富美實 (FMC) 2005 Q3 法說會逐字稿

Good morning and welcome to the 2005 third quarter earnings release conference call for FMC Corporation. Phone lines will be placed on listen-only mode for the conference. After the speakers' presentation, there will be a question and answer period. If you would like to ask a question during this time, please press star plus the number 1 on your telephone keypad. Questions will be taken in the order they are received. If you are on a speakerphone, please pick up your handset before asking a question. If you would like to withdraw your question, press the pound key. Thank you. I will now turn over the conference to Mr. Brennan Arnt. Mr. Arnt, you may begin.

Thank you. On behalf of the entire global team, welcome to FMC's third quarter 2005 conference call and webcast. With me today are Bill Walter, Chairman, President, and CEO who will begin the call with a review of the highlights of the quarter. Bill will then turn the call over to Milton Steele, Vice President and General Manager, Agricultural Products Group, who will provide us an in-depth review of the performance and prospects for our global agricultural chemicals business. Following Milton, Kim Foster, Senior Vice President and Chief Financial Officer, will report on our financial position. Bill Walter will then complete the call with a discussion of our outlook for the balance of 2005, and we will then take your questions. Our discussion today will include certain statements that are forward-looking and subject to various risks and uncertainties concerning specific factors that are summarized in FMC's 2004 Form 10-K, our most recent Form 10-Q, and other SEC filings. This information represents our best judgment based on today's information. Actual results may vary based on these risks and uncertainties. During the conference call, we will refer to certain non-GAAP financial terms. On the FMC website available at fmc.com, you will find the definition of these terms under the heading entitled glossary of financial terms. We have also provided a reconciliation to GAAP of our non-GAAP financials that we will use on the call as well as have provided you our outlook statement. It is now my pleasure to turn the call over to Bill Walter. Bill?

Thanks, Brennan. Good morning everyone. As you saw in our earnings release, we had another good quarter despite a number of challenging economic and operating issues. We delivered earnings before restructuring and other income and charges at the mid point of our previously issued guidance of $0.80 to $0.90 per share, and we continue to make significant progress in meeting our corporate objectives and further strengthening our financial position. Let me summarize. Sales of $510 million were up 3% versus the third quarter of 2004. Earnings before restructuring and other income and charges of $0.85 per diluted share were up 9% over last year's third quarter of $0.78 per share. Specialty chemical earnings increased 26% driven by stronger demand and higher pricing in our lithium business and improved performance in the food ingredient sector of our biopolymer business. Industrial chemical earnings of $18.1 million were down 3.1 million versus the year ago quarter as start-up costs associated with the Granger Soda Ash facility, higher energy and raw material costs, and the effect of Hurricane Rita on our peroxide and soda ash businesses more than offset the benefit of higher selling prices.

As expected, ag products’ earnings were essentially level to a year ago despite a modest decline in sales. Strong sales growth in Asia and operational productivity gains were offset by the impact of generic bifenthrin competition in North America. A slightly weaker Brazilian ag economy and higher raw material and energy costs. Milton will review the ag segment’s results for you in a few minutes.

Across our company's businesses, we were affected by higher energy and raw material costs and Rita. In the third quarter versus the prior year quarter, there were unfavorable impacts on a total company basis including higher energy costs of $0.07 per share, higher raw material costs of $0.08 per share, and a $0.03 per share impact for Hurricane Rita which impacted our industrial chemical segment late in the quarter. Currency translation for the first time in several years, however, had no impact on the quarter. Regarding our corporate and financial performance during the quarter, we redeemed the entire 355 million principal amount of our 10.25% notes, repatriated $180 million from Europe under the American Jobs Creation Act and reduced net debt to approximately $600 million. On a GAAP basis, we reported a loss of 4.4 million or $0.12 per share.

GAAP earnings for the quarter included $1.43 per share pre tax charge related to redemption of our notes, a $0.05 per share pre tax gain related to restructuring and other income and charges, and a $0.41 per share charge for the tax effect of these items. With those reconciliations, our non-GAAP earnings, as I said previously, were $0.85 per diluted share versus $0.78 a year ago. Moving into a little more detail by segment. Specialty chemicals sales of $137 million increased 2% versus the prior year. Our lithium business experienced strong sales growth, driven by increased demand across a broad base of markets coupled with higher selling prices in most segments. Our biopolymer sales, however, were down slightly as a result of lower pharmaceutical excipient sales. Segment earnings increased 26% versus the prior year quarter to $24.8 million. Key drivers of the increase were strong demand growth and higher pricing in lithium and improved food ingredients performance in biopolymer due to improved pricing and a moderation of raw material costs relative to recent quarters. Moving on to our industry chemical segment, sales of $212 million increased 6% versus the prior year driven by higher selling prices across the entire segment. This reflects the success our team has had in implementing price increases, not only in our soda ash business but also at Foret in Europe and in our North American hydrogen peroxide business.

Segment earnings, however, of $18.1 million were 3.1 million lower than a year ago. As we announced in our second quarter conference call, the significant majority of the costs associated with the start-up of our Granger soda ash facility would be incurred in the third quarter. I'm pleased to announce that the Granger restart is complete and production is now at the planned 250,000-ton annual rate. We also saw some volume impacts late in the quarter due to the transportation and logistical issues arising from Hurricane Rita. In addition, our Bayport, Texas hydrogen peroxide plant was down for ten days. There was no significant damage, however, to the site, and it's now back in full operation. As expected, given very tight global supply demand conditions, our soda ash subsidiary, FMC Wyoming of which we own 87.5%, was a major contributor to the earnings as a result of higher domestic and export selling prices.

The business, however, continues to experience significantly higher energy and transportation costs which offset a portion of these price increases. Foret, our wholly owned European industrial chemical subsidiary, realized higher selling prices across most product lines. Profits, however, declined slightly as lower volumes in specialty peroxygens and higher raw material costs, particularly caustic soda, offset the price increases. Our North American hydrogen peroxide business also benefited from higher pricing. However, sales and production volumes declined modestly as a result of Hurricane Rita. Higher energy costs also impacted their margins. With that, let me now turn the call over to Milton Steele who will provide an insight into the business that comprises our agricultural products group, discuss the third quarter results of the business, and provide an outlook for the segment for the balance of 2005. Milton?

Thanks, Bill, and good morning to everyone. It's a pleasure to be able to discuss the accomplishments of and opportunities for our ag products business. As well as review our third quarter and year-to-date financial performance. I will close by giving our outlook for the full year 2005 and outlining some of our plans for the future. First, let me provide a brief profile of our business. We're a focused player in the agricultural chemical crop protection market. Over the last 12 months, our sales totaled $729 million of which approximately 70% is insecticides and the remainder primarily herbicides. We compete globally and enjoy relatively strong east positions in crop and noncrop market segments in North and South America, Europe, and Asia. We differentiate ourselves through a focused strategy in selected markets, leveraging our proprietary products as well as third party products and technologies. In addition, we have successfully implemented and expanded our market access alliances which allow us to effectively market and distribute our products in key segments. Our market strategies, coupled with significant manufacturing cost reductions accomplished primarily by sourcing raw materials and all products from low cost areas have proven to be a successful formula.

Since 2002, sales have grown 14% while profits have improved by more than 70%. We achieved record sales and profitability in 2004. In addition, EBITDA as a percentage of sales was 21% in 2004 which we believe is better than the industry average. While some of this improvement was attributable to recent growth in the overall chemical crop protection market, our competitive positions in key market segments have also been a significant factor. With this brief overview, let me now provide an update of our third quarter and year-to-date financial performance. Third quarter sales of $161 million were down $2.8 million or 2% compared with the prior year quarter. Sales increased in Asia driven by generally favored market conditions in many of our key Asian countries. However, it should be noted that our margins in Asia are generally lower than other regions of the world. The improvement in Asia was essentially offset by the anticipated and favorable impact from generic bifenthrin competition in North America. In addition, pest pressures in North America were moderate during the quarter which was generally similar to last year.

Finally, we had slightly lower sales in Brazil in the third quarter following an exceptionally strong performance in 2004. Pre-tax earnings in the quarter were level with last year as the impact from lower sales and higher raw material and energy costs offset the strong Asian performance. Although profits are flat in the quarter, our year-to-date performance has been better than originally expected. As I discussed with you last year, we believed 2005 would be challenging due to the falling commodity prices, high energy and raw material prices, the impact from generic bifenthrin competition, and generally peak conditions and pest pressures in Brazil. As expected, 2005 has been challenging due to these factors, but nevertheless our financial performance has exceeded our original expectations and is tracking better than the record performance of last year, specifically year-to-date sales were 556 million, an increase of 5% from the prior period. Earnings of $104 million were nearly $10 million or 10% higher than last year. Our year-to-date results were driven by several factors, including continued improvement in our European operations driven primarily by our market access JVs in western and Eastern Europe as well as growth in key high value crops. The continued strong performance in Brazil due to increased planted acres in cotton and heavy pest pressures in the first quarter of 2005, better than expected growth in Asia, particularly in China, Korea, and India.

And finally, continued improvements in our manufacturing cost structure and productivity, although higher raw material and energy costs have offset some of these gains. We are certainly pleased with our year-to-date financial performance. And despite more challenging market conditions compared with last year, we expect higher sales and increased profitability in 2005. Our business strategies will allow us to achieve higher year-over-year financial performance for the third year in a row. As part of this full year -- as part of this full year 2005 outlook, we expect fourth quarter earnings will be below the prior year as the continued impact of generic bifenthrin competition in North America, a challenging Brazil market and higher raw material and energy costs more than offset incremental improvements in Europe and Asia. Let me get into the details of our full year outlook. In Europe, our performance in 2005 has exceeded expectations due to our focus on key crops, the continuing positive evolution of our market access alliances in eastern and western Europe and the impact from a stronger Euro. We are actively negotiating arrangements to expand our alliances in other key countries on the continent, and in addition our investment in product development and label extensions is paying off. In North America, we continue to experience generic competition in our pyrethroid product line, a trend which we expect to continue.

However, to offset this unfavorable impact, we are aggressively pursuing growth opportunities and cost reductions. From a growth perspective, we are launching several new products, including new formulations of our proprietary chemistries, ISK's flonicamid insecticide for cotton, fruits, and vegetables, and [inaudible] for our specialty noncrop business. For flonicamid, we recently received the first crop registration and will be launching this unique mode of action insecticide in 2006. We will also launch Acetamiprid, a highly effective insecticide, into several lucrative specialty non crop segments such as ants and cockroach baits. In addition, our herbicide chemistry is enjoying a resurgence as these products fit well in acres, where traditional and widely used herbicides appear to be losing some of their spectrum and/or efficacy. We've increased our emphasis in developing premixes and unique formulations and expect future growth in these segments. To complement our top line growth strategies, we remain committed to reducing costs. Therefore, we have implemented a series of restructuring initiatives to reduce our SG&A spending in North America and also drive improved manufacturing and efficiencies and cost reductions.

Finally, I want to discuss our views on Brazil. As you know, over the last several years, Brazil has experienced rapid growth in its demand for conventional crop protection chemistries. The growth was driven by an increase in planted acres, particularly for soybean, cotton and sugar cane. Relatively strong pest pressure in certain crop segments, generally stable economic conditions, and in 2004 strong crop prices. We were able to capitalize on this growth with our portfolio of products, our market alliance initiatives, and our ability to effectively access the Brazilian farmers. However, market conditions in 2005 are not as favorable as the last several years. First, the Brazil currency, the Real, has strengthened by approximately 25% since last year, and the majority of soybean and cotton growers sell their product in U.S. dollars. Second, crop prices have fallen compared with 2004 and third, input in operational costs such as fuel and fertilizer have also risen. These three trends have negatively impacted the majority of Brazil's farmers, squeezing cash flows and profits. Consequently, growers are initially cutting back on their planted acres for the current crop year and are slowing payments to suppliers. We believe the entire ag sector has been impacted by these trends. In spite of these difficulties, we expect FMC sales and profitability in Brazil for 2005 to be approximately equal to the record results achieved last year.

Of course this will ultimately depend on the strength of the fourth quarter, the actual level of pest pressure, and planted acres. In closing, despite more challenging market conditions in 2005, we expect higher sales and increased profitability this year. Our focus on key products and market segments coupled with our low cost sourcing strategy, productivity initiatives, and growth plans have allowed us to achieve strong financial performance for the third year in a row and have laid a firm foundation for the future. As we look to the future of ag products, I'm confident that we will see further sales and earning growth driven by can aggressive effort to acquire complementary chemistries and/or related technologies for our key market segments and further cost reduction initiatives both in manufacturing and SG&A areas. Finally, we are implementing programs aimed at shortening the innovation time cycle from the current 10-plus years. The concept is to work closely with our customers to create productivity enhancing technology for these customers or, as we refer to these efforts, customer driven innovation. While it is premature to go into more detail today, I'm confident that when I have the opportunity to talk with you next year, I'll be able to share some really exciting EBIT growth initiatives that APG has initiated and hopefully by then begun to realize. Thank you for your time. I look forward to taking your questions during the Q&A session and would now like to turn the call over to Kim Foster.

Thanks, Milton. And hello everyone. As Bill said earlier, FMC has made significant progress in meeting our corporate objectives and further strengthening our financial position. Since the end of the second quarter, we've executed a new unsecured $850 million credit agreement, replacing a $600 million secured credit agreement and completed the redemption of the entire $355 million senior notes due in 2009. On execution of these agreements, Moody’s raised all of our existing senior unsecured debt ratings to BAA3 and issued a stable outlook. Standard and Poor’s affirmed our rating of triple B minus. As a result of these actions, FMC regained a full investment grade credit profile. We have repatriated the first tranche of $180 million from Europe under the American Jobs Creation Act. We announced on September 1st that FMC and Solutia had reached an agreement to sell our 50/50 joint venture, Astaris, LLC, to Israel Chemicals Limited. Under the terms of this agreement, ICL will purchase substantially all of the assets of Astaris for $255 million. We estimate our cash proceeds from the sale will be approximately $100 million.

And by the end of the fourth quarter, we intend to repatriate a second tranche of cash from Europe under the American Jobs Creation Act which will be similar in magnitude to the first tranche. By the end of 2005, we will have met the financial targets we set two years ago and we'll have the financial flexibility to execute on our strategic goals. In the near future we'll provide more specific guidance regarding the use of our free cash flow. Let me now discuss the first nine months from a cash flow and debt perspective. Capital spending of 59.5 million was higher than the 49.9 million a year ago but still well below our depreciation and amortization expense. As I have mentioned on many previous conference calls, we expect this relationship to continue even with the strong growth in our businesses as a result of several factors, including moth balled capacity in industrial chemicals, outsourcing strategy in ag products, and debottle-necking initiatives in specialty chemicals. At quarter's end we had reduced net debt to 608 million, or by approximately $100 million since the beginning of the year.

Based upon continued strong cash flow from operations and the pending sale of Astaris, we expect to reduce net debt to approximately $420 million by the end of this year. With that, I will now turn it back to you, Bill.

Thanks, Kim. In summary, we had a good quarter in first nine months despite economic and operating headwinds. When the year is over, 2005 will go down as a year of very good performance for FMC and one in which we'll meet or exceed the objectives we set for ourselves two years ago. Let me expand further on our expected performance for the balance of the year. For the fourth quarter, we expect earnings before restructuring and other income and charges of $0.89 to $0.99 per diluted share. Primarily drivers of the fourth quarter earnings are expected to be earnings growth of approximately 20% in specialty chemicals resulting from higher selling prices, organic growth, and improved product mix. Our earnings in industrial chemicals are expected to be flat to slightly up as higher energy and transportation costs will largely offset higher selling prices across the segments' businesses. Timing of closing on the Astaris sale will also affect the quarter's results. I would point out to you that in the fourth quarter of last year, our share of Astaris’ earnings were $2.7 million.

In ag products, earnings are expected to be 15 to 20% lower as a result of the things Milton just talked about. The impact of generic bifenthrin competition, higher raw material costs, and Brazilian profits slightly lower than the exceptionally strong results we achieved in the fourth quarter of 2004. And then finally, as a result of our refinancing, interest expense should be approximately $10 million in the fourth quarter. Reflecting upon the first nine months’ performance and our outlook for the fourth quarter, we expect full year 2005 earnings before restructuring and other income and charges of $4.20 to $4.30 per diluted share. This represents an increase of $1 to $1.10 per share versus 2004 or 33% at the midpoint of the range. Let me spend a few minutes getting into the details by segment. In ag products, we expect modest growth in full year 2005 sales as the benefit of new products and labels and continued growth in South America and Europe more than offset the impact of lower North American bifenthrin selling prices.

Full year earnings for ag products are expected to be about 5% higher than last year, reflecting higher sales and lower manufacturing costs, partially offset by lower bifenthrin pricing and higher raw material inputs. Our outlook for ag assumes conditions for the fourth quarter in the Brazilian ag economy similar to those of the third quarter as well as normal Brazilian pest pressures. For the full year 2005, we expect specialty chemicals to deliver mid single digit revenue growth driven by growth in lithium and biopolymers food ingredients business. Specialty chemicals full year's earnings growth is expected to be approximately 15% driven by higher volume leverage, increased selling prices, and better product mix. In industrial chemicals, we expect high single digit revenue growth driven by the higher selling prices across most businesses but in particular soda ash. Full year earnings growth is expected to be approximately 45% above 2004, driven by these higher selling prices, partially offset by higher energy, raw material, transportation costs, and the sale of our interest in Astaris. At the corporate level with the partial year effect of the reduction in interest expense resulting from our refinancing, we now expect interest expense for the year to be $58 million.

As Kim just mentioned, our net debt of 608 million at September 30, we are on course to reduce net debt to approximately $420 million by the end of the year. Finally, with strong earnings growth, our debt reduction success and low capital expenditures, our returns have steadily improved since 2003 rising from 8.4% to our expectation of over 11% this year. We fully expect to meet or exceed our return on invested capital target of 12% by 2006. When you add it all up, our strong first nine months performance has taken us one step further toward unlocking value for you, our FMC shareholders. Though our 2005 year-to-date stock performance reflects that to some degree, in my opinion we're only part of the way to realizing full value for our shareholders. We will enter 2006 with a very strong balance sheet and free cash flow forecast. We will have and in fact we do have the strategic and financial flexibility to invest for profitable growth, and I commit to you that we'll manage our businesses to further unlock value for you, our shareholders. With that, I'll be happy to take questions. Operator?

Thank you, sir. Again, if you would like to ask a question, please press star and number one on your keypad.

A rather bashful group this morning.

You have a question from Kevin McCarthy of Banc of America.

Good morning, guys. Milton, I appreciate your rundown on the ag business. It's very helpful. I noted that you commented sales in Asia were relatively strong, and it occurred to me that it kind of stands in contrast to what we've heard from some other companies with regard to insect pressure in South Asia. I was wondering if you could elaborate on what's driving your good results there.

Kevin, we've seen increased demand for insecticide products in Korea, India, and Indonesia, and we believe we've also increased market share, so that's where the growth has occurred for us.

Okay. And then Brazil seems to be weakening a bit at least with respect to planted acreage. Could you talk a little bit, Milton, about how FMC manages credit risk in Brazil and allowance for doubtful accounts and that sort of thing, what you think the trends will be from that perspective?

We don't go into the granularity of providing our receivables or allowing for doubtful debts by country, but our receivables are slightly up year-over-year. Based on our recent collections and the collections in the first month of the fourth quarter, we are very comfortable and confident about our receivable position.

Okay. And then shifting gears, Bill, to your industrial chemicals area, you mentioned energy has been a headwind there. And you had some Granger costs as well on the restart. If we were to exclude those two factors, what do you think your earnings would have been in the industrial chemical segment in the third quarter?

Kevin, I can't answer the question as specifically as it was asked. I have energy impact across the corporation, not by segment. I think, as I said, that was $0.07 in the quarter. And as we previously talked about, the majority of the $5 million start-up expense associated with Granger was to fall in and did fall in the third quarter. Let's just for discussion purposes say it was 3 to 4 million or $0.06 to $0.08 a share. So between the two of those, you're talking about probably $0.15 in total.

Would the majority of the $0.07 for the corporation you think be attributable to industrial?

Yes. Kevin, I think about 80% of our energy requirements are in the industrial chemical segment.

Thanks very much. I'll get back in queue.

Your next question is from Bill Young of CSFB.

Hi, Bill. Can you give us any guidance about the -- when Astaris might close? I know you don't know exactly. Are you talking about like midway through the quarter, near the end of the quarter? Just a rough idea.

Yes, Bill. I would have hoped we'd have been able to close by now. Obviously have not. We're working on it day to day. I'd be disappointed if the closing were to continue into the mid part of this month. And the other -- on the other hand, you shouldn't be surprised if it happened in the next 24 or 48 hours.

Okay. Fair enough. That gives us a good idea. Now, I just wondered when is the board going to decide about what to do with the cash flow and just conceptually I'm not asking you to preempt the board, but how do you feel about, say, dividends and share buybacks, that type of thing? What kind of thing -- if you were the board, what kind of thing would you recommend? A mixture or just what?

Bill, I've got to again compliment you on your efforts to try to get an answer out of me that is toward where the process is. Let me answer the first question, and that's, as I've said in previous conference calls, the process with the board will extend through the December Board meeting, so we've got another -- a month or so here at the earliest before any decisions will be taken. And I don't want to even conceptually preempt what the board may decide to do. I've obviously had discussions with any number of people. I think maybe even including you on the question of the best way to create value for shareholders. We continue to examine those. And I guess finally I'll just repeat myself. I'm not going to go out and answer the question specifically as asked in terms of my personal preference over acquisition, stock buyback or dividends, but they're all in play.

Okay. A couple short ones here. How much of an impact do you think Rita might have in the fourth quarter?

We ought to recover some of the loss of volume that we experienced in Q3. I think I quantified the total impact of Rita as being $0.03.

Right.

Maybe half of that was volume loss. The other half represented one-time expenses that we incurred that are just sunk and lost and won't come back. So maybe we can pick up a penny to two pennies in the quarter.

That would be good to recover some of that. And on the -- Milton, this is for you. I'm not sure how you want to define this, but at what point do you think we might see some stabilization on the generic bifenthrin? Where do we stand on that? Is this going to be -- continue to be -- negatively impact comparisons going forward? Where do you think we are?

The price decline is in line with our expectation, Bill. Generally when crop protection chemistry goes off patent, prices can eventually decline by 25 to 50%. A large portion of the price impact has been reflected in our year-to-date results. However, we do expect some further decline in the fourth quarter as well as the first half of next year. But the majority of the decline is reflected in our results to date.

Okay. That's good to know. Last but not least, on the Brazil side, what do you hear about BT cotton plantings in Brazil? When might they become important now that we're seeing -- now that we got approval to plant genetically modified cotton and what could this do to your insecticide earnings in that country?

Bill, I expect BT cotton to take on in Brazil. The good news for us is that a predominant amount of our insecticide sales in the Brazil cotton market is for sucking pest. BT cotton doesn't control, for example, agents.

But in the U.S., didn't you lose some business on the caterpillar control side when BT cotton came in?

Yes, we did.

But you don't expect much of that in Brazil?

No. Not at all.

Okay. Great. Thanks very much for the answers.

Your next question is from Mike Judd of Greenwich Consultants.

Good morning. We're getting pretty close to, I guess, the December timeframe when you sit down to renegotiate your contracts on soda ash. Has there been any preliminary news or discussions that you could share with us?

Mike, Bill. No, there really aren't. The discussions really just started here in really mid October. And the process, as I've described to you previously, is painfully slow. For me to comment on that process right now would be -- is premature, and I'd simply be speculating on the outcome. Having said that, I feel very confident that we will see significant year-over-year price increases in our domestic soda ash business.

And then also in the industrial business, in terms of the impact of higher energy, can you just provide a little bit more color on that? Is it processing costs, transportation costs? What are the variables, please?

Yes, Mike. It's primarily processing or at least when we talk about energy costs, it's processing. The energy price impacts that we're seeing through transportation surcharges, freight surcharges and so on, we generally attempt to quantify and speak of separately. So, again, we're talking about purely processing or input cost increases. I think we have said in the past that energy of all forms represents about 10% of our cost of goods sold. 40% of that 10% is natural gas. I think we've also given you enough information in the past that you can calculate roughly what our total BTU consumption is on an annual basis across the corporation. If you haven't been able to do that, let me help you. We consume somewhere between 14 and 16 million, million BTUs a year. So you can figure out what $1 an MMBTU would mean to us.

Having said that, we also have had in place since I've been in the chair a hedging policy which we continue to follow whereby we hedge 80% of our natural gas requirements forward 12 months. But that remains 20% that is unhedged, and that's largely the impact we saw in the third quarter. And we will see an increase year-over-year in our hedged price and also obviously a year-over-year increase in our unhedged portion of our requirements. We haven't got all our hedges in place for '06 yet, so I can't quantify the year-over-year increase on the hedged portion. But the unhedged portion, if we just compared average unhedged '05 to current spot prices for gas in '06, you're talking about several dollars in MMBTU increase. That's a lot of information. I hope you can figure out what it all means, but I thought it's important that you have a full picture of our energy requirements.

Thank you. And just lastly, if you get your net debt down to $420 million by the end of the year, are you basically at that point, are you pretty much done with paying down debt? And what are the other options for the cash or do you have desires to pay down debt further?

Yes, Mike. It's really the same question that Bill just asked. At a $420 million debt level, though, I can tell you that we're probably at the sweet spot of our cost to capital curve, but available to us is always the option of continuing to pay that down to zero. Until we get through this discussion with the board and decisions made at that level, though, to comment any more specifically on what we might do with that free cash is inappropriate.

Okay. And then just lastly on the acquisition front. I know in the past there were some things available in the market, and really you couldn't take a look at them because your debt covenants required you to I think pay down some debt before you considered doing those things. Any commentary along those lines?

Yes. First of all, Mike, you're right the covenants imposed upon us by our previous credit agreement and the notes prohibit us from doing acquisitions of a basket I think of anything more than $50 million. Those are all gone. We've got an unconstrained -- we're in an unconstrained position right now. We did look at and continue to look at acquisition opportunities in the specialty group in particular. I think, as you can appreciate, though, valuations on properties today are very rich, and we're not going to go out there and make a bad investment simply to grow the top line of any one group of the corporation. As valuations decline -- and they will at some point -- I would hope we'd be in a position to be able to pursue them.

Thank you.

Again, if you would like to ask a question, please press star and the number one on your keypad. Your next question is from John Roberts of Buckingham.

Good morning, guys.

Good morning, John.

Are you at all concerned about Ansac’s export volume given some of the slowdown that appears to be going on in Asia in the industrial sector and also Latin America, Brazil? Not only is the ag sector weak, but I think the industrial economy there has been slowing down a little bit in Latin America. Will Asia maybe have a little bit more ability to serve the Asian market over there? The Chinese have been a little disruptive from time to time. Do you think we'll have a little volatility in volumes?

John, Bill. The quick answer is no. We have not seen the slowdown in demand that you just described in Asia, Latin America or Brazil specifically. Global demand for soda ash remains very strong. Global soda ash supply remains tight. And so therefore we don't anticipate any slowdown in Ansac volume. The Chinese admittedly have increased production year-over-year, somewhere between 11 and 12% with domestic demand growing about 9%, so they've been pushing a little more product into the export market, maybe a couple hundred thousand tons. It did put some pressure on pricing in the second and third quarter, but we have seen the Chinese here just in the last 45 days increase prices again. So a long-winded answer to a very simple question. Unless there's something going on out there that we're not aware of, we would expect Ansac volumes to at least be stable if not grow slightly year-over-year.

Was the hurricane impact on the business -- the soda ash business just the energy spike that you saw or somehow did the logistics -- I didn't think you moved a lot of product through the Gulf.

It was not energy. Any energy impacts of Rita were captured in my quantification of energy. The hurricane impacts were simply lost volume, lost production, and higher costs that we incurred to shut down and then restart a plant. The majority of the soda ash volume losses, though, were timing and was timing of shipments through Port Arthur, Texas into Mexico.

Okay. Thank you.

Your next question is from Kevin McCarthy of Banc of America.

Yes, Bill. This is a follow up on soda ash. Can you give us an idea of what your volume has been year-to-date in that business and then how much inventory do your customers normally keep? I would imagine it's modest since volumes are so large.

Yes, Kevin. Our sales volume year-to-date in soda ash is actually down slightly. We've been sold out now for the last 21 months or something. But in '04, we were able to purchase material from another producer and sell it to our customers. We've not been able to do that this year. Sales volumes are down. Production volumes are up, however, as are Gran -- or as our West Vaco property continues to operate well and as we've now brought up the Granger increment of capacity. With respect to inventory, now given just the physical dimension of soda ash, customers are carrying a week to maybe two weeks of inventory.

So it sounds like, given your sold-out position and lean inventory downstream, it would be very difficult for your customers to prebuy ahead of 2006 price increases.

Not impossible but very, very difficult.

Okay. That's helpful. Then shifting gears to your specialty business, could you elaborate on why lithium is so strong and then on the biopolymer side it sounds like excipients were weak. Has your share been stable in microcrystalline cellulose?

In lithium, we've just seen good demand growth across virtually every product line, be it the first molecule lithium carbonate or at the specialty end. Just strong fundamental end use markets. And our expectation is that that should continue here into '06. In terms of our pharmaceutical excipient business, we've maintained share. In fact I think we may have actually gained slightly this year. What we're seeing is a weak end market. The number of oral dried dosages produced and sold by the pharmaceutical industry for the first time in 25 years has actually taken a pause in its growth. Some of that can be attributed to very specific events, pulling the C02 inhibitors off the market, a relatively low number of new drugs has been introduced this year. But to be honest with you, Kevin, to me it's largely inexplainable. Our expectation is that it is a blip, that we will see a return of 4 to 6% physical volume growth starting next year, but there's no assurances that will happen.

Thanks very much.

Your next question is from Dmitry Silversteyn of Longbow Research.

Good morning. I want to dig in a little bit into the two businesses specifically on the soda ash business. You talked about energy and raw material costs being higher. I understand the energy component. Can you give us an idea of which raw materials were most impactful for you in the third quarter and where they are in the fourth quarter and what your expectations are for the next three to six months let's say?

Yes. Dmitry, in soda ash, as you know the process, there really aren't other raw materials. There I think we're talking about other input costs, may have just casually swept them into raw material. A good example is just simple things like roof bolts. We've seen steel prices double here in the course of the last 12, 15 months. Specifically raw material price increases in the industrial chemical business has been largely in two areas, one in hydrogen prices for our hydrogen peroxide businesses and second our caustic soda prices that go into some of our Foret operations. Expectations for those is that they will remain high as we go into '06. I don't see anything that's going to alleviate the current caustic pricing strength, and hydrogen, given its raw material source, I don't see much relief there either.

Okay. All right. The second question, on the transportation and energy costs again, a lot of your energy costs are in the industrial portion of the business and the soda ash specifically. My understanding was that beyond the price increases that you've gotten at the beginning of the year that throughout the year there have been attempts made to impose energy and transportation surcharges. To the extent that margins in the business seem to be declining year-over-year despite about 15% price increase, am I to understand that these surcharges are not sticking or if they are sticking they're nowhere near close to covering your actual costs and we can expect to see some more surcharges in the quarters ahead?

Yes, Dmitry. I would have to characterize ours and the industry's success at passing through energy surcharges as mixed at this point. In some circumstances, current contracts just simply prohibit it. In other contracts, we've been a little more successful. As we enter this contract season, we are doing our utmost to provide flexibility in the contract to ensure that going forward at least we should be able to recover not just transportation cost increases but energy price increases as well, and we'll obviously be reviewing that with you in much more detail at the fourth quarter conference call. At least we'll be reviewing our success in that. To date, I don't know, Dmitry. No, I can't say it more clearly. We have not been successful in recovering energy and transportation cost increases in any of our businesses. '06 I would hope that would be a different story, but that's yet to play out.

So for '06 negotiations, it sounds like you're going not only after price increases but changing somewhat the nature of the contracts as well.

Absolutely.

Okay. Can you give us an idea, and I think you mentioned a little bit about Asia in the answer to the previous comments. Can you give us an idea of the various dynamics in the domestic market versus export market for soda ash As far as I know that Asian pricing has to be more spot than contract. You talk about volumes there being kind of flattish and pricing being down in the last couple of quarters and reversing here in the fourth quarter. To the extent that you brought on the Granger facility to basically address the growth in the export market, how does that reconcile with the flattish volumes you're seeing there currently?

Let me answer the last part of that first, Dmitry. I think I said we were seeing relatively stable or flat demand growth in the export market, but that market has been underserved. The U.S. industry has been sold out and, in fact, we have shorted the export market here for the last 18 months so that the Granger increment of capacity is simply getting us back to the share position that we, the industry, previously had despite the flat demand growth. In terms of the overall dynamics of export and domestic, the domestic demand situation is stable. It's actually up slightly this year, '05 over '04. Domestic pricing, as we had talked about in previous conference calls, is up significantly year-over-year, on average about $11 a ton. Export volumes I just talked about.

We will see as an industry an increase in export volumes year-over-year due to market share gains, and I would expect that we will see even more of an increase next year. And finally, with respect to export pricing, it is a little more volatile than domestic because it tends not to be conducted on annual contracts as extensively it is domestically, but we have seen export pricing hold stable through the year despite some pressure from the Chinese in the second and early third quarter. As I also mentioned earlier, however, we have seen the Chinese recently increase prices, which gives us some hope that at minimum we ought to be able to hold export pricing through the balance of the year and gives us some reason to believe that we may actually see some price increase, albeit nominal, in '06.

Okay. Okay. And then let me switch gears a little bit and go back to the agricultural business. You talked about in your fourth quarter guidance, generic pressures as part of the reason for a 15% or so decline in earnings. To the extent the fourth quarter is not that much U.S. driven, why is generic pricing still a contributing factor there? Are you experiencing generic pressures in Brazil as well where you had the fourth and first quarter are going to be dominated by Brazilian sales?

Dmitry, Milton. No, it's not Brazil. It’s predominantly in our specialty business in North America where we have significant sales in the fourth quarter.

Okay. Okay. And then the final question on the specialty chemical side. With your lithium business doing so well and earnings there looking so strong, you must have experienced a pretty significant decline in the volumes of the biopolymers business. Besides the pharma excipient market, was there any other market that showed any weakness?

Dmitry, no. The rest of the business was fairly strong.

And is the Pharma market, the excipient market, is it typically a lumpy business or was this an unexpected kind of a hiccup that you hope will not be repeated?

Historically it's not been lumpy, in fact it's just the opposite. It's been very consistent and predictable. Our belief is that it's an '05 phenomenon that is not going to carry through into next year.

But you are seeing it so far in the fourth quarter as well?

I haven't seen anything yet, Dmitry, and I haven't asked the business unit heads what they're seeing in the quarter so far.

All right. Thank you.

At this time, sir, there are no further questions.

Thank you, operator, and thank all of you for joining our call this morning. Despite some headwinds, I think we had another very good quarter. And when you combine that with our outlook for the fourth quarter, we expect to finish the full year of 2005 well above the good if not outstanding results we turned in last year. Our guidance for the fourth quarter is largely unchanged from what we had expected three months ago. The fundamentals of the businesses are very solid. As I've commented, demand growth with a couple of exceptions remains strong across all of our businesses. Price realization continues to improve, particularly in our industrial chemical segment, and our cash generation remains solid. There is an exception to all of this, and it relates, as I've commented on for the last 20 minutes, our input costs. We're experiencing unprecedented increases in energy and raw material prices, and I don't see any relaxation in those pressures near term. Our challenge now is to find ways to offset these, and we'll discuss with you at our fourth quarter conference call exactly what the impact of these will be and the actions that we're taking to address them. With that, let me again thank you for joining us today and your continued interest in FMC, and I expect to see many of you in the course of the next several months. Take care.

This concludes today's conference call. You may disconnect at this time.