point in time in FMC's future where dividends may be paid out?

Yes.

Okay. So, it is a real possibility, not that you can commit to any timing here but if you could, that would be great. But this is a real serious consideration. It would be a big change from the past, right?

Yeah, Andy. As we get out of underneath the constraints that are on us in the seven-year notes that we placed two years ago, our flexibility with respect to -- our flexibility increases tremendously including giving us back the option of paying dividends or engaging in stock repurchase programs. And that, again, is probably two years away, premature to speculate currently as to what we might do. But certainly, instituting a dividend would be one of the options that we consider.

I think it would be a great idea that your investor audience would improve. Don has got one question. Thanks.

You mention in your specialty chemicals business, the plant shutdown. Can you elaborate more on that? That's a one-time event. Spending and product initiatives. Can you talk about -- does that account for all of the loss? Or is that a predominant source of the loss?

It is a predominant thing. The plant shutdowns and the slowness of coming out of a turnaround is just a timing thing. We don't manage our plant turnarounds to hit earnings targets. We manage them to -- in the way that's in the best interest of the requirements of the business and it just so happens that we had thought these outages would occur -- we thought previously these outages would occur in the fourth quarter and they happened in the third quarter plus we had a little bit of trouble with it coming out of one of those. So, it is normal. But it was -- it happened on a different time line than we had imagined. The spending on growth initiatives in BioPolymer comment, we continue to spend money in BioPolymer in our efforts to grow the business. And we'll spend next quarter and the next year and the following year as well. We just had the timing of a number of bills come through on that in the third quarter. And it was material. The sum of the plant outages and the spending again represented a major portion of the earnings decline in the quarter. And the absence of them is one of the reasons why we're as bullish as we are about the fourth quarter.

Great, thanks for your comments, Bill.

Your next question comes from Kevin McCarthy of Banc of America securities.

Yes, good afternoon. First question is for Milton. I guess this is the second year where we've seen somewhat subpar insect pressure at least in North America. I was wondering if you could comment on your crop mix there, Milton and maybe address the relative trends that you have seen in crops like cotton and corn where biotechnology may be an issue, as opposed to other crops like fruit and vegetables, rice, beans, et cetera.

Yeah, sure, Kevin. The low pest pressures for us this year were mites and corn. That was really weather-dominated. Very cool, wet weather which is the opposite kind of weather we need for mite pressures. Last year we had high aphid pressures on soybeans and this year there were none. Neither of these events have anything to do with biotechnology. We saw some impact on insecticide demand for BT on corn. But we maintained our share of bifentrin that's used as a (inaudible), as a soil applied insecticide. We're beginning to focus on fruits and vegetables. Obviously not susceptible to GMO technology. We still have a long ways to go in penetrating those markets.

Okay, sounds like it was not a main driver for you. To follow up on bifenthrin, you made comments in your prepared remarks, how large is that business? Would it be fair to say it is perhaps a quarter of your insecticide portfolio, Milton?

Kevin, we don't give this kind of information out.

Okay. Very well. Moving along, maybe Bill, could you comment on soda ash volumes in the quarter both domestically and in the export markets, how much that might have been up?

Yeah, Kevin. Both domestic and export volumes were up. I don't think we have disclosed even an aggregate what the total soda ash volume changes were sequentially or year-over-year. What we have said, Kevin, and I think this would probably hold true for the third quarter as well, is that export volumes are up, high single digits for the year. And domestic demand has been essentially flat.

Okay. That's helpful. I'll get back in queue. Thanks.

Your next question comes from Dmitry Silversteyn of Longbow Research. Caller, you may begin your question.

Good afternoon, gentlemen. Congratulations on a solid quarter. Couple of questions. Some have already been answered. I would like to go back to the specialty chemicals. And back to profitability. Can you give us some idea what the relative composition was of the shortfall related to the manufacturing start up delays post the shutdown, and what was the impact of raw materials?

Dmitry, first, thanks for the comment about the quarter. Again, I don't want to be obstinate here but it is a level of granularity we don't go to. I think it is sufficient to say though that the entire quarter's shortfall vis-a-vis at least our expectations, is a direct result of the things that we mentioned. Plant turnarounds, the one-time -- strategic spending in BioPolymer and raw material. The first two probably represent -- not probably, first two representing a significant majority of it.

Okay. Then, following up on the investments that you're making in the BioPolymers. Can you give us an idea of what form they are as well as what the goal is as far as the return you expect to get on them?

Yeah, Dmitry, this is all obviously expense spending rather than capital. So, this is not acquisitions, plants or anything else that we could capitalize. The spending -- again, I'm not going to get into the specifics of it, but it could take the form of technology fees, license fees, consulting fees, market research fees, strategic counseling fees, and so on. Just a myriad of things.

Okay. But it had all been done during the quarter and you don't see that recurring going forward?

No. Again, it is a timing. We just got a bunch of these bills come through in the third quarter.

It is something that you've been engaged in over the past several months then.

Correct.

Okay. And the goal of this investment is to identify market opportunities or it is possible to raise prices without impacting demand too much or kind of what you're hoping to get out of the investments?

Ultimately, it is growth. Access to newer technologies. I should say different technologies.

Okay. All right. Talking about -- in the comments made about the agricultural products business, obviously the growth on the top line was very impressive, but there is also impressive growth in the bottom line which in the absence of top line growth next year will be reduced, but to the extent it was driven by cost savings, have these run their course or do you have more to go, and can you give us an idea of how much cost have been taken out of the business over the past 12 months or since the program started?

Dmitry, let me answer the second question first. How much costs have we taken out? I said earlier on in my discussion on our business, it is about $50 million on an annual basis. There is more to go and we're not going to quantify that at this stage.

Okay. But will it provide sufficient offset to lower revenue in 2005 to at least mitigate some of the margin declines that you may be experiencing or profit declines, you may be experiencing next year?

Oh, it should help mitigate as I said earlier on.

Finally, I guess question for Kim. You talked about later on this week, redoing at least part of the credit facility. What interest expense should we expect for the fourth quarter and more importantly, you're going into 2005 on quarterly rates, or on a quarterly basis, I should say.

This is Kim. It is not going to have a measurable impact on the fourth quarter but as -- and we have not put together our projections for next year. So, in order to calculate an interest expense for you, I would have to have a full year projections which would conclude and what our debt levels would be. So, I don't have that. I can tell you, however, that if we would have had this financing in place at the beginning of the year, since -- and if you look through September year-to-date, and compared the benefits of refinancing to what we actually reported, it would be approximately $8 million. Now, I would caution you next year as we continue to lower our debt levels, that number would be reduced from that. But that should give you an order of magnitude of the benefit we're talking about.

More importantly, it gets rid of some of the more restrictive covenants you've had in your old facility?

Dmitry, we expect to have a number of changes as we finish this credit facility which will place us more in line with what we believe we are as investment grade company. There will be provisions that to the extent that we do return to investment grade rating by both rating agencies, that that it will look substantially like an investment grade deal.

Okay, thank you very much.

You have a follow-up question from John Roberts of Buckingham Research. Caller, you may begin your question.

Thanks, Bill. I thought I heard you mention that your prices were up in the micro(vassal) and cellulose area as well -- I didn't think pulp prices were up at all. I recall Hercules recently saying the at least the pulp costs for the Aqualon business over there were down year-on-year.

First of all, John, you heard me right. Second, you've got -- given me a question to take back to my organization. We buy specialty family -- a family of specialty pulps and the pricing there could be quite different than pulp prices generally. But I need to find out why Hercules is experiencing just the opposite that we are.

Because the paper industry hasn't picked super I think output in general has been stable. Although it is a different segment of the industry, as you say. Ok, thank you. I just wanted to check.

You have a follow-up question from Jay Harris of Goldsmith and Harris.

Milton, did you mention which pesticide products are not going to be sold this fourth quarter in favor of more timely marketing next year?

Jay, no, I didn't get into that and we will not get into those details today. Thank you.

When will that information become available?

Jay, Bill. We'll obviously talk about it in the first quarter, but I think it is safe to assume that first of all, it is North America. The products we sell in North America which are both insecticides and herbicides.

In other words, it is a broad array of products? Or a narrow array of products?

Someplace in between.

Fair enough. Thanks very much.

I will now turn the call over to Mr. Bill Walter for any closing remarks.

First of all, let me thank all of you for joining the call and for your continued interest in FMC. Our stronger than expected third quarter performance obviously gives us greater confidence in our full-year outlook. More importantly, our results this year combined with continued improved market conditions in many of our businesses, set the stage for what I would expect to be several years of strong earnings growth, significant debt reduction and increasing returns on invested capital. It has taken us a while to get to where we are today. And for those of you who have been longer term investors in FMC, I thank you for your patience. For those of you who are relatively new to the stock, I welcome you and for both of you, I look forward to creating significantly more value for you in the years ahead. Thank you again.

This concludes today's 2004 third quarter earnings release conference call for FMC Corporation. You may now disconnect.