富美實 (FMC) 2004 Q4 法說會逐字稿

Good morning, and welcome to the 2004 fourth quarter earnings release conference call for FMC Corporation. Phone lines will be place on listen-only mode throughout the conference. [OPERATOR INSTRUCTIONS]. I will now turn over the conference to Mr. Eric Norris, Director of Investor relations for FMC. Mr. Norris, you may begin.

Eric Norris. Thank you Marsha and good morning everyone. Welcome to FMC's fourth 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 on 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 website available at ir.fmc.com you will find a definition of all such terms under the heading entitled Glossary of Financial Terms. In addition, we have provided a reconciliation of certain non-GAAP figures which we'll use on this call to GAAP, also available on our website. The agenda for the conference call today is as follows, Bill Walter, Chairman, President and CEO will review highlights of the quarter, and then Bill will turn the call over to Michael Wilson, Vice President Industrial Chemicals Group for an update on that segment and the recent round of selling price negotiations for 2005. Following Michael, Kim Foster, Senior Vice President and CFO will review cash flow and debt. Bill Walter will then discuss outlook for 2005 and close the prepared portion of the call. Afterwards, we'll take your questions. It's my pleasure to turn the call over now to Bill Walter. Bill?

Thanks Eric, and good morning to all of you. Last night we reported a very good quarter that has capped off what I could only characterize as a very good year for the company. In the quarter we earned $0.88 per share before restructuring and other income and charges, versus $0.76 per share last year on the same basis, a 16% increase. The quarter's performance was driven by industrial chemicals, which is beginning to benefit from significant improvement in selling prices. As expected, Ag Products fourth quarter results were lower than the prior year, due mainly to a shift in demand in North America into the first quarter of 2005, which Milton Steele described to you in last quarter's call.

Specialty Chemicals demonstrated steady sequential improvement from the third quarter as expected, but was unfavorable impacted by continued high raw material costs and a less profitable mix in our pharmaceutical business.

We ended the quarter with net debt of $701.1 million, and for the year we earned a return on invested capital of 10.5%, both well ahead of where we thought we would be when we set forth our long-term targets early in 2003.

We can get into more of the financial and operating details at this point. After tax income for the quarter, before restructuring charges and on a continuing operations basis was $33.8 million versus $27.2 million in the year earlier quarter. Favorable foreign currency translation accounted for $1.2 million after tax, or $0.03 per share of the quarter's results. On a GAAP basis, current quarter earnings were $94.5 million, significantly higher than both prior year's fourth quarter, and our non-GAAP proforma figures, due to a benefit of slightly over $60 million related to tax adjustments net of several charges. Kim will get into the details of this gain in a moment.

Earnings in the prior year quarter, including charges, total $20.9 million after tax. Sales in the quarter of $514 million increased modestly from the fourth quarter of 2003. Industrial chemicals contributed the strongest growth, increasing 7% versus the prior year quarter due to improved soda ash volumes and domestic selling prices, and higher phosphate and peroxygen selling prices at 4F (ph). Ag product sales decreased 5% versus the fourth quarter of 2003 due to the shift in North American demand I referenced earlier, and weaker sales in Japan. These were partially offset by higher sales in Brazil due to a continued strength in the Brazilian farm economy. Specialty Chemicals grew 2% versus the prior year quarter. Stronger microcrystalline cellulose and alginate sales in the food ingredients market resulted from the launch of several new products.

BioPolymer sales in the pharmaceutical market were relatively flat due to product mix. The timing and demand for lithium in the battery market offset higher sales of lithium into both the polymer and pharmaceutical synthesis.

Fourth quarter 2004 operating profit before restructuring and other income and charges of $61.5 million was up 8% versus the same period last year. Industrial chemicals higher selling prices, particularly in soda ash and lower cost at Astaris, drove the increase in earnings. Ag Products earnings decreased in the quarter with the lower sales and higher selling prices in Brazil-higher selling expenses, I'm sorry, in Brazil, partially offset by lower manufacturing costs and improved mix.

Specialty Chemical [inaudible] were down 11% mainly due to unfavorable BioPolymer mix in the pharmaceutical market, and continued high raw material costs. In total, corporate expense and other income and expense were relatively flat versus last year. That's the summary, let me now turn it over to Michael Wilson who will discuss the industrial chemicals business.

Thank you Bill, and good morning. I'm going to spend my time with you today discussing the significant and sustained improvement we're seeing in our Industrial Chemicals segment reflecting improved market conditions and consequent higher prices, as well as our ongoing focus on operational excellence. I'll begin by first providing a brief overview of our industrial chemicals businesses.

We are a low-cost producer of inorganic chemicals with number one market positions in North American soda ash, hydrogen peroxide and for sulphate. In Europe, FMC Foret, our wholly owned Spanish subsidiary, is one of the leading inorganic chemical producers on the Iberian Peninsula, participating mainly in phosphorous chemicals, hydrogen peroxide, specialty peroxygens and other inorganic salts. On a consolidate basis, our soda ash business, which we refer to as the alkali business, represented approximately 46% of 2004 sales. Domestic peroxygens, including both hydrogen peroxide and persulphate, represented about 19% with Foret accounting for the remainder.

In North America we also participate in phosphorous chemicals through a 50/50 joint venture, Astaris. Astaris is not consolidated in our sales, but is accounted for via the equity method in our segment earnings. For the year just ended, we reported full-year Industrial Chemical segment sales of $814 million, which were up 6% from 2003. Sales were higher primarily due to increased volumes and generally higher selling prices in North America and Europe. These gains were partially offset by lower soda ash net export prices in Asia and Latin America. Earnings of $57.3 million were up 69% in 2003 driven by higher sales and a significant improvement in Astaris' profitability following its restructuring. Partially mitigating these benefits were higher energy and transportation costs.

The biggest level on profitability in our Industrial Chemical business is selling price, which strongly correlates with industry supply and demand balance. Let me first discuss what we're seeing relative to supply and demand balance across the group, and then I'll summarize our pricing expectations and earnings outlook for 2005.

I'll start with soda ash. By way of background about half the demand for soda ash is for the production of glass of all forms, architectural glass, automotive, containers and fiberglass. The effect of plastic substitution in glass, for glass in food and beverage containers in North America have resulted in essentially flat domestic demand for soda ash for several decades. In developing regions of the world, soda ash demand tends to grow with GDP which in the case of Asia and result in growth in the mid to high single digits. With US soda ash producers possessing a significant global cost advantage via natural soda ash, this industry has become the world's largest soda ash shipping approximately 40% of US production offshore, primarily to Asia and Latin America. The combination of flat demand in the US, coupled with modest to strong export demand growth has resulted in an overall growth rate for US produced soda ash of 1% to 3% per year for the past decade.

During 2004, Chinese exports into the Asian market were hindered by energy and raw materials shortages. The ongoing shortages have resulted in a significant run up in input costs for salt, coke and energy, all essential ingredients for the production of synthetic soda ash. This has resulted in some Chinese producers operating at reduced rates while some new capacity that had been scheduled to come online near term has now been delayed and/or scaled back. As a consequence, during 2004, Chinese exports into the Asian region increased only slightly versus 2003, creating greater demand for US produced soda ash.

As we enter 2005, strong export demand in conjunction with the shut down of the American facility in 2004, has put the US industry in a completely sold out position. Every US soda ash producer is operating at full capacity, yet based upon public statements every producer has been forced to initiate some form of order control. In hydrogen peroxide, approximately two-thirds of production, both in the US and in Europe is consumed for bleaching use by the pulp and paper industry. A variety of smaller applications, including those for environmental remediation, chemical production and food and cosmetics account for the balance of demand.

During 2004, domestic and European demand for hydrogen peroxide grew between 3 and 4%. Our expectation for 2005 is for aggregate demand to again grow by 3 to 4% in our principal markets in North America and Europe. As hydrogen peroxide is shipped [dilute in water], exports are not significant. Both North American and European hydrogen peroxide industries are now operating in the mid to upper 90% utilization range of nameplate capacity, the sold out conditions occurring during the seasonal peak of the annual pulp cycle. These tight market conditions have prompted minor capacity additions in both regions. In North America, Solvay has recently announced their intent to expand capacity by 100 million pounds at a plant in Deerpark Texas, while simultaneously announcing the permanent shut down of the moth balled line at the Deerpark site. The net increase in industry capacity will be about 4%. We believe this capacity will initially target the Latin American market, and may be staged gradually to meet growth in North American demand.

In Europe, [Veca] and Chemira (ph) are completing minor de-bottleneckings that will add 33 million pounds each, or collectively about 3% to industry nameplate capacity in 2005. Fave (ph) is set to bring on approximately 100 million pounds for an additional 4% industry capacity late in 2005. Given the expected European market growth for 2005 and 2006, the expansions would appear to be well sized and well timed.

Phosphorous chemicals are used in a wide range of applications including detergents, food and industrial uses. Demand growth for phosphorous chemicals, which tends to mirror GDP, improved in 2004 with the strengthening economies in North America and Europe. In 2005, we anticipate growth continuing at GDP levels. Though the demand outlook has not changed appreciably, several factors have led to much tighter market conditions for key phosphorous chemicals, including Astaris' actions to close several of its plants and exit commodity grade sodium tripoly phosphate or STTP as part of its restructuring. Rodey's (ph) to close its Roulin (ph) plant in Europe, and Chinese production constraints resulting from energy shortages. As a result, in both North America and Europe, purified phosphoric acid and phosphorous salts, particularly STTP are in very short supply.

Against this backdrop, we saw steadily increasing momentum throughout 2004 for significantly higher selling prices across the industrial chemical segment, as evidenced by a number of price increase announcements from all producers.

In soda ash, at the start of the 2005 domestic contract season, increases of $22 per short ton were in play. An additional $8 per ton was added toward the end of the contract season, after most contracts had been settled. In the soda ash export market, ANSAC, the US Export Coorperative, implemented a $15 per metric ton surcharge in Asia during the third quarter, and followed with an additional announced increase effective January 1.

In hydrogen peroxide, FMC announced an increase of $0.05 per pound in North America effective January 1, following our August announcement. We've made similar announcements in Europe. In phosphorous chemicals, Astaris announced increases or 3 to 7% across its entire product line, and Foret has secured significant increases for STTP in Europe.

As many of you know, the vast majority of our business tends to be on an annual contract, rather than spot basis. Therefore, with the exception of the third quarter ANSAC surcharge on soda ash to Asia, little margin improvement was realized in 2004 as a result of these announcements. In most of our businesses, price caps put in place by industry competitors over the past several years will also limit the realized increases in some customers in 2005. That said, each business has now largely completed its contract negotiations for 2005 and their efforts were highly successful.

Overall we expect higher prices in our consolidated operations to contribute more than $50 million in improved earnings for the segment, the majority of which is coming from soda ash. In our uncapped domestic soda ash contracts, we secured increases essentially equivalent with the amount in play at the time of contract settlement. By 2006, when nearly all remaining competitive caps will have expired, our expectation is that we will be able to get substantially all of our domestic volume up by at least the $30 per ton currently on the table, if not more, putting us at or above the average peak price for the last cycle in 1996.

All of this benefit, however, will not fall to the bottom line due to the continued rise in energy, transportation and raw material costs, we expect costs in our consolidated operations to be approximately $25 million higher in 2005 versus 2004. Freight and energy will account for two-thirds of this increase. Raw materials, including general commodity chemicals such as caustic, sulphuric acid, acetic acid and phosphate rot represent the majority of the balance. These higher costs will only modestly offset the positive benefit of higher prices, increased volumes and ongoing cost reduction efforts, resulting in full-year 2005 segment earnings that are approximately 50% higher than 2004. Furthermore, since these costs are not unique to FMC, they will put increased upward pressure on industry selling prices in future contract seasons. As a result, we believe we're on track for another substantial improvement in earnings in 2006, driven once again by higher selling prices.

Finally, included in our guidance for 2005 is the favorable impact of restarting a portion of our mothballed Granger soda ash capacity. As we have previously stated, Granger represents the lowest cost and most capital efficient mothballed capacity in the industry. The improvement we've seen in soda ash prices, and given the sold out status of the market, we decided to restart 250,000 short tons of capacity, an amount sufficient to meet only the expected growth in export demand in 2005. We will employ our low-cost solution mining technology and utilize cost effective coal as the energy source. We expect modest startup expenses of less than $5 million, and capital expenditures of less than $2 million, all to be incurred in the first half of 2005.

We plan to begin commercial production at Granger by June, the remaining 1 million tons of capacity will be started only in 250,000 ton increments, as export demand warrants, and only if profitability continues to improve.

In summary, as I hope you can see, we're very bullish on the prospects for significant and sustained profit growth in the industrial chemical segment for the next several years. With that I'd like to turn the call over to Kim Foster. Kim?

Thanks Michael, and good morning all. As Bill mentioned the focus on my comments will be on FMC's debt reduction initiative. This objective is a key component for our continuing effort to restore financial flexibility to the company. In addition I will discuss the tax benefit summarized on the financial schedules attached to our press release. FMC's net debt at the end of 2004 was $701 million, a reduction of $155 million from the end of 2003. Strong operating earnings, tight control on operating working capital and continued low levels of capital spending all contributed to our robust cash flow performance.

However, several other items also influenced the net debt reduction. First FMC received $47 million in cash, largely from former FMC executives as they exercised stock options during the year. Secondly, our Agricultural Products Group accessed an additional $26 million in Brazilian vendor financing which reduced debt. Partially offsetting these benefits was the last Astaris key flow (ph) payment of $36 million.

As we have discussed at every conference call, one of FMC's key objectives is to reduce net debt to $600 million by the end of 2006. This target translates to a $300 million reduction from the end of 2002. Based upon our strong 2004 performance, we are two-thirds of the way to our goal. Looking ahead to 2005, from a cash flow perspective, we expect no more Astaris key flow payments; similar Pocatello spending to 2004 of about $20 million; very little benefit from stock option exercises and vendor financing; slightly higher capital spending offset by lower interest expense; and legacy environmental spending of about $41 million. 2005 spending should be $16 million higher than the average annual spending of $25 million that we have experienced in recent years, due to the agreement in principal we reached with United States Environmental Protection Agency to settle certain liabilities at two environmental remediation sites in New Jersey.

Accounting for these cash flow differences, and assuming a mid-point of the earnings guidance range that we provided in our press release, we expect net debt reduction of approximately $140 million in 2005. There are several additional items that represent upsides to this estimate, the most pressing of which is the potential sale of the first phase of our San Jose California property to the City of San Jose. On Tuesday of this week, the City Council unanimously approved the bond offering which will finance the sale of Phase 1. Subject to normal contingencies of a bond offering, we could be in a position to close on the first phase of the property valued at $50 million by the end of February. As many of you know, I've been involved in this project for four years and I look forward to reporting the successful conclusion of this effort to you before the next conference call.

The second item that we have not fully dimensioned for you yet is the refinancing of Astaris and early repayment of cash deferrals to FMC. We will provide more details on this initiative in our next conference call.

With the improvements in our financial performance, we have been able to greatly improve our capital structure. Two days after our third quarter conference call, we closed on a new 5-year bank facility with improved pricing and improved terms and conditions. The improved pricing will lower year-over-year interest costs by approximately $10 million. In addition to negotiating more investment grade like covenants, we upsized our committed revolving credit facility and letter of credit facility, which eliminated the requirement for restricted cash. The refinancing also extended our maturity profile. As I mentioned in the last conference call, the rating agencies are responding favorably to our improved financial profile and to the structure of the financing. Moody's maintained FMC's BA 1 credit rating and raised the outlook to positive. Standard and Poor maintained FMC's BBB minus rating and raised the outlook to stable.

Before I turn the call back to Bill, let me describe the two primary drivers of the $69.7 million favorable tax adjustment that we included in our fourth quarter income statement. The first is a consequence of a favorable IRS pronouncement that confirms the position taken in a prior year filing. The second is related to significantly improving business conditions in two of our foreign entities that confirms their ability to recover past years tax losses. In summary, with another solid operating performance we remain on track to regain our full financial flexibility on or before 2006. I will now turn the discussion back to you, Bill.

Thanks, Kim. Our good fourth quarter performance caps off a year that has exceeded our expectations with regard to earnings growth, net debt reduction, and return on invested capital. Looking ahead, our financial performance should improve further in 2005.

We expect continued double-digit growth in earnings before restructuring and other charges which will result in full-year earnings of between $3.70 and $3.90 per diluted share. The significant recovery in industrial chemicals that Michael just described will be the primary driver with approximately $10 million of lower interest expense being an important contributor as well.

We expect modest growth in Specialty Chemicals with mid to single-digit top line growth and slightly stronger earnings growth driven by our franchises in the pharmaceutical and food ingredients markets, and continued productivity gains.

In Ag Products we now expect flat earnings for the year due to the beginning of what appears to be another good year in Brazil. Given a strong early season in Brazil, the positive impact of the fourth quarter shift in North American Ag demand, and the recovery in industrial chemicals, we anticipate exceeding last year's first quarter results by a considerable margin, delivering earnings before restructuring and other charges, of between $0.55 and $0.65 per diluted share.

As for other financial matters, as Kim earlier described, we expect net debt reduction of $140 million and an increase and an improvement on our return on invested capital approaching our long-term target of 12%. Clearly, we're set for another strong year. And with that, let me thank you for your time and interest, and I would now like to turn the call over to your questions. Operator?

Thank you, Mr. Walter. [OPERATOR INSTRUCTIONS] Our first question comes from Bill Young, with First Boston.

Hi, Bill. Bill it's a really good performance there. A couple of quick questions; number one, I don't know, did you change one of your numbers from the first 5 months in the Ag area? I noticed, maybe I made a mistake but when I added up the four quarters it didn't quite match, and the same as cost of goods sold. It was off a little bit.

Yes, Bill, first thank you for the compliment about the quarter and the year. As you'll recall, Bill, post our release of third quarter earnings, we had an adjustment to the third quarter results that had to do with profit and inventory in our Ag businesses. And I can't remember the exact number, Bill, but it was approximately $3 million or $4 million on a pre-tax basis--sent out a press release; announced it to the world.

Okay, okay, fine.

That's probably what you have meant.

Yes, I think that's what it was; that's what it was. Second, can you give us an idea about your contracts on soda ash, caps and that type of thing? Can you give us a little more detail on the amount of the caps on those particular contracts, a rough idea? And then how much of your contracts still have to be, still capped for '05? Could you give us a little more detail on that?

Hi, Bill, this is Michael Wilson. I'll be happy to try to answer your question. I mean first of all just to reiterate we had a very successful contract discussions and domestically in our soda ash business, and as I indicated where we didn't have caps we essentially got the full increases. But we were a little bit surprised coming into the season with the amount of competitive caps that were out there, and to give you a rough idea, it's roughly 50% of contracts had competitive caps in them which limited the up side, but beyond that on the rest of the volume, whatever increase was on the table at the time we closed the contract, we essentially got.

Yes, yes. Okay, let's say on average you have cap, what's the most on average you could raise these guys? Or maybe you can't raise them at all?

It really varies. In some cases you can't raise them at all. In some cases there are going to be small increases, but we also have offsets with rising freight costs so in some cases there weren't increases on those cap customers.

Okay, okay well great. I'll get back in the queue for some more.

Our next question comes from the line of Mike Judd with Greenwich Consultants. Go ahead with your question, sir.

Great quarter.

Thanks, Mike.

My question is with the improving balance sheet, and with the increasing cash flows would you expect that to be down with the rating agencies, and hopefully get a better rating, and if that were to occur when do you think we could start thinking about maybe paying a small dividend?

Mike, this is Kim and Bill will take the last part of that question. But as it relates to the rating agencies, as you know, we as is usual for most companies we meet with the rating agencies usually once a year. We obviously continuously update them throughout the year, and have continuous conversations with them.

And we are ahead of the projections that we provided them for early last year, and we are very optimistic that they're going to react quite favorably to what we've seen. It's difficult for us, however, to predict what the rating agencies are going to do. But we set out these long-term debt targets in order to meet the metrics which we believe would give us an upgrade at least by '06, and so we're ahead of that plan, and optimistic when we meet with--when Tom and I meet with them in the middle of this year, that all this would be very favorably received.

And Mike, with respect to the second half of your question and a dividend, we haven't addressed that, the issue of what happens to us once we get the upgrade. That's been in our gun sights here for the last 2 years, and until we pass that point in time I think it's probably premature to speculate about what we would do with continued positive free cash flow.

Okay, and then secondly, a clarification on the San Jose parcel, is that the entire piece there and also do you have anything new on what's going on in the Princeton R&D facilities, and any outlook there in terms of perhaps selling that and leasing back the buildings?

Mike, this is Kim. No, your memory is right. There is a second phase of the San Jose land which would probably be one to two years away as we finish a number of environmental remediation projects on that second piece of land. So this is only the first piece of land.

As it relates to Princeton, there is no updated information I can give you around the Princeton property.

Great, thank you.

Our next question comes from the line of Dmitry Silversteyn with Longbow Research.

Good morning, gentlemen. Congratulations on a very good year, and an excellent quarter. My question has to do with the BioPolymer's business. You talked about seasonally or maybe something structurally, a slowdown in the battery, the rechargeable battery market for the lithium. But I'm actually more interested--I'd like to get a little bit more detail on that, but I also want to get into the raw material issues on our your BioPolymer's business. How has the harvest been looking in seaweed as far as both quantity and quality? You don't expect much on the top line; I think you said mid-single digits. What are your expectations on that profit line if there is an improvement in raw material sourcing?

Dmitry, Bill. First thanks for the congratulations; we thought it was a great year too. BioPolymer raw material, we've talked to you all year long about the rise in both seaweed and pulp prices. They continued in the fourth quarter at the high levels that we'd experienced in the second and third. The quantity of raw material does not seem to have changed materially in any direction in the last quarter. The quality still remains marginal.

The net effect on us in BioPolymer of raw material alone in the year was about $5 million on purchase price, and another several million dollars in operating inefficiencies from the poor quality. So you can get a feel for the effect that has had on us.

As we look forward into '05, our crystal ball says that those prices should stabilize at the current level and, therefore, the unfavorable impact year-to-year due to raw material prices will be significantly less than it was in '04. Finally, to your question about bottom line, I think I did say that we'll see a top line of mid-single digit growth and a higher growth to the bottom line. So we expect to see some leverage on the volume as well as some productivity improvements which ought to improve margins.

Okay, thank you. And then to follow up, you've talked about the progress you're making in the soda ash negotiations. My understanding of the peroxide negotiations are a few days behind. There were two separate $0.05 price increases. I guess not everybody followed the second $0.05. Can you update us on what's going on as far as negotiations in the peroxide business? And also address the cap issue as far as what's your best feel for how many contracts are out there or what percentages of the contracts out there are capped?

Yes, Dmitry, this Michael Wilson and to answer your question on hydrogen peroxide, I think in terms of the cap question; again like soda ash, roughly 50% of the business we found was under competitive caps. We tendered the movement we did; we have two price increase announcements as you referenced. The latter one, which was effective January, has not been followed by everyone in the industry. Nevertheless I would anticipate, you know, it's hard to speak across the industry but I would anticipate that prices are going to move up a couple of cents a pound.

Okay, excellent. Thank you very much.

Our next question comes from the line of John Roberts with Buckingham Research.

Good morning, guys.

Good morning, John.

In the outlook statement that came out, I got it just before the conference call started. It talks about the generic competition in North America and the higher raw material costs in the Ag business. Those aren't areas that I recall we've had much discussion on in the past. Could you maybe put it in perspective how big it is, and exactly what's going on?

Yes, John, Milton in the third quarter conference call did talk about an effect, talked extensively about the generic competition of bifenthrin in North America. The product is off patent in North America. We saw a number of generic producers get into that business in '04, and it is having an impact on our bifenthrin pricing and bifenthrin margins.

Raw materials, no. We have not talked about that before, but it is an increasing issue across all of our businesses like we've been successful in getting price increases through. We're seeing that in our input costs as well and simply wanted to alert everybody to the fact that it's not all positive.

I guess I didn't recall the bifenthrin discussion being enough to offset this shift in North America into the first quarter as the strong Brazil results.

It's all up in the revenue side, so the cost issue isn't in the revenue side. So the bifenthrin competition is big enough to offset all of that North American shift and the Brazilian good results?

Correct but again, John, as you recall that North American shift was at an earnings level of, I think we quantified it last quarter as $3 million to $4 million or $3 million to $5 million. It's not tens of millions of dollars.

Got it, and then second, Michael, now that caustic soda is up pretty high again, could you give us a little discussion again on the impact on the soda ash industry?

We really don't see a lot of the impact on soda ash as a result of the caustic soda simply because the soda ash producers are sold out. So the volume transition that you might have seen in the past isn't going to happen in any substantial way?

Is it helping with pricing or it's immaterial really to the pricing discussions; they're set really just based on the supply/demand that's going on in soda ash?

I think it's really immaterial. I think it's the supply and demand in soda ash that's driving soda ash pricing.

Thank you.

Our next question comes from the line of Kevin McCarthy with Banc of America Securities.

Good morning and congratulations again on the progress that you'd made. A follow up soda ash, you've made a lot of progress on pricing. I understand you're somewhat limited by the competitive caps but presumably you'll have more flexibility looking ahead to 2006 as contracts roll over. So my question is, with the Asian synthetic producers still limited by infrastructure issues, not a lot of new capacity coming on, how do you view the longer term trajectory of the cyclical ramp up in soda ash? Which year might you peg as a cyclical peak?

We would anticipate that the cyclical peak would be in '06 or '07.

Okay, and what would precipitate a down turn? Do you see any grass roots expansion over the intermediate term?

I really do not at this point. As we've talked about we've got the most efficient cost-effective capacity to bring back; that's been de-bottle necked. Other competitors in North America we believe would have to spend substantial capital to expand and given the kinds of returns the industry has provided over the last few years I would think they'd be somewhat reticent to do that. So we see a very favorable market for North American producers going forward for the next several years.

Right now we're clearly getting a benefit from the situation in China with the Chinese producers being somewhat constrained, but we don't see that changing dramatically either over the near term. And it would really take some additional capacity coming on that's substantial to change that.

Okay and my second question might be for Bill or Kim on longer-term capital plans. You know, we're starting to see evidence elsewhere in the chemical industry of CapEx increasing, in some cases significantly. It appears that's not the case at FMC. Maybe you could give us a little bit more color on what you are spending capital on in 2005, and how long can you keep CapEx significantly below D&A there, and remained so disciplined?

Yes, Kevin, the '05 CapEx, the mix of that spending is not going change materially from the mix that you've seen over the last 2 or 3 years. And that mix is largely profit-maintaining capital to keep the plants in their current operating condition, attractive cost-reduction projects, and whatever legislative investments we need to make for the environment.

With respect to going forward, I don't see a lot of pressure on us for that number to be changing in any material way over the next few years; because we're fully funding right now the capital we need to maintain the assets we have in place. And the pressure on capacity, while it's there in some of the businesses, remember we have significant mothballed capacity that we can bring back on line--.

Right.

--with very, very nominal CapEx. And that's the case in our domestic Industrial Chemical business. In our Specialty Chemical businesses we have demonstrated for the last 20 years ability to through process improvements increase the capacity of our operations incrementally every year by 3% to 5% which largely leads to demand growth.

And in Ag, our strategy of outsourcing and variabilizing our manufacturing is placing huge current and future capacity capital on the backs of somebody else.

Great, thank you very much.

Our next question comes from the line of Alex Mitchell (ph) with Scopist Asset Management (ph).

Good morning, hi this is Bob Goldberg (ph) for Alex. A couple of quick questions; I apologize if I missed this in the prepared remarks, but the $140 million in debt reduction, I assume that excludes any potential proceeds from San Jose land sales or any other operating items.

Hi Bob, this is Kim. That's correct.

Okay, the $140 million is strictly from operations?

The normal operating cash flow items, not major capital or capital dispositions, that's right.

Right, okay. And just to follow up on the issue with China and their soda ash. The theory I think in the markets in the medium term and longer terms is that China might grow their capacity well in excess of their domestic growth, and upset the market over time. And it seems like from your comments in the prepared remarks that capacity might be delayed and/or scaled back. Any thoughts on what the landscape looks like now given that the Chinese growth rates, do you believe that the growth rates will be in excess; I mean the demand growth rates will be in excess of supply or vice versa? How do you see that playing out now?

Our outlook really calls for the China situation to stay in balance on the supply/demand side. As you indicated you've got the demand growing rather rapidly, and a number of capacity expansions that were out there have either been cancelled or pushed back. So we really see a situation of balance going forward.

Have they been a net importer or exporter in the last couple of years?

China is a net exporter, and exports in '04 were just slightly higher than in '03.

Okay, so you would expect that to continue; you'd expect China to continue to be a net exporter just not increasing very rapidly?

Yes, that's correct.

Okay, thanks. Just wanted to clear that up; I appreciate it.

[OPERATOR INSTRUCTIONS] You have a follow up question from Kevin McCarthy with Banc of America Securities.

Just a quick follow up for Michael. You alluded to the Solvay addition at your park. What is the timing on that project; when would you expect it to be up and running?

Based upon Solvay's public announcement they said the capacity would begin to be available in the second quarter of '05.

Okay, thanks very much.

There are no further questions at this time. Mr. Walter, are there any closing remarks?

Thank you, operator there are. And again, thank all of you for joining our call. From my perspective, our fourth quarter performance caps off a year of what I would characterize to you as being a very, very solid performance with earnings up 70% year-over-year, net debt reductions significantly higher than our earlier expectations, and an improvement on our return on invested capital of well over 2%.

Now for momentum in '04, as you've heard, is expected to carry us in '05, to an even higher level of performance. And our outlook beyond '05 remains equally as bullish. I'll end my comments with what you hear, a refrain you hear from me frequently; at a stock price of $46 a share we remain grossly undervalued. With that, I thank all of you for joining us.

Thank you for participating in today's conference call. You may disconnect.