富美實 (FMC) 2005 Q4 法說會逐字稿

Good morning and welcome to the 2005 fourth quarter earnings release conference call for FMC Corporation. [OPERATOR INSTRUCTIONS] I would now turn the conference over to Mr. Brennen Arndt. Mr. Arndt, please go ahead.

Thank you, Casey, and thank you and welcome, everyone, to FMC's fourth quarter 2005 conference call and webcast.

Bill Walter, our Chairman, President and Chief Executive Officer, will begin the call with a review of fourth quarter performance. Bill will then turn the call over to Michael Wilson, Vice President and General Manager, Industrial Chemicals, who will provide us an in-depth review of the performance and prospects for the soda ash, peroxygen and phosphates businesses that form our industrial chemicals group. Following Michael, Ken 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 2006 and we will then take your questions.

But note, 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 and 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 upon these risks and uncertainties.

During the conference call, we will refer to certain non-GAAP financial terms. On the FMC website, available at www.fmc.com, you will find three hot links. The first will provide the definition of the non-GAAP financial terms we will used and it's entitled “Glossary of Financial Terms.” Second, we have also provided a reconciliation to GAAP of non-GAAP figures that we will use on the call and third, our 2006 outlook statement, which will provide corporate operating segment and other corporate and financial item details in terms of our guidance for 2006.

It's now my pleasure to turn the call over to Bill Walter. Bill?

Thanks, Brennen, and good morning to everybody. As you saw in our earnings release, we delivered a strong fourth quarter, capping off what was a very good year for us. In 2005 we continued to meet or exceed the key strategic objectives we set for ourselves several years ago regarding earnings growth, capital structure and return on invested capital and we achieved our 2006 targets one year ahead of plan.

Let me now summarize our fourth quarter performance. Sales of $522 million were up 2% versus the fourth quarter of 2004. Earnings before restructuring and other income and charges of $1.08 per diluted share were up 23% over last year's fourth quarter.

As expected, ag products earnings of $20.2 million were down approximately 15% versus a year ago. Good performance in South America and Asia and continued global supply chain productivity gains were more than offset by the timing of sales in North America, the impact of generic bifenthrin competition and higher raw material and energy costs.

Specialty chemicals earnings of $22.9 million increased 6% versus the year-ago quarter as a result of higher volumes and selling prices in lithium. However, higher raw material and energy costs in this segment offset a portion of this improvement.

Industrial chemicals earnings, $19.7 million, increased 7% versus the year-ago quarter as higher selling prices across the group were partially offset by higher energy, raw material and transportation costs and the partial quarter absence of profits from Astaris, which we divested in early November. Michael will review the industrial chemicals segment's performance in more detail with you in a moment.

Our strong fourth quarter performance was achieved despite significant increases in energy and raw material costs. Versus the prior year, these costs were up $0.27 per share in the quarter. In addition, currency translation had an unfavorable impact of $0.03 per share in the fourth quarter of '05.

On a GAAP basis, we reported net income of $25.3 million or $0.64 per diluted share. GAAP earnings for the quarter included $1.45 per share pretax gain related to the sale of Astaris, a net $0.94 per share pretax charge related to restructuring and other income and charges and a $0.95 per share charge for the tax effects of these items and other tax adjustments. With those reconciliations, our non-GAAP earnings were $1.08 per diluted share versus $0.88 a year ago.

Moving to the operating segments, first, in ag products, sales of $168.7 million decreased 2% versus the prior year as higher sales in South America and Asia were more than offset by the timing of sales in North America and the impact of generic bifenthrin competition. Sales growth in Europe was modest, offset in part by a weaker euro.

Ag products earnings, at $20.2 million, were down 15% versus a year ago due to the timing of the sales in North America, where we experienced a shift from the fourth quarter of 2005 to the first quarter of 2006. The impact of generic bifenthrin competition and, again, higher energy and raw material costs.

Moving on to specialty chemicals, sales of $135.8 million grew 7% versus the prior year quarter. Our lithium business was the primary driver of the segment's top-line growth this quarter. Broad-based global demand growth and higher selling prices were realized across lithium's product lines. In BioPolymer, higher pharmaceutical acceptance and food ingredient sales were offset by lower sales into the pet food and industrial markets.

Specialty chemicals earnings of $22.9 million were 6% higher than a year ago, driven by the strong lithium performance, as well as improved mix in BioPolymer. However, raw material and energy costs in the segment offset a portion of this profit growth.

That's our coverage for ag products and specialty chemicals. For a discussion now on industrial, I would like to turn the call over to Michael Wilson. Michael?

Thank you, Bill. Good morning, everyone. It's a pleasure to be with you today to highlight the businesses that comprise our industrial chemicals segment, to review our fourth quarter and full-year 2005 performance and provide you with our 2006 outlook.

I'll start with a profile of our industrial chemicals business. Post the divestiture of Astaris, our 50/50 joint venture with Solutia, in November, our industrial chemicals group consists principally of three businesses -- our soda ash business, our North America peroxygens business and Foret, our wholly-owned Spanish subsidiary, which participates in peroxygens and phosphates.

While the products we produce in these businesses serve a wide range of end markets, including glass, pulp and paper, detergent, polymers and geochemical processing, the businesses share a number of common characteristics.

First, all of our industrial chemicals products are inorganic. Consequently, while energy is a significant component of the cost structure in the manufacture of these products, none of the businesses are directly linked to the petrochemical supply chain. Second, the businesses are cyclical, with GDP-driven growth and third, the businesses are relatively capital intensive, which creates barriers to both entry and exit.

We have excellent cost positions in each of these businesses, resulting largely from our backward integration in raw material and/or proprietary process technology. As a result, we hold leading positions in the markets in which we compete.

In 2005, our industrial chemicals segment's sales were comprised as follows -- 46% from soda ash and downstream derivatives; 19% from North American peroxygens, which is principally composed of hydrogen peroxide; and 35% by Foret.

From a strategic standpoint, we manage the segment's businesses to maximize earnings and cash generation, not growth. However, as in the case of the restart of our Granger soda ash facility in 2005 and in the current debottlenecking of our Delfzijl, the Netherlands, hydrogen peroxide facility, we do invest in growth when the economics are compelling and the opportunity is warranted by market conditions.

Let's look at each business in a little bit more detail, starting with the soda ash business. As noted earlier, soda ash is a cyclical business, but it's important to distinguish that its cycles are primarily supply-side driven, not demand-side driven.

About half of the demand for soda ash is for the production of glass in all forms -- architectural, flat, automotive, container and fiberglass. The effect of plastic substitution for glass in food and beverage containers in North America has resulted in essentially flat domestic demand that has moved in a narrow range around 7 million tons per year for the last 20 years. In developing regions of the world, soda ash demand tends to growth with GDP, which, in the case of Asia, can result in growth rates in the mid-to-high-single digits.

Trona ore is the key raw material in the manufacture of soda ash, of natural soda ash. We extract trona from our underground mine, the world's largest, in Green River, Wyoming. We estimate there are more than 70 years of available trona reserves in our mine at Green River.

Energy costs for the typical Wyoming soda ash producer vary considerably, depending on the relative use of natural gas versus coal. On average, energy is about 30% of the cost of sales. Our energy costs are lower since the vast majority of our energy comes from coal. Sustained high natural gas costs will move the industry toward an increased reliance on coal over time, despite the capital costs.

U.S. soda ash producers possess a significant global cost advantage as a result of mining and processing trona, consequently U.S. producers have become the world's largest soda ash exporters, shipping approximately 40% of U.S. production offshore, primarily to Asia and Latin America and predominantly through ANSAC, the American Natural Soda Ash Corporation.

ANSAC's primary competition in Asia is the exporting Chinese producers, of which there are only eight out of more than 50 Chinese producers in total. The outlook for ANSAC in Asia remains favorable due to a number of factors.

First, ANSAC is the lowest-cost supplier to Asia, ex-China. Second, Chinese domestic pricing is currently high enough that ANSAC could compete in China, if desired, and third, going forward Chinese soda ash producers face a variety of issues which will negatively impact their competitiveness, including high salt costs, increasing environmental pressures and the continued revaluation of the yuan. As a consequence of these issues, in conjunction with the sustained demand growth in China and the attractiveness of the China market for major Chinese producers, we expect that Chinese exports will only grow marginally in 2006 and beyond.

The combination of level demand in the U.S. and good export demand growth has resulted in an overall growth rate for U.S.-produced soda ash of 1% to 3% per year for the past decade, which we expect to see continue going forward.

As we begin 2006, the U.S. industry remains in a completely sold-out position. Every U.S. soda ash producer appears to be operating at full capacity. As a result, the industry remains in the midst of the most favorable pricing environment of the last decade.

We believe the favorable market dynamics are sustainable for two reasons. First, we do not foresee any significant near-term changes in the U.S. supply/demand balance.

Our Granger, Wyoming, plant represents the lowest cost and most capital-efficient capacity in the industry. The facility employs low-cost solution-mining technology and utilizes cost-effective coal as its energy source. We still hold more than 1 million tons of idle capacity at Granger. An additional 250,000 ton increment of this capacity could be brought in three to six months at a capital cost of less than $5 million. We will restart that capacity only as export demand warrants.

Second, cost pressures on all producers, particularly for energy and transportation, primarily ocean freight, continue to favor a rising price environment. I'll provide more specifics on the 2006 outlook for soda ash prices and earnings later in my discussion.

Now I'll move to our second business, North American peroxygens. Hydrogen peroxide represents 75% of this businesses sales. Approximately two-thirds of hydrogen peroxide production is consumed by the pulp and paper industry for pulp bleaching. A variety of smaller applications, including those for environmental remediation, electronics, chemical production, food and cosmetics, account for the balance of demand.

During 2005, North American demand for hydrogen peroxide grew by approximately 1% to 2% and our expectation for 2006 is for demand to grow at the same rate. Growth will be driven by the trend tower higher-brightness papers, led in North America by International Paper, and now widely followed by other producers, and non-pulp market applications, offset by the closure of some North American pulping capacity. Consequently, despite a modest 4% increase in industry capacity from debottlenecking in 2005, supply conditions are expected to remain tight, with capacity utilization in the mid 90 percentile range, with some seasonal fluctuations.

The primary raw material purchased for the production of hydrogen peroxide is hydrogen gas. We source hydrogen via over-the-fence relationships with local producers at our plants in Bayport, Texas, and Prince George, British Columbia. At our plant in Santa Clara, Mexico, we produce hydrogen via the reformation of steam. Regardless, the cost of hydrogen is linked to natural gas. Consequently, energy and energy-related costs for the typical North American producer of hydrogen peroxide are slightly in excess of 50% of the cost of sales.

The major impact of Hurricanes Rita and Katrina on the hydrogen peroxide industry, aside from lost production, was the dramatic rise in natural gas pricing. This has strengthened the momentum for higher selling prices, which have moved up steadily over the past few years, as well as necessitated a strict implementation of energy and transportation surcharges. Consequently, the North American hydrogen peroxide market will again see higher pricing in 2006.

Moving to our European hydrogen peroxide business at Foret, 2005 demand in Western Europe is estimated to have grown 4% to 5% and our expectation for 2006 is for demand to grow by close to 4%, driven by pulp and paper industry demand. Relatively tight market conditions since the end of 2003 have prompted a number of minor hydrogen peroxide capacity additions in Western Europe over the past of years. In 2005, about 4% was added to industry nameplate capacity via plant debottlenecking. In aggregate, the additions have been marginally less than industry growth over the same period of time, thus the increases have been well-sized and well-timed.

In 2006, Foret will complete the minor debottlenecking of its plant in Delfzijl, Holland, but the 10,000 metric ton capacity addition will add less than 1% to the industry nameplate capacity. With no other announced additions on the horizon, capacity utilization is expected to remain in the mid 90% range. Consequently, due to the same drivers as in North America -- tight supply coupled with a rising cost environment, hydrogen peroxide prices in Europe will move higher again in 2006.

Foret's phosphorus chemicals products are used in a wide range of applications, including detergents, feed and industrial uses. Demand growth for phosphorus chemicals, which tends to mirror GDP, improved in 2005 with the strengthening of the economy in Europe. In 2006 we anticipate growth continuing at GDP levels.

Though the demand outlook has not changed appreciably, supply-side factors, including plant closures in Europe, have led to tighter market conditions for key phosphorus chemicals. As a result, Foret's purified phosphoric acid and phosphorus salts realized appreciable gains in 2005. Pricing momentum remains positive for 2006, due to the continued of favorable market conditions and higher costs, particularly for energy.

With this background, let me now summarize our fourth quarter and full-year 2005 results. For the fourth quarter, revenue in industrial chemicals was $218.2 million, an increase of 2% from the prior year quarter, driven by higher selling prices across the group, particularly soda ash.

Segment earnings of $19.7 million increased 7% versus the year-ago quarter as higher selling prices were partially offset by higher energy, raw material and transportation costs and the partial quarter absence of profits from Astaris, which was divested in November.

For the full year 2005, revenue in industrial chemicals was $870.4 million, an increase of 7% versus the prior year. The soda ash business accounted for the majority of the increase due to significant improvements in both domestic and export soda ash selling prices. North American hydrogen peroxide and Foret also benefited from higher selling prices.

Segment earnings of $83.9 million increased 46%, driven by higher selling prices across the group and improved earnings from Astaris, offset in part by Granger soda ash plant startup costs and higher raw material, energy and transportation costs.

As expected, given the 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 improvement, as significantly higher domestic and export selling prices far exceeded higher energy, ocean freight and other inflationary cost increases.

In the soda ash business, we've been able to protect domestic margins from higher transportation costs by successful moving to FOB pricing in almost 90% of the volume for 2006 contracts. Both our North American hydrogen peroxide business and Foret also contributed to higher earnings, as higher sales, driven by price increases, more than offset the escalation in energy and raw material costs.

Prior to its divestiture in November, Astaris contributed approximately $11 million of income to FMC in 2005, reflecting improved pricing, lower costs and the full-year benefit of the restructuring completed in 2004. Astaris had no impact on 2005 FMC sales, as its results are not consolidated.

The industrial chemicals segment has now delivered two consecutive years of substantial earnings growth, up 68% and 46% in 2004 and 2005, respectively, since its cyclical low in 2003. Regarding 2006, the biggest lever on profitability in our industry chemical businesses will again be selling price.

As many of you know, the vast majority of our business tends to be on an annual contract rather than spot basis. Each business has now largely completed its contract negotiations for 2006. As in 2005, their efforts were highly successful. We expect higher prices in our consolidated operations to contribute $75 million to improved earnings for the segment in 2006.

In soda ash in North America, we secured increases essentially equivalent to the amount of increase in play at the time of settlement. Actual increases varies by customer, depending upon contract provisions, timing and the amount of increase previously accepted in 2005. On average, we expect our 2006 domestic price, including volumes protected by price formulas, to rise approximately $20 per ton.

In the export market, ANSAC announced a price increase of $15 per metric ton, effective January 1, 2006. With the majority of the South American volume subject to price restrictions due to existing multi-year contracts, the success of ANSAC's 2006 increase will depend on the response of the eight Chinese producers with whom ANSAC competes in Asia. Overall, we anticipate only a modest increase in ANSAC pricing for 2006.

In North American hydrogen peroxide, we were successful in securing both price increases and energy surcharges where contracts allowed. In aggregate, net of mix impacts and contractual restrictions, we expect prices will be up approximately 15% in 2006.

At Foret, where hydrogen peroxide price increases have been more significant in prior years, we expect to see a more modest increase. In its phosphorus chemical products, Foret has also been successful in obtaining meaningful price increases for phosphate salts and purified phosphoric acid.

All of the selling price benefits across our industrial chemicals group, however, will not fall to the bottom line. The continued rise in energy and raw material costs are expected to significantly offset the positive benefit of higher prices, increased volumes and ongoing cost reduction efforts.

We expect energy and raw material costs in the industrial chemicals segment to be approximately $40 million higher in 2006 versus 2005. Energy is expected to account for $30 million of this increase. As a result, full-year 2006 segment earnings are expected to be about 50% higher than in 2005, after excluding Astaris' $11 million contribution to 2005 earnings.

Looking forward, due to the ongoing market stability in both supply and demand, we believe our industrial chemical segment is on track for further meaningful improvement in earnings in 2007, driven once again by higher selling prices.

In summary, as I hope you can see, we remain very bullish on the prospects for further significant profit growth in industrial chemicals in the years ahead. I look forward to taking your questions during the q-and-a period and with that, I'd like to turn the call over to Kim Foster. Kim?

Thanks, Michael, and good morning, all. Three years ago, we established performance targets aimed at unlocking shareholder value and improving the strategic and financial flexibility of the corporation. We met these targets at the end of 2005, one year ahead of plan.

2005 earnings per share, before restructuring and other charges of $4.39 per share, represents a compounded annual growth rate of approximately 20% since 2002, significantly better than our 10% target. 2005's return on invested capital was 12.4%, above our 12% target. And finally, net debt at the end of 2005 was $514 million, below our $600 million target for 2006 and almost $400 million below year-end 2002.

During 2005, FMC made substantial progress in building a strong balance sheet and moving toward an optimal capital structure. To that end, we took a series of refinancing steps. In the second half of last year we executed an unsecured $850 million credit agreement, replaced a $600 million secured credit agreement and completed the redemption of $355 million senior notes due in 2009.

Upon execution of these agreements, Moody's raised all of our existing senior unsecured debt ratings to Baa3, with stable outlook. Standard & Poor's affirmed our rating of BBB-. This actions resulted in the company regaining a full investment grade credit profile.

Following our credit upgrade, we repatriated in two tranches $528 million of international cash under the American Jobs Creation Act, executed a $90 million IRB refunding and completed the repayment of $242 million of domestic term loans. All these actions were directed towards achieving our capital structure objectives of maintaining strong liquidity and continuous access to the capital markets, lowering our after-tax financing costs on a worldwide basis, matching foreign cash flows with like currency debt, extending the debt portfolio's maturity to reduce future re-funding risk and providing flexibility for future corporate initiatives.

During 2005 we reduced net debt from $708 million to $514 million. At the end of the third quarter conference call, I forecasted a net debt of $420 million at year end. The year end net debt was higher for three primary reasons. First, after completion of the refinancings, management determined that it was more economical to replace vendor financing in Brazil with debt. Secondly, the repatriation of $528 million in foreign cash under the American Jobs Creation Act, resulted in the payment of cash taxes in late December. And lastly, working capital balances at year end were higher than anticipated.

Regarding our book tax rate on earnings from continuing operations before special charges, we had been projecting a 25% tax rate in 2005. Our book tax rate is a combination of a U.S. tax rate and the generally lower tax rates from numerous foreign locations. In the fourth quarter of 2005, we had a higher percentage of our profits-- profits from several lower foreign tax jurisdictions and consequently, our book tax rate was approximately 21%, with an average for the year of slightly over 24%.

Looking ahead to 2006, we expect free cash flow of approximately $150 million. This projection does not include any asset sales. The cash flow projection for 2006 includes approximately $35 million in net interest expense. The net interest expense is based on an average interest rate on our outstanding debt of approximately 6.5% and approximately 4.5% interest income on our outstanding cash balances.

The book tax rate for 2006 is projected to be 27%. The most significant elements driving the higher 2007 rate are lower foreign profits due to the European refinancing and higher domestic profits, primarily due to ag products. The increase in the tax rate year-over-year has the effect of reducing 2006 earnings per share, before restructuring and other charges, by $0.19 per share as compared to using the 2005 book tax rate. Let me remind you, however, that from a cash tax perspective we pay minimal U.S. taxes due to our domestic net operating loss carry-forwards.

On January 1st, 2006, we will be adopting FS-- FAS 123R, which requires that we record stock option expense in our financial statements based upon a fair value methodology. Our best estimate of this expense for 2006 is $3 million, or approximately $0.06 a share.

As we have said during previous conference calls, we are considering several strategies to enhance shareholder value, however, at this point no decisions have been made and, therefore, we have not included any significant growth capital or return of cash to shareholders in our projections for 2006.

In summary, we're proud of have accomplished our goals a year ahead of plan and look forward to unlocking further shareholder value now that we have achieved the strategic and financial flexibility that was an essential component of the plan.

With that, I will now turn the call back to Bill, who will provide an outlook for 2006. Bill?

Thanks, Kim. Looking ahead, while the external business environment will likely remain challenging, we're confident of delivering another year of good performance and one that will, once again, meet our strategic objectives. Specifically, regarding our outlook for 2006, we expect earnings before restructuring and other income and charges of $5 to $5.20 per diluted share, which at the mid-point represents a 16% increase above 2005.

In ag products, full-year revenue is expected to be up slightly as the benefit of new products and labels are largely offset by a generally weaker Brazilian ag market and the continuing impact of lower North American bifenthrin selling prices. Full-year segment earnings growth of 5% to 10% reflects the higher sales and lower manufacturing costs partially offset by the impact of bifenthrin competition and higher raw material and energy costs.

In speciality chemicals, we expect low-to-mid-single-digit revenue growth, driven by improved BioPolymer pharmaceutical sales and higher selling prices in both lithium and BioPolymer. Full-year segment earnings are expected to grow mid-single digits as a result of the higher sales and continued productivity improvements.

As Michael has just said, in industrial chemicals we expect mid-teens revenue growth, driven by higher selling prices across most businesses, but, in particular, soda ash. Full-year segment earnings are expected to grow 30% to 35%, driven by higher selling prices, partially offset by higher energy and raw material costs and the absence of Astaris' earnings.

And, as a result of our favorable refinancing and debt reduction in 2005, as Kim has just said, we expect interest expense in 2006 of approximately $35 million. Let me repeat something else that Kim just reviewed with you. As a result of the adoption of FAS 123R and a higher book tax rate of 27%, the combination of these two will cost us $0.25 a share versus our 2005 results.

Moving to the outlook specifically for the first quarter, first quarter of 2006 we expect earnings before restructuring and other income and charges of $1.30 to $1.40 per diluted share.

In ag products, segment earnings are expected to be 20% to 25% higher due to the demand shifts in North America from the fourth quarter of 2005 to the first quarter of 2006 and a shift from the second quarter of 2006 into the first quarter of this year. In addition, higher pre-emergent herbicide sales in North America and further manufacturing productivity improvements will contribute to the earnings improvement. These improvements, however, will be partially offset by lower bifenthrin pricing and higher raw material costs.

In speciality chemicals, mid-single-digit first quarter segment earnings growth is expected as a result of higher selling prices in both BioPolymer and lithium.

And in industrial chemicals, we expect earnings growth of 20% to 25% in the quarter, driven by higher selling prices, partially offset by higher energy and raw material costs and the absence of Astaris' earnings.

In closing, I hope you'll agree that FMC has entered 2006 with good operating momentum, a strong balance sheet and robust cash flow. We have the strategic and financial flexibility to invest for profitable growth and we'll manage our businesses to create further value for our shareholders.

With that, I thank you for your time and attention. Now I'd be happy to take your questions. Operator?

Thank you, Mr. Walter. [OPERATOR INSTRUCTIONS] Our first question comes from Mike Judd of Greenwich Consultants.

Yes. Good morning and congratulations on a good quarter.

Thanks, Mike.

We've been hearing that the-- with the abnormally warm weather in the Midwest that there is a potentiality for greater insect pressure, perhaps, this year than in other years. And I'm just wondering if you guys have any thoughts about that, please?

Mike, again, thanks for the-- first, thanks for the comment. You've read the same articles I have. We really don't have any more insight into that at the moment than what you have.

Okay. And then secondly, on the-- the contracts -- and I may have gotten this wrong, but it sounds to me like you have made some changes there in the sense that you are able to pass on, it looks like, higher freight costs, to begin with. But there is also energy surcharges on the soda ash and hydrogen peroxide side? Could you provide a little bit more color on that, please?

Yes, Mike, this is Michael Wilson. And the pricing expectations that I gave you in soda ash does incorporate the energy surcharges that we would get in soda ash in North America for 2006. And further to that, any multi-year contracts that we entered into we have protected with the ability to pass through future energy surcharges, should they be necessary, beyond that.

Okay, does this--?

In relation to hydrogen peroxide, the price increase amount that I said, with prices up 15% year-over-year includes, in aggregate, both the increases we got as well as the surcharges that we expect.

Great. And just lastly, on the-- on the export sales of soda ash, I think you said overall you thought there'd be a slight increase. Is there any way to-- is that like 3% or is it more like 5%? Any kind of sense there?

You're asking specifically about the demand growth in the export markets or are you asking about the U.S. producers' ability to supply?

Actually, I was looking for-- Actually, I shouldn't have used a percentage. I'm looking more-- is it more like a $3 to $5 type of increase?

Price side. No, I don't quantify that and I think at this point it wouldn't be prudent to do so because we just don't know how it's going to work out until we see how the market reacts, particularly producers in China. But given the situation we know we have in Latin America and what we see in Asia, we expect that to be a very modest increase, if at all.

Thank you.

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

Yes, good morning and congratulations on a very strong year. Kim, you mentioned three factors that caused the net debt number to be higher at year end versus your prior projection -- the vendor refinancing, repatriation taxes and working capital. How would you size those-- those three contributing factors?

Hi, Kevin, this is Kim. Thanks for the congratulations, once again. The-- you have, as attached to our press release, some financial schedules and I'm going to actually refer to them. So to the extent that you don't have them, I'll just give you the numbers.

But first of all, you can look at vendor financing, year-over-year, and you can see that that contributed $40 million. It just made more sense to us to finance the Brazilian working capital through debt rather than more-expensive vendor financing. So that was $40 million.

As it relates to working capital, you can see that-- on this schedule, trade receivables year-over-year were up only 3% with sales up 5%. So we had good performance in receivables. Inventories year-over-year were actually down 2% with that 5% increase, so continued good performance. The item that we missed is trade accounts payable was down almost $40 million year-over-year. As we've looked at that, we're confident that that's mostly timing and it relates to the timing of vendor payments and is not a structural problem.

As it relates to the cash associated with the American Jobs Creation Act, that's approximately $20 million which was paid in late December.

Okay, great. That's very helpful. And then on the ag business, you referenced some sales that were deferred to the first quarter of '06 from the fourth quarter of '05. How large is that deferral and can you give us a little bit more color as to the background there, please?

Sure, Kevin, as we've talked for the last couple of years -- and I think as Milton discussed with us at the third quarter conference call -- we've seen a shift now into its third year that really represents an efficiency in the broad supply chain between ourselves, distributors and the retail system, in North America in particular, toward deliveries more closer to the planting season and that's what's happened again here in the fourth quarter of '05. Distributors held purchases until the first quarter where historically they may have purchased them in the-- in the fourth.

The aggregate amount of that is probably only about $5 to $6 million in sales, $2 to $3 million in earnings that shifted from one quarter to the next.

Okay. And then finally, on soda ash, how would you characterize the likelihood that you would restart additional capacity from Granger in 2006?

I'm anxious to hear Michael's answer to your question.

Kevin, we haven't taken that decision yet and, again, much like the answer to your other question, it really depends upon how the market reacts. We need to see what's going to happen in the export market and with supply from other regions to make that decision. We're intent not to start that capacity up until we know that it's needed.

I'll try it a slightly different way, if you don't mind. Does your guidance of $5 to $5.20 for 2006 assume the status quo for Granger?

Yes.

Yes, it does.

Okay. Thanks very much, guys.

Your next question comes from [Frank Mish] with BB&T Capital Markets.

Good morning. Looking forward to see you guys in a couple weeks. Michael, a couple questions, if you could, on the-- on the soda ash pricing. Is it your sense that regardless of what we see happening in the caustic market you've pretty much locked in what you're going to-- what you're going to receive in 2006? And then secondly, looking at the peroxide business, you talked about your pricing being up 15% in '06. I'm wondering if you can give me a sense as to how, let's say, the delta between hydrogen costs going up in '05 and hydrogen peroxide costs going up in '05, how that delta is going to trend in '06? Is that 15% more than enough to offset what you're seeing in terms of higher raws?

Yes, it is. So we will see a margin improvement as a result of the increases that we were able to get as a combination of both price and energy surcharge.

Care to-- care to offer how big in absolute terms that increase may be?

I'm not going to comment on that. And your first question regarding soda ash again?

Yes. You've talked about having pricing kind of locked in on an annual basis and you gave some-- you gave some outlook there. I'm wondering to what extent you may or may not be concerned, if the caustic market pulls in a little bit, that that may have a deleterious effect on 2006 soda ash market.

Most of our pricing is on a contract basis. We believe the pricing is pretty well set. And if think about the caustic substitution for soda ash, I mean, caustic pricing's probably got to fall below $160 a ton and I think current spot caustic pricing's still above $350. So we're a long way from that going the other way. Right now the market pressure is to substitute soda ash for caustic, but it's just not available to do that and I think that's part of what's keeping the caustic price high.

Okay, terrific. And then lastly, Bill, can you talk a little bit, big picture, about the M&A environment that you're seeing out there right now? Is 2006 likely to be year of great action in the M&A markets, in your opinion?

Frank, I don't have any real insight into what my peers in the industry might be doing in that arena. Multiples are bit frothy, but there's a lot of pressure on a lot of companies to do something different than what they're currently doing. So having said all that, I really don't know what will happen in '06.

Okay, great. Well, if multiples are a bit frothy, it means it's a bit more of a seller's market than a buyer's market?

By comparison to where they were two to three years ago.

All right. Terrific. Thank you.

Your next question comes from Bill Young of Credit Suisse.

Good morning. Good quarter there, Bill. A couple questions. On the segment breakdown of sales and earnings there was a pretty big jump in other income. I think it went from $10 million to $14 million and, of course, the fourth quarter, by far, was the largest contributor as it was a year ago. Maybe you can give us a little bit of explanation on that?

Hi, Bill, this is Kim Foster. There's a-- there's a couple of components to that and we have disclosed and talked about these before, but if you also think back to my earlier comments about the inventory reduction that we've done, we've been focusing on reducing, well, working capital, but in particular the component of inventory over the last couple of years and have benefited from a reduction of our domestic inventories as a part of that plan, which contributed to a LIFO income increment, both in 2004 and in 2005. And we reduced inventories even more than we had planned and I talked about that earlier and so that LIFO income contributed, in large part, to what that increase was.

So how about '06? What should we be factoring in? Anything at all there or what would you suggest, Kim?

Down in '06 on a composite basis, as you've seen in our guidance, we have guided an OID number for 2006 of approximately $2 million of expense. That does, however, include a small component of additional benefit from inventory reduction. But that's how I would guide OID for 2006.

Okay, great. Now I was looking at some of the-- some of the Commerce data. I don't know how much faith you put in that, but through November it looked soda ash exports were down 4% year-on-year. Do you subscribe to that? And maybe you could give us an idea of what's going on there, Mike, in the export market?

Yes, Bill, the real issues there were supply issues and there were really two things going on. I mean, first of all, with just the tight capacity conditions and the ability to have product available for the export market and we also had some disruptions in the fourth quarter on the transportation side. December shipments did pick up, so you'll probably see that number narrow in the full-year numbers, but it was really supply constrained.

Okay. Okay, that's great. Now, Mike, did you say that Granger was your lowest-cost operation?

No, what I said was-- what I said was that Granger was the lowest-cost increment of capacity.

Oh, increment. Okay. Okay, good. I just wanted to make that clear.

Now my colleague, [Nils Wallen] here, he's got a question for you.

Hi, Mike, this is Nils. I have a question about the-- also from the Census--

I'm sorry. Can you speak up? We can't hear you.

Oh, sorry. Hi, this is Nils. This is-- I'm Bill Young's colleague. A question, also, about the Census Commerce data. With Granger coming on, I would have expected to see some additional production, but according to the Commerce Department from January through November production is exactly the same as it was in '04. Is there something that they're not putting in or is there a different number we should be looking at?

Again, remember that we only restarted a small increment of Granger, 250,000 tons on an annual basis that really didn't restart until mid-year, second half of the year. So it's probably getting lost in there. I'm not sure. I haven't looked at the Commerce data and reconciled that with our numbers, so we'd have to take a look at that to see what might be going on.

Okay. I've got another question. You get this every quarter, I'm afraid. I'm not sure why is it taking so long for the board to make a decision about returning cash to shareholders? I mean, you've made so much progress on your balance sheet and it was pretty clear in the third quarter, very, very clear and I just can't understand what's taking so long and do you have-- do you have any idea when the thing could be-- could be resolved?

Bill, first of all, I'm going to take exception to your characterization that it's taken so long. So, period, paragraph.

Second, our board and I would hope you would expect this to be true of our board, is a very deliberate one and it's not going to rush to judgment or decision with respect to major strategic actions. Period, paragraph.

Finally, the next board meeting here is in two weeks from tomorrow and the subject will be back on the agenda then.

Okay. Okay, that's great. I appreciate it. I'll get back in the queue.

Your next question comes from Dmitry Silversteyn of Longbow Research.

Good morning, guys. A few questions. First of all, on the industrial chemical side, both for the fourth quarter and for all of 2005, I'm having a hard time reconciling the revenue growth rate and the price increases and modest volume growth that you experienced in peroxygens and in the soda ash business.

So let's start with the fourth quarter. The 2% growth in revenues, what were the offsetting factors that brought it down from 10% in the first half of the year and 6% in the third quarter, especially given the 7% addition coming from the Granger restart?

Dmitry, to understand your question, you're talking about from fourth quarter of '04 to fourth quarter of '05, the 2%?

Right. Right and then for all of '05 having a 7% growth there where you've gotten mid-teens price increase, realized price increase, in soda ash and probably close to 10% price increase in peroxide. So are volumes being drained away somewhere or is this all FX in the fourth quarter or kind of what's going on there?

Let me jump in here, Dmitry, as Michael thinks about the fourth quarter question, and address the full-year question. Obviously, as you've said and we said, we got significant price increases across most of the business in industrial chemical in '05. However, then you've got to turn to the volume side. We have been and continue to be essentially sold out in hydrogen peroxide, so year-over-year we saw virtually no volume increases.

In soda ash, we actually had a volume decrease, despite the additional incremental capacity from Granger. In 2004 the industry was not completely sold out and we were successful in buying a couple hundred thousand tons of supply from a competitor and in '04 we resold that. We were unable to do that in '05. While we haven't added it all up, I think it's probably safe to say that volumes across the segment were down, year-over-year.

And now I'm hoping Michael's got an answer to your question about the fourth quarter.

Okay, that's great, Bill, on the year. That really helps.

But I think it's the same answer for the fourth quarter. I mean, I think it probably is volume driven and I can't sit here and reconcile it for you right now. We can go back and take a look at that, but I think that, directionally, is right.

Okay.

Certainly nothing happening on the price side.

Okay. And then secondly, on-- looking out to 2006, you talked about export pricing being up modestly and depending on the response from the Chinese. My understanding is that the freight-- or that the ocean freight rates are declining a little bit and to the extent that freight rates are part of your total price, would it be fair to say that even with a modest or no price increase at the-- in the Asian port that the effect-- in effect, the prices will go up, excluding freight, and, therefore, your margins should improve, provided that freight is just a pass-through?

I really don't want to predict that. I mean, you're right in that ocean freight rates have come down off their peak, but, as you may recall from earlier discussion, ANSAC was never really exposed to those peak ocean freight prices, because they had long-term prices. As those contracts roll off, the real question now is what prices are they securing relative to the price that they have previously and I can't tell you the answer for that at this time.

Can you give us an idea of how quickly they're rolling off? In other words, is it, like, some percentage a year or is it all going to come off as one?

They are laddered, but I'd have to come back with that information on the specifics, Dmitry.

Okay, fair enough. And then switching to ag, obviously your guidance for the year for 2006 and your performance in the fourth quarter and your guidance for the first quarter is significantly better than some of the worst-case scenarios we've heard out there. Brazil you talked about being a little bit-- actually pretty strong in the fourth quarter, maybe a little bit weaker in the first quarter. Can you give us an idea of why your performance in Brazil seems to be better than some of the other crop protection and ag players serving the region? Is there anything specific to what you're doing or the markets that you're in?

Yes, Dmitry, I think there are a number of things that-- that explain our consistent outperformance of the market in Brazil. One is that we do have market access. We do have distribution access in Brazil where a number of the other companies, including some of the majors, don't have it to the scale that we do.

Second, we've got a product focus which is, on average, better than the industry. We're not a-- we're not a fungicide player, as you know--

Right.

--and the big runup in '04 and the disastrous performance by some ag companies in '05 was directly related to fungicide oversupply in '04 and buy-back in '05.

And then finally, there's a focus on crops that positions us differently than the average ag company down there. We're not big in soybeans. We're not big in corn. It's cotton, sugar cane, tobacco, sunflower, fruits and vegetables and those end-use markets, those crops, have generally held up better than the major row crops.

Okay, excellent. And then final question on ag, you talked about the push-out of sales from-- well, from the fourth quarter to the first quarter, but also you expect the first quarter to see some accelerated sales from the second quarter. You gave us an idea of what the magnitude was of the revenue and profit shift from the fourth to the first. Is it a similar magnitude from the second to the first?

It is, Dmitry.

Okay. All right. Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Philip Gaucher, George Weiss.

Hey, guys, congratulations on a great quarter and what looks like some great guidance. All of my questions have been answered at this time. Thanks.

Your next question comes from Bob Goldberg of Scopus Asset Management.

Good morning. I apologize if I missed this earlier, but did you comment at all about pest pressure in Brazil. I know you had very strong pest pressure the last few years down south and I think there was a question earlier about North American pressure, but is it too early to tell how this season is shaping up down in Brazil in terms of pest pressure?

Bob, so far it's been-- it's been light to moderate. Certainly less intense that it has been in the previous two years.

Then I imagine, obviously, that that's factored into your guidance?

It has been.

And a question for-- for Kim. I think your-- Kim, your net debt to total cap is now about 35%. Can you just remind us where you'd like that range to be? Are we there? Do we need to go down a little bit further if we're not going to, for whatever reason, buy back stock or return cash to the shareholders in any other way? So what are some uses of cash that you would be looking at in 2006?

Hi, Bob. This is Kim. You essentially asked two questions. On the first question, we do believe, and I mentioned this in my remarks, that we are very close to what we would think would be an optimal capital structure, both the debt to total cap that you referred to, but also the placement of our debt as it relates to in the different jurisdictions we are in the world. So we are pretty close to what we would argue which would be optimal, which is somewhere around a BBB, solid BBB credit rating profile.

As to future uses of capital, I'd like to just say what I said in the script and reiterate what Bill has said, is we continue to look at opportunities, both growth capital, as well as options to return cash to shareholders. And this is-- from that perspective, I understand your question and we'll be getting back to you as soon as we have something to say on that.

Okay and just one followup on your free cash flow guidance of $150 million. What does that assume for cash taxes for 2006? And also what does assume for any recovery of the working capital build in the fourth quarter? Does that also reflect the fact that you did make some tax payments in December rather than in first quarter? Is that all reflected in that guidance?

It's all reflected in the guidance and cash taxes would be about $20 to $25 million and we will get a portion of that working capital build that I referred to back in 2006.

So are you assuming that working capital is a source of cash in 2006 or what are you assuming?

A modest source.

Thank you very much, Kim.

Your next question comes from Bill Young, Credit Suisse.

Hi, forgive me for not knowing this precisely, but where-- where would you expect to cross over on bifenthrin as far as, well, it went generic last year and the negative comparisons are still in place, when do you think that would basically come to an end?

Bill, I think as we've said for the last four quarters, we expect that to end about mid-year.

Okay, thanks, Bill.

Your next question comes from Herbert Hardt of Monness.

Good morning. I have two questions. One is [inaudible]

Herb, can you speak up? We can't hear you?

Is there anything in your bank line that precludes a share buyback? And the second question is, [inaudible] into an acquisition [inaudible], which acquisition would it be?

Herb, I'm sorry. I don't know if you're on a cell phone or what, but you're breaking up. We got the first question, but not the second.

Okay. Where would you place funds if you were going to increase [inaudible]?

Okay. I think I understand the question. Let me answer the first one. The answer is no, there are no covenants or restrictions in any of our credit agreements that would prohibit a stock repurchase, nor a dividend.

Second, what segments would we invest in? I think as we have said for the last couple of years, we would like to grow our specialty chemical group and have looked at and continue to look at acquisition opportunities and are currently funding internal developments. And second, we'd be willing to selectively invest to strengthen certain positions in certain geographies with certain products in our ag business.

Thank you.

Yep.

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

Yes, thanks. I have a few followups. I think with regard to the divestiture of Astaris you had previously indicated cash proceeds would be about $100 million. Yet on the cash flow statement I see a number of $69.5 as distributions. Are there some accounting angles or timing issues that would explain the differential there? Or perhaps you could help me reconcile that?

Kevin, this is Kim. That's a very insightful question. Yes, the-- it's an accounting issue is that the gain that's portrayed in that part of the cash flow statement is the gain on the investment. As a part-- as a part of the transaction we had some-- some receivable items due from them, which were also paid off. And so the total proceeds, as you mentioned, were $100 million, but as to how that shows up on the cash flow statement, only the return of the investment amount shows up on the line you referred to.

I understand. Thanks for that clarification. Then what were your NOLs at year end, Kim?

Kevin, this is Kim. I'm sorry, I don't have that number on the top of my-- on the top of my head.

Okay. But they're large enough such that you would not expect to pay cash taxes in the U.S. in '06?

Yes, Kevin. We don't actually expend-- expect to pay cash taxes in the U.S. for quite a number of years.

Okay, great. And then, another one on bifenthrin. Bill, I know you commented already. I'm trying to sort of gauge the magnitude of the pricing pressure. I think in the past you've said that as the product rolls off patent history would suggest a price decline of 25% to 50%. Is there a way to gauge whether we're closer to 25% or 50% yet at this stage or how that's tracking relative to your prior expectations?

Yes, Kevin, we don't get that granular to get you to a direct answer to the question. Let me suffice it to say that, one, what we have experienced to date and have incorporated into our outlook is consistent with what we had-- had expected to happen. Second that probably-- well, not probably, at least two-thirds of the expected total impact of bifenthrin generic competition is already in our '05 results.

Okay. That's helpful. Thanks very much.

Your next question comes from Jay Abramson with CRM.

Good afternoon. I just wanted to get some further clarification on the free cash flow. So if you're going to have net income in '06 of roughly $200 million, how do we get from the $200 million down to $150 free cash flow if working capital is also a source?

Jay, this is Kim. There's a number of components that clearly get to the free cash flow, some of which, and the more significant of which, we outlined on our outlook statement. For example, we have approximately $50 million in legacy environmental spending, which is-- which is outlined on the outlook statement for 2006. And, of course, we have capital expenditures of approximately $115 million.

$115? That's a little bit of a step up. Are there any particular projects that weren't there last year?

There is a bit of a step up. One of the things that we're looking at and this will be something we'll continue to look at, as energy prices stay at the levels they are, both oil and natural gas prices, we're looking at any opportunities to invest capital which will have quick payoffs to address these higher energy situations.

And on the $50 million of legacy environmental, is that higher than what you thought it would have been six or nine months ago?

Jay, that's also a good question, is that this year, in 2005, that legacy environmental spending will be approximately $30 million. The step up year-over-year has to do with a settlement we made with the EPA having to do with some environmental sites in New Jersey. We thought that spending was going to happen in 2005. We guided it to happen in 2005, but it delayed into 2006 and that's a one-time payment of approximately $16 million.

And as you look at '07 and beyond, are going to go down to a new sustainably lower level of environmental spending?

Jay, this is Kim. Yes, somewhere around $30 to $35 million.

In perpetuity, then?

Yes. Let me-- let me, Jay, add a postscript to that. The $30 to $35 Kim just gave you included-- or includes what we expect to have on an ongoing basis, but for a few years yet, in Pocatello. Excluding Pocatello, we haven't changed our long-term guidance on legacy liability spending.

Okay. Thanks.

Your next question comes from Les Ravitz with BKF.

You just answered the question with the previous one. Thank you.

Your next question comes from Richard O'Reilly with Standard & Poor's.

Good afternoon, gentlemen. I guess I'm going to ask Mike to go over his soda ash price comments, because I guess I'm a little confused why it's only a $20 a ton increase for '06. I guess I would have been thinking it was going to be a higher number than that. Can you go over that again?

Well, the increase that we are expecting is the $20 per ton. I assume your question is based on the fact of all the announcements that have been out there over the course of '04 and '05--

Correct.

--that totaled $60 a ton. Part of what you have to keep in mind is that portions of increases were taken in '05 by some customers, more so than others, and it really-- it really depends by customer and varies to a great degree. If you add up what we said for '05 and now '06 you're getting a total price movement, I think, of around $33 a ton out of the $60. So that's where we've come out based upon negotiations in the market place.

Okay. Okay. $33 out of the $45 or $60 that have been announced you've realized. Okay, fine. Okay. I think that helps. Thank you.

Ladies and gentlemen, we have reached the allotted time for questions and thank you for participating in today's conference. You may disconnect at this time.

Operator, I do have a comment. First of all, let me thank everybody for joining us again today. A couple messages that I want to leave with you. One, all of our businesses are healthy and growing. Our 2005 performance was strong, as you've heard. Our outlook for 2006 is even stronger and we anticipate that the momentum we've had over the last couple of years is going to continue to-- is going to carry us to even higher levels in 2007 and beyond. Our cash flow generation remains strong, another $150 million in 2006 and, as Kim just said, our balance sheet is in good order and our capital structure is near optimal.

Despite all of that, we continue to trade at the low end of peer multiples. I think if you put that all back together again, the result should be and an expectation I have is for a significant increase in our share price going forward from here. And, like you, as a significant shareholder in FMC, I look forward to the ride. Thanks, again.

This does conclude today's conference. You may disconnect at this time.