富美實 (FMC) 2006 Q2 法說會逐字稿

Good morning, and welcome to the 2006 second quarter earnings release conference call for FMC Corporation. [OPERATOR INSTRUCTIONS] Thank you. I will now turn the conference over to Mr.Brennen Arndt. Mr. Arndt, you may begin.

Thank you and welcome everyone, to FMC second quarter 2006 conference call and webcast. Bill Walter, our Chairman, President, and Chief Executive Officer will begin the call with a review of our second quarter performance; Bill will then turn the call over to Ted Butz, Vice President and General Manager of Specialty Chemicals who will discuss the group's performance and its prospects for continued growth. Following Ted, Kim Foster, Senior Vice President and CFO will report on our financial position; Bill Walter will then complete the call with a discussion of our outlook for 2006 and we'll then take your questions.

A reminder, 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 2005 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 our FMC website, available at fmc.com. You will find the definition of these terms under the heading entitled glossary of financial terms. Also on our website, we provided a reconciliation to GAAP of the non-GAAP figures that we will use on the call today, as well as have provided our 2006 outlook statement. My pleasure now to turn the call over to Bill Walter. Bill?

Thanks, Brennen, good morning, everyone. As you saw in our press release, we had a good second quarter. Earnings per share were at the high end of the range issued in our outlook at our last conference call. Had products met our earnings expectations through improved margins, specialty chemicals again delivered -- higher volumes and higher selling prices and industrial chemicals continued to realize significant pricing leverage, particularly in soda ash.

Let me briefly summarize then the specifics of our second quarter performance. Sales of $592 million were up 5% versus the second quarter of 2005. Earnings before restructuring and other income and charges of $1.47 per diluted share were up 9% over last year's second quarter of $1.35 a share. On a GAAP basis, we reported net income of 46.3 million or -- $1.16 per diluted share. GAAP earnings for the quarter included a net after-tax charge of $0.31 per share related to discontinued operations and restructuring and other incoming charges. With that reconciliation, our non-GAAP earnings were $1.47 per share. Again versus $1.35 in last year's second quarter.

Our second quarter performance was achieved despite the impact of higher energy and raw material costs across the Corporation versus the prior year higher companywide energy and raw material costs unfavorably impacted earnings by $0.27 per share in the quarter. In addition, currency translation had an unfavorable impact of $0.02 per share versus the year-ago quarter.

In my view, our second quarter performance clearly reflects the benefit we derive from the Company's end market diversity and relative insensitivity to GDP cycles. Certainly we're not immune to the impacts of rising energy and raw material costs, slowing economic growth or geopolitical volatility and its impact on the price of oil. Our business portfolio, however, both in the quarter and over the last few years, has demonstrated in its performance qualities that I believe differentiate FMC and make the Company an attractive investment in an environment of increased uncertainty and slowing economic growth. Specifically, all of our businesses hold leading market positions.

Relative to others in our sector, our revenue stream is less sensitive to GDP cycles as a result of the diversity of our end markets and customer base. We benefit from a diversified and integrated cost structure. And relative to other chemical companies, we have limited dependence on petrochemical feedstocks. And finally, we mitigate our exposure to the volatility of energy costs by hedging 80% or our planned purchases of natural gas on a rolling 12-month basis.

Let me now take a look at the performance of our individual businesses in the second quarter. Moving first to Ag products. Agricultural products revenue of 184 million was 6% lower than the 196 million achieved last year. North American sales declined as a result of the previously reported shift of product sales into the first quarter and the continued impact of generic competition. Due to the timing of certain sales in eastern Europe, overall European revenue was also low. Sales in Asia continued to show good growth, particularly in China, Australia, and Korea. And finally, Latin American sales rose modestly.

Ag products earnings of 44.5 million were essentially level to the year-ago -- to a year ago. Margin expansion was achieved through improved product mix and continued supply chain productivity improvements which together more than offset the revenue decline and a higher raw material costs. In our industrial chemical segment, revenue of 252 million increased 14% versus a year ago, as sales gains were achieved across soda ash, peroxygens, and Foret. Higher selling prices for soda ash and hydrogen peroxide were the primary drivers. This revenue increase was achieved despite the impact of unfavorable currency translation primarily the euro our European operations. Segment earnings of 24.9 million increased 2% versus the year-ago quarter as the revenue gains were mitigated by higher energy costs, particularly in Spain, higher raw material costs and the absence of profits from Astaris, which as you remember was divested in November of last year.

And finally, corporate items. Corporate expense of 11.2 million was essentially level to a year ago. Interest expense net was $9.2 million, down from 17 million in the prior year period due to lower interest rates and debt levels. On June 30, 2006, gross consolidated debt was 680.4 million and debt net of cash was 476.6 million. For the quarter, depreciation, amortization was $33.5 million, and capital expenditures were 28.8 million. That's it for Ag products and industrial products, industrial chemicals and corporate. And for a discussion on specialty chemicals, I'll now turn the call over to Ted Butz.

Thank you, Bill. And good morning. Pleased to be with you to report on the performance of specially chemicals group and its prospects for continued profitable growth. I'll begin with a review of the second quarter. We had a good quarter. Revenue of 156.6 million increased 5% over the prior year's quarter while earnings increased 12%. Lithium and biopolymer pharmaceutical business delivered strong performance during the quarter. Lithium's performance was the result of higher pricing in our upstream primary business due to tight industry supply/demand, coupled with continued volume growth in our downstream specialty business.

Biopolymer results were led by good performance in pharmaceutical excipients offset in part by weaker than expected results in our food ingredients business. Pharmaceutical excipients showed broad growth across several product lines, driven primarily by growth in generic pharmaceuticals, both in the U.S. and emerging markets. The food business was impacted in the quarter by higher energy and seaweed costs, a low order pattern for pet food carrageenan, and an inventory reduction program at one of our larger customers. Both the pet food and the inventory reduction issues are now behind us and we have seen normal order patterns return.

We expect seaweed and energy costs to remain slightly higher in the second half than the prior year. We have raised prices and are driving various productivity initiatives to mitigate these impacts. Year-to-date performance for the group is ahead of last year with earnings up 11% on 5% growth and revenues. For the full year, we expect revenues to increase approximately 5% over 2005 with earnings growth of approximately 10%. As has been typical of the segment, second half results are expected to be lower than those in the first half. Lower lithium results in the second half due to timing of planned maintenance shutdowns and order pattern changes in the synthesis market will only partially be offset by continued growth in biopolymer.

Let me now turn to specific opportunities we are seeing in the group. Starting with lithium, the division is a global supplier of value added lithium chemistry. Its revenues approximately 185 million, we're the second largest supplier in this $500 million market. Overall growth of the industry is around 4 to 5% per year, led by the energy storage and pharmaceutical synthesis markets. Energy storage market is growing between 8 to 10% per year, while the synthesis market is growing between 5% and 7%. The remainder of the business, which includes polymers and various other industrial applications, historically has grown at rates similar to GDP. FMC's strength in this business is in downstream specialty applications where we serve higher value end uses, and where we have technical capabilities that are unmatched in the industry. These markets, due to lithium continues to exhibit attractive growth driven by polymer and synthesis applications.

Emerging market growth is increasingly important to global demand and we increased our footprint in the region with additional resources and investment. In the upstream or primary markets we have benefited from a tight industry capacity which has led to improved pricing. Growth in energy storage applications continues to drive demand in this market. We believe that capacity utilization will remain high through at least 2007, and, therefore, expect the current favorable pricing environment to continue. Our focus in primaries has been to raise prices, drive productivity improvements and selectively invest in small debottlenecking expansions to improve profitability. In tandem with the growth of our traditional markets, we are investing in several technologies that have an interesting longer-term potential for the division. In the energy storage area, our proprietary stabilized lithium metal powder technologies show promise in new battery applications. In the pharmaceutical market, we continue to work closely with customers to develop new synthesis applications.

Finally, we are encouraged by the emerging potential of several new technologies that focus on reducing alkali, silica reactivity in concrete. A critical problem that can reduce the effective life of high-use roads and airport runways. The outlook for lithium remains healthy. We expect the full year to remain well ahead of last year. However, as I mentioned, second half results will be lower than the first half due to customer campaign timing in our synthesis business and annual maintenance shutdowns. Longer term we expect earnings to continue to grow albeit at a more moderate rate than we have seen this year.

Let me now turn to our largest division in the group. Biopolymer has revenues exceeding $400 million. The global leader in microcrystalline cellulose, carrageenan and sodium alginates. Biopolymer sells its products to two market oriented organizations for food ingredients and pharmaceutical excipients. Each end market accounts for roughly 45% of the division revenue with personal care and minor industrial applications accounting for the remainder. We hold leading positions in both markets and believe that we have significantly better margins than the industry as a whole. In the food ingredient business, we are a key supplier of value-added texture ingredients. This is a $4.5 billion market growing approximately 3 to 4% a year. Health and convenience trends is a major driver of growth in food ingredients. Our business is leading positions in all three of our product categories.

In addition, we have excellent global capabilities in sales and technology that allow us to serve the ingredient needs of major multinational, as well as smaller regional customers throughout the world. Over the last few years, many food processors have been impacted by changing dietary trends and significant price pressure from value-based retailers. It's been particularly significant in the developed markets of North America, Europe, and Japan. As a result, there's been limited growth in these markets with significant amounts of restructuring and cost focus of many customers. Our business has not been immune from these impacts.

More recently, however, several of these leading customers are seeing improvements and feeling more bullish on their growth prospects. If this plays out, we should see a favorable impact on our volume growth over the coming years. In the meantime we remain excited about potential emerging markets -- the potential in emerging markets where our growth continues to be attractive. We are increasing our presence in China and several other markets to take advantage of these favorable trends.

In the pharmaceutical excipients business, we are a leader in supplying critical formulation chemistry to the world's leading ethical and generic pharmaceutical company. Our products primarily focus on oral dose form applications which account for 60 to 70% of the total market. FMC's Avicel brand is a gold standard in the industry. Avicel is used for tablet binding where we hold close to half the world market for applications using microcrystalline cellulose. We also have significant positions in other excipients, including disintegrants, coatings, alginates, and colloidal cellulose which are marketed to many of the same customers globally.

Our primary focus is on the prescription and OTC markets, our products sell at a premium to others in the market due to our reputation for outstanding quality, service, and reliability. We are well positioned to serve key pharmaceutical innovators and the leading generic players throughout the world. Growth in this $3 billion market for excipients typically follows growth in overall prescriptions and to a lesser extent the growth in nutritional vitamins. Over the last 10 years, this growth rate has averaged 4 to 6% per year driven by new product launches and the increased use of drugs to treat diseases that previously required surgery and extended hospital stays.

In recent years, the growth rate has declined as fewer new drug therapies were launched and several key drug categories were negatively impacted by product recalls or significantly reduced new prescription activity. The industry experienced very low growth in 2004 and while 2005 showed some improvement, growth was still below historical levels. This year, we are seeing improved growth over prior years driven by stronger Avicel demand with generic companies in the U.S. and emerging markets. New product launches at several customers have favorably impacted several other products in our portfolio and longer term we expect growth to return to historical levels.

Turning to costs, biopolymer has seen rising input costs over the last several years driven primarily by higher raw material and energy prices. Raw material prices seem to have stabilized, but like the rest of FMC, we expect higher year-over-year energy costs. To offset these costs, we are driving productivity initiatives to reduce our energy dependence and improve our operating costs in both our plants and supply chain. Moreover, we have successfully raised pricing in several product lines.

We continue to make significant investments in new technologies that we believe have attractive longer-term potential. Specifically, we are investing resource in several promising healthcare initiatives. Because of the nature of these opportunities, we've also created a separate focused organization to drive commercialization. Our healthcare ventures organization focuses on developing proprietary technologies that are marketed to the pharmaceutical and medical device industries. We have developed several novel drug capsule technologies and a unique dose form technology called NRobe. These technologies are targeted at faster growing nutritional and pharmaceutical applications.

In the medical device and therapeutic area, our NovaMatrix line of advanced biomaterials offer innovative solutions for this rapidly growing market. As an emerging business, healthcare ventures is not yet profitable given the requisite technology and commercial development spend. Revenue growth through June is up 40% over last year. And we expect 2010 revenues to exceed $40 million. We also continue to evaluate opportunities to add to the biopolymer franchise through acquisitions. In our view, acquisition multiples for recent deals have been unattractively high resulting in noncompelling economics. We are hopeful that acquisition multiples will return to rational levels over the next couple years. We will remain patient and disciplined in our actions to profitably grow this business.

In summary, specialty chemicals has strong market franchises in each of our businesses. We have attractive opportunities in both emerging markets and through the commercialization of new technologies. TO supplement this growth, we will continue to look for bolt-on acquisitions to expand into. As I mentioned at the start of my comments, specialty chemical group is on track to have a strong 2006 with earnings growth of approximately 10%. Over the longer term, we expect revenue growth in the mid single digits with slightly higher earnings growth. Thank you for your interest and I'll be happy to answer any questions at the end of the conference call. Let me now turn the call over to Kim Foster.

Thanks, Ted, and good morning, all. Throughout this year, we have forecasted a free cash flow of approximately 150 million for 2006. Despite a number of significant events, during the past 6 months, we still expect to deliver $150 million of of free cash flow for the year. Regarding this significant events during the second quarter, we had two offsetting impacts on our 2006 free cash flow guidance.

First, we completed the sale of 23-acres of land located in San Jose, California, to the City of San Jose and received payment of $25.3 million. Second, we anticipate spending $25 million before the end of 2006 to settle a class-action suit involving microcrystalline cellulose. In addition to the aforementioned, two additional events occurred in the first half of 2006 which are not expected to impact our 2006 free cash flow.

In April of this year, the European Commission imposed a fine on us regarding alleged violations in competition law in the hydrogen peroxide business in Europe. We have appealed this ruling and do not expect the appeal process to conclude in 2006, which would defer any settlement, if any, until the end of next year. Then, in May of this year, we entered into an agreement with the Princeton Healthcare System to sell the FMC research center facility in Princeton, New Jersey, closing is not expected until 2007.

Free cash flow is the cash generated by the Company before accounting for cash returned to shareholders. In February of this year, we announced the initiation of a share repurchase program, as well as the reinitiation of a quarterly dividend. Dividends paid to Shareholders of record during the second quarter were approximately 7 million. Regarding our share repurchase program during the second quarter we repurchased approximately 315,000 shares at a total cost of $20 million. Under the $150 million share repurchase plan authorized by our Board in February, shares my be repurchased through open market or privately negotiated transactions at the discretion of management based upon its evaluation of market conditions and other factors. Although the repurchase program does not include a specific timetable or price targets, and may be suspended at any time, we expect that the program will be accomplished over the next two years. We will not provide any more specific guidance on our plan and have not included future repurchase amounts in our earnings per share projection for 2006.

In summary, despite several significant events during the first half of 2006, we are reaffirming our free cash flow guidance of 150 million for the year. We believe that the end market diversity of our businesses, relative insensitivity to GDP cycles and strong focus on cash flow management enable us to sustain predictability of cash flow in the face of unpredictable global markets. With that, I will now turn the call back to you, Bill.

Thanks, Kim. Looking ahead, we're confident of delivering another year of strong performance and one that will again meet our strategic objectives for earnings growth and return on capital. Specifically, regarding our outlook for 2006, based on our current outlook for each of our businesses, we are reaffirming our full year 2006 outlook for earnings before restructuring and other incoming charges of $5.35 to $5.55 per diluted share. Through the balance of the year, we expect to realize the ongoing benefits of higher selling prices and industrial chemicals, lower interest expense, and continued profitable growth in specialty chemicals. However, higher energy and raw material costs and unfavorable currency translation are expected to persist. In Ag products, full-year revenue is expected to be up slightly as a result of continued label expansions, new product introductions and the benefit of a shift of sales from the fourth quarter of 2005 partially offset by the impact of lower bifenthrin selling prices.

Full year segment earnings -- full-year segment earnings growth in Ag in the mid to high teens is expected reflecting a favorable mix and further supply chain productivity improvements, partially offset by lower bifenthrin pricing and higher raw material costs. Our outlook for Ag assumes normal pest pressures in North America in the third quarter and increases in sugar cane and cotton planted acres in Brazil in the fourth.

As Ted just covered, in specialty chemicals we expect full-year revenue growth of approximately 5% driven by improved volumes and higher selling prices in lithium and biopolymer offset somewhat by unfavorable currency translation. Full-year earnings growth 10% is expected driven by the strong commercial performance in lithium and biopolymer offset in part by higher raw material and energy costs. Industrial chemicals we expect full-year revenue growth in the midteens driven by higher selling prices across most businesses, but in particular in soda ash.

Full-year segment earnings growth of 30 to 35% is expected driven by the higher selling prices partially offset by higher energy costs, particularly in Foret, higher raw material costs and the absence of Astaris earnings which was divested in 2005. And as a result of our favorable refinancing debt reduction in 2005, we expect interest expense for the year of approximately $35 million.

Moving to the outlook for the third quarter, we expect earnings before restructuring and other income and charges of $0.95 to $1.05 per share. In Ag products, segment earnings are expected to be flat to down slightly due to unfavorable weather conditions in Europe, the continued but albeit lower impact of generic bifenthrin competition and higher input costs offsetting the positive impacts of new products and labels.

In specialty chemicals, we expect third quarter earnings growth in the high single digits based on continued solid performance of lithium and pharmaceutical excipients and an improvement in food ingredients. And in industrial chemicals we expect earnings growth of approximately 20 to 25% led by higher prices and improved volumes partially offset by higher input costs, particularly energy. With that, I thank you for your time and attention. And I'll be happy to take your questions.

Thank you, Mr.Walter. [OPERATOR INSTRUCTIONS] Our first question comes from Dmitry Silversteyn with Longbow Research.

That's unexpected, to be the first one on a call. Good morning, gentlemen. A couple of questions if I may. On the industrial chemicals business, you've had declining margins on year-over-year basis as well as sequentially. I understand that year-over-year probably had to do with the Astaris not being part of the Company anymore. But can you explain a little bit the sequential decline in margins, especially given that sequential energy costs seem to be down? What was the impacting your costs in this business?

Dmitry, first good morning to you as well. I haven't talked to you for a while, I hope you're feeling all right. I think the sequential explanation is pretty straightforward. In the second quarter of '06 we had the longwall move. As you remember we talked about that in the first quarter conference call and said that would cost us somewhere between 3 and $4 million in the quarter. When you adjust that out of the second quarter results and compare the margin that pro forma margin if you may, to the first quarter margin, they're essentially the same.

Okay. Okay, all right. I understand that. And then staying with the industrial chemicals in the top line, it's hard to argue with a midteens growth there. But given that you have probably, what about 7% or so higher volumes in soda ash from the startup last year, the Grainger plant and higher pricing, how big of a negative impact was foreign exchange? I would have expected growth to be closer to 20% in revenues.

Dmitry, I'm not sure I have the FX impact on the top line available to me. It was not insignificant. It is in Foret, obviously all of Foret's income statements, Foret operates in a euro, we translate back to dollars and we had a stronger dollar year-over-year. I'm babbling with you. I really don't have the answer.

Okay, all right. I guess the root of the question is, is there anything for us to be concerned and especially in the industrial chemicals business when it comes to top line growth as far as demand in peroxides perhaps being a little bit lower because of the paper market weakness, or pricing in the Asian or other export market for it being lower? Is there anything like that going on behind the numbers?

No, there's not, Dmitry. We continue to be in a sold-out condition in soda ash, domestic demand for soda ash remains fairly constant, export demand continues to grow. The demand for hydrogen peroxide and the pulp industry in North America continues to grow. Peroxide demand in the pulp industry in Europe continues to grow at an even healthier level. So I guess I'm saying no, there's nothing we can see in the marketplace today that has us concerned about volumes or top line.

Okay. That's good to hear. And then finally, can you give us a little bit more color on -- this is more probably for Kim, why the sequential interest expense has gone up as much as it did? Was it just a question of interest rates moving and you being overweight I guess in floating rate debt?

Dmitry, this is Kim. No. It's primarily just the result of the -- and as you know, cash flow or both cash levels and debt levels and interest expense and interest income are really a month, a daily phenomenon, not a quarter-end phenomenon. When you look at the average cash balances and average debt balances. Instead of single points in time, that explains the difference. There isn't anything fundamentally going on. By the way, we had the same phenomenon in '05 between the first quarter and the second quarter.

Okay, very good. I'll get back into queue.

Your next question is from the Robert Feliz with Gabelli and Company.

Hi, gentlemen. Just piggybacking on Dmitry's question, given the margin compression in industrial chemicals, if I'm not mistaken, you've also lowered your full year guidance from 40 to 45% growth, to 30 to 35% growth. I was kind of hoping you could comment as to what dynamics have led you to lower your expectations for this business?

Yes, Robert. Largely relates to energy costs. And in turn, largely relates to energy costs in our European operations in Spain in particular. We have seen a deregulation of natural gas pricing that was unanticipated, a lower energy selling price. We generate our own electrical power at most of our operations in Spain and sell the surplus into the grid. And energy, electrical energy prices have been significantly lower than we had anticipated. And that's the entire explanation for the drop in margins, drop in the growth outlook year-over-year for the segment. All other things in the segment are performing and developing as we'd expected.

Okay. And then, Bill, also, 2006 is really an interesting year for FMC. Last couple of years, you've cleaned up the balance sheet. You're generating good free cash flow as you made clear before in the past, your first priority is to redeploy that cash via acquisitions. Bill, transaction multiples where they are and the stock price where it is, assuming you can't find an acquisition that would be prudent relative to the price you'd have to pay, what's your next use of cash?

Rob, we haven't said anything about what we would do should we not be successful in redeploying the cash. If I was a betting man, however, I would assume that we would continue to do something like we have done, what we announced in the first quarter of this year, find a tax-efficient way to return cash to shareholders. But again, having said what I just did, no decision has been made with respect to the dividend nor further stock repurchase program beyond that that's already been announced.

Okay. And I hate to put any kind of time frame on things. But just going with that, what kind of time frame did you put in front of yourself, Bill, in terms of saying, all right, we've searched for perhaps bolt-on acquisitions and we can't find anything and now is the time to return cash?

Rob, I'm going to duck the question. I don't want you guys to come back to me at some date, if I gave it to you, nothing happened and you asked me why nothing has happened. So I'm not going to give a date. I have a lot of patience but not an infinite amount of patience.

Okay. That's fair. And then also recently you announced your agreement with BioCrop Science. Could you explain the strategic rationale behind the move? I guess mainly what does this agreement provide FMC's Ag products that you perhaps didn't think it had prior?

Yes, the strategic rationale, Rob, Milton Steele covered it to a large extent in the first quarter conference call. And all had to do with shortening innovation paradigm or model that we had in Ag come from a 10 to 12-year small molecule discovery paradigm to one of acquiring through outright acquisition, licensing and joint ventures technology that we could bring to market a lot faster than the old paradigm. So that's what -- that's the whole strategic rationale. Well, that's the innovation paradigm. Consistent with that, it was, we made the decision to abandon the discovery R&D, i.e., that spend that was associated with the 10 to 12-year discovery effort. Having made that decision, we sought to get value for what we had already in the pipeline and it enter discussions with several different Ag chem producers and finally concluded one with Bayer that provides for an outride sale of that pipeline to them and in turn, what we will receive are milestone payments and royalties as they develop and commercialize any of the molecules that were in that pipeline.

Okay. Thank you.

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

Good morning, guys. Bill, earlier this year, you'd indicated that some fairly large Chinese soda ash plants had been at least delayed if not canceled. Can you update us with regard to your expectations for supply growth in China and how that would affect the net export position there?

Kevin, I think it was in the first quarter, may have been in the fourth quarter conference call, we did talk about two major Chinese facilities having either been delayed or permanently postponed. One was a second increment of capacity and an existing producer on the order of 500 to 800,000-tons. The second was a million ton plant. The former has been delayed indefinitely. The latter has been canceled to the best of our knowledge. So you've got a 1.5 to 1.8 million-tons of Chinese soda ash capacity that was planned to come on the market that we do not believe for the foreseeable future will.

What does that do to the Chinese? The Chinese in '06 are -- have been exporting slightly more volume than they did in '05, probably on the order of magnitude of 100 to 200,000-tons. We expect that to turn around in '07 as the Chinese market continues to grow, capacity is constrained by the lack of expansion. And that the Chinese in fact will be moving less material into the export market in '07 than we have seen in either of the last two years.

Okay. That's helpful. And, Bill, in Spain, you alluded to the higher energy costs of Foret. Is there any mechanism by which you can recover those costs, perhaps via surcharges or otherwise in coming quarters?

Yes. There are a couple of things going on, Kevin, in Spain. One of which we think is self-correcting by the fourth quarter. I don't want to get into the details because this really gets complicated. But it has to do with the price of power going into the grid and the price of power coming out of the grid. And again, that we expect will straighten itself out by the fourth quarter. The second being higher natural gas price as a result of a Spanish government decree to deregulate completely natural gas effective July 1, this year, it's going to be tough for us to recover any of that effect in the course of '06 given the annual contract nature of most of our businesses. Our expectation is, however, as we move into '07, we're going to be able to recoup most if not at all of that through higher prices in the '07 contracts.

Okay. And then finally on Ag, if I may, are you doing anything differently in Brazil today, given the agricultural environment and credit risk in that country versus last year, that -- anything we should be thinking about in terms of modeling growth there?

Well, we continue on the strategic path that we have been on down there for years. So we're not deviating off of that. We are obviously paying far more attention to the receivable situation. And are being very, very disciplined about collecting before we extend new credit to farmers. Having said that, our collection experience down there has been good if not outstanding, at least relative to our competition. We believe that as a result of that, we're better prepared for what we believe may be an upturn in the Brazil Ag market in the '06/'07 season. At least a recovery in that market in sugar cane and cotton, the two big crops for us.

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

Your next question is from Robert Goldberg with Scopus Asset Management.

Good morning.

Good morning.

Bill, you did revise upwards slightly your expectation for Ag products earnings for the year, which has impressed -- I'm impressed with because crop protection has been a very difficult business for a lot of your peers. Dow, DuPont, BSF, has been very difficult to crop protection and you seem to be doing just fine. You did mention the situation in Europe having some impact on the third quarter. But could you talk a little bit about why you're able to increase the full-year guidance and maybe you could talk qualitatively at least, I know it's just early August here, but 2007 and what the factors will be to drive growth on a qualitative basis in 2007?

Well, how much time do we have, Bob? We remain bullish in our Ag business. We continue on a very focused strategy, which is quite different than what most of the rest of our competitors are pursuing. Second, a lot of the global weakness in Ag chem business this year is in fungicides and we have very little exposure to fungicides. Third, our two proprietary herbicides, carbfentrycil and sulfentrazone, we have been able to reposition into several crops as well as increase the supply. If you'll remember over the last couple of years, we were supply constrained in sulfentrazone. I'm rattling off a bunch of things here, Bob, for you.

We have introduced three new molecules this year. New products into the market that helping drive our growth given our relative size, those three have an impact on us. We continue to pursue supply chain improvements across the board and are seeing the benefits of that accruing to us. It's just a whole bunch of things, Bob, not any one thing, that is going to produce the results that we expect for Ag this year. As we roll forward into '07, we're getting pretty speculative at this point because we haven't even gone through our budgeting process. But on a qualitative level, an improved market in Brazil, particularly soybeans and cotton. I mean, cotton and sugarcane. Not soybeans. The benefit, a greater benefit of the three new products that I talked about us having introduced in '06, the full effect of generic bifenthrin competition having been behind us, and then continued growth in our proprietary herbicides.

Great. And one other question on the other expense. It seemed like the, if you could call it a miss for the quarter and I know you hit the high end of your guidance but the consensus had gone unfortunately above the high end. But seems like the shortfall for the quarter was in the other expense items. I was wondering how much of that was, would you consider one-time versus a recurring?

Bob, this is Kim. I'd like to take a shot at that. Our other income and expense item, and I know you've looked back in previous quarters, but has some variety on it quarter by quarter. So, there has historically been that variability, it's caused by a variety of different items, usually all very small, sometimes having to do with closing out hedges, sometimes having to do with changes to some of our self-insured programs, sometimes having to do with stock price movements and mark-to-market on some things. So there has historically always been the variabilitity. If you looked at, however, our full-year guidance on OID which is unchanged from what it was last quarter, you can conclude in its aggregate sense that variabilitity is timing.

So that other income line from looking at this properly was about a negative 6 -- 5.9 million in the first half? Is that -- am I looking at the right line?

That's right.

And you're saying for the year, that's going to be a negative 2 million implying a contribution of 4 million on the positive side in the second half?

That's right, Bob. And these are questions that normally actually, you may remember if you listened to the fourth quarter call, I was addressing this issue in the fourth quarter call. And over the last several years and we expected it to continue into '06 as I mentioned in the fourth quarter call, we have been focused strongly on our cash flow and as a dimension of that, we have been looking at reducing inventories and more specifically based upon the strength of our markets globally and domestically we've been reducing domestic inventories. To that end, the reduction of domestic inventories as we're on a LIFO inventory system gives us a LIFO increment and usually the inventory reduction manifests itself in the fourth quarter, a reduction year-over-year and we have for the last two years, and expect again this year to have a LIFO increment at the end of the year. And that's what will rebalance that OID amount and have income in it and bring it back to about $2 million on full-year basis.

Okay. So if you're looking at a third quarter, you still expect a million or two, a modest negative?

That's correct.

All right. Thank you, Kim. Appreciate it.

Your next question is from Stuart Lippy with Freedom Capital.

Two questions. First of all, I just wanted to -- reaffirming the -- I'm getting the sense you're sort of guiding down a little bit on a net basis for the third quarter but maybe raising estimates or raising guidance for the fourth quarter, is that right? And secondly, you've talked a lot about how FMC is so attractively valued relative to other specialty chemical companies and do you still, is there anything that's happened to the business that makes you feel any different about that? And do you still feel like you can really grow at a decent rate over time? Or do you start to feel right now that maybe things are at a peak in terms of margins and growing will be -- growth will be difficult in the years ahead? Do you still feel there's a significant gap between what the Company is worth and what it's selling for?

Stuart, see if I can remember all the questions. First of all, are we guiding down in the third and up in the fourth? The answer is, no. We never gave discrete guidance for the third or fourth. And to the extent, we have reconfirmed our full-year and the second quarter came out of the high end of our guidance. So from our perspective, there's really nothing that has changed in the mix or composition of the third and fourth quarter. Can we continue to grow over time? Are we at peak margins? Is there still a value gap? Yes, no, and yes. I think we can continue to grow. You heard Ted talk about the long-term prospects for our specialty chemical business. You heard Milton talk at the last conference call about the creative and innovative things that he's doing to drive topline and therefore, bottom line growth in Ag and growth at an accelerated rate over our previous expectations.

And within the industrial chemical segment, there's nothing I can see on the near-term horizon that's going to affect the outlook for those businesses. The net result of all of which should be continued top line growth and leverage on that on the bottom line. So, that's the comment on growth. Are we at a peak earnings now? The answer again, therefore, would clearly be no.

And finally, is there, does there remain a value gap between what I believe the Company is worth and what the market is valuing it at? The answer is yes. I just need to hold up for you just about any comparative metric you want and it becomes obvious to you. As I have said in the past and will continue to say for some period of time, I believe over a long period of time, the market is sufficient and will recognize the true value of FMC and reward it accordingly. If, however, I'm wrong and it doesn't, at some point we'll do something to realize that value. But have not got a timetable put around that yet.

Thank you.

Your next question is from Dmitry Silversteyn of Longbow Research.

Just wanted to follow-up. Actually, that was a nice segue into my next question. Looking at the Company's undervalued proposition, the stock's off today on the miss versus expectations. You weren't repurchasing enough shares in the quarter to even offset a share creep. So your average shares outstanding on diluted basis have gone up. Is there a sense that you can probably return money to shareholders a little bit faster through share repurchases in second half of the year, especially taking advantage of the low price here to leverage your repurchase dollar?

Obviously, Dmitry, we have that option available to us. But as you heard from Kim's comments, we're not providing any guidance on a going-forward basis with respect to our specific repurchase plans. As you say, that option is available today.

Okay. But I mean, I'm kind of looking at your free cash flow generation, your cash position, the fact that acquisitions in the specialty chemicals business probably aren't going to come cheap and, therefore, probably would be out of reach at least for the time being for you. To the extent that I believe you that you're sincere in your efforts to try to get value for the shareholders, but this seems to be a fairly easy way of doing it if done aggressively, especially at these prices. I mean, would you -- obviously you would buy the stock for your own portfolio, I'm just trying to understand the rationale behind not being more aggressive at the current stock prices.

Not being more aggressive in terms of a repurchase program, Dmitry?

That's right.

I'm going to just repeat myself. We have the option available to us, we may or may not exercise that option. I'm sorry, but you're just going to have to wait until the third quarter conference call to find out if we did.

All right. Fair enough, Bill. Thanks.

Nice try, though.

Your next question is from Brian Furlaw of Sigma.

Hey, guys, how you doing?

Good, thanks.

Just a couple questions on the soda ash. Obviously in the quarter, there was an announcement for $15 increase. And knowing you guys don't have a lot of spot market business, I know that's not going to affect you this much this year. But how does this set up for the 2007 negotiations? Is there an expectation that there might be even another increase or are you going to stick pat with the 15 and try to get that to your customers? And secondly, if you could just talk about the pricing in the lithium market, I know that's been a strong market for you guys.

Brian, first of all, you're correct. There's been a $15 a ton price increase announcement by four of the five domestic producers. The announcement was effective immediately. But as you understand for all practical purposes, that has no effect until calendar rolls over. I'm encouraged first of all by the announcement. It came early and came earlier than it generally does historically, which leads me to hope if not believe that there will be further announcements before we enter into the contract season this fall. To predict how -- for me to give you a discreet forecast at this point for further price increases, let alone the effectivity in '07 is at best premature. But the industry remains sold out, conditions couldn't be more favorable and we'll just have to see how it plays out.

With respect to pricing lithium, as Ted said, the primary sort of the basic end of the business, global supply/demand is relatively tight, we have seen good price increases in the basic molecules, lithium carbonate, lithium hydroxide, lithium chloride. And given announced capacity expansions and our outlook for growth, that situation should not change itself through at least '07. So we remain optimistic if not bullish on lithium pricing in the basic end of the business. It's difficult to talk about pricing as you move down the value chain into the higher value items. They tend to be by definition, far less commodity. They tend to be differentiated. And, again, it's just difficult if not impossible to talk about pricing in those.

Great. And just another question on the Spain issue for the deregulation, how much did that affect you in the quarter? And then I guess when you look to do your further negotiations out in '07, is that something that you're going to look to pass onto your customers?

Yes. I think it is safe, Brian, to say that energy in Spain was the entire explanation for why the segment came in at a 2% earnings growth versus the 10% that we had guided in the first quarter conference call.

That's roughly $2 million or so?

Roughly, that's exactly right, $2 million. Do we -- our expectation of being able to pass that on, yes, as I think I answered to a previous question. It's going to be the '07 contract, though, before we're going to be able to realize much if any of that pass-through.

So it's a bit of a temporary squeeze if you will.

Correct.

Great. Thanks a lot, guys.

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

Thanks. On Ag, I know you are end licensing several products, flonicamid insecticide and a couple of others maybe I'll let you try to pronounce. Another insecticide and a fungicide. Because those are end licensed, I'm imagining they have somewhat lower margins than your existing portfolio. Can you talk about as a group, what kind of average margin might we assign to the incremental sales coming in from those products?

Yes, Kevin. Flonicamid, acidomiprid -- and I have now forgotten the third one.

I didn't want to attempt that either, cyazofamid, something like that.

Yes, cyazofamid, thank you. First you're right as an end license product generally, they will carry lower margins than a proprietary branded product that we make in-house. The margins in those products, however, can vary tremendously, one from the next depending upon the nature of the license agreement. And whether or not we would actually manufacture the product. To give you a discrete number, though, I think could be misleading, Kevin, given what I just said that the individual margins on each of those can vary significantly one from the next. I guess I'm going to stop there and not answer your question.

Okay. We can always try to circle back on that. And then on the existing portfolio, Bill, in Ag, can you talk about whatever new label expansions you've procured or would expect to have over the next couple of quarters?

Well, you're down to a level of detail, Kevin, that I'm not that comfortable with. I know we have several on both the insecticide and herbicide portfolio.

That's okay. I'll circle back on that. And I may have missed it, Kim. But on Princeton, what is the amount of of cash proceeds you would expect to receive from that land sale? And is timing early '07, late '07? What is your expectation there?

Kevin, this is Kim. My best guess would be late '07. It's subject to a couple of contingencies having to do with zonings and approvals by the state which we think will happen, but it's very difficult to predict the specific timing of, but having said that, late '07. As to the amount, neither we nor the hospital have disclosed it, but as a way of dimensioning it for you, you may remember we sold the parcel of land in San Jose, that first parcel at 56 million the amount that we're talking about here a little north of that.

North of that? Okay.

That's right.

Sounds like a fairly significant cash flow event for you next year.

That's right.

Okay. Thank you very much.

At this time, there are no further questions. Mr.Walter, do you have any closing comments?

I do. First of all, thank you, operator. Let me thank all of you for joining our call today and for your continued interest in FMC. Our good second quarter performance I think once again demonstrates the strength of our underlying business and the value of our portfolio. And despite a number of unfavorable external developments, we earned record profits in the quarter. And as you've heard, feel quite comfortable about our full-year outlook. And I would ask you, or maybe even challenge you to compare our performance and outlook to the most of the other companies in our space.

We also remain bullish about our future beyond this year. Our Ag products team has a number of initiatives under way to shorten the innovation cycle and accelerate our growth prospects over the next several years. In specialty as you heard from Ted, we expect demand growth to remain strong in lithium and to strengthen in our biopolymer pharmaceutical and food ingredients franchises. In industrials, the fundamentals of supply and demand remain favorable with the potential for further increases, price increases very good. With that, let me conclude the conference call and once again say thank you for joining us.

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