富美實 (FMC) 2006 Q4 法說會逐字稿

Good morning and welcome to the 2006 fourth-quarter earnings release conference call for FMC Corporation. All lines will be placed on listen-only mode through the conference. After the speakers' presentation, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

I will now turn the conference over to Mr. Brennen Arndt.

Thank you, and welcome, everyone, to FMC's fourth-quarter 2006 conference call and webcast. Bill Walter, Chairman, President and Chief Executive Officer, will begin the call with a review of our fourth-quarter performance. Bill will then turn the call over to Michael Wilson, Vice President and General Manager, Industrial Chemicals, who will review the segment's fourth-quarter performance, as well as provide our 2007 outlook for the soda ash, peroxygens and phosphate businesses that form our Industrial Chemicals group.

Following Michael, 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 overall Company outlook for 2007, and we will then take your questions.

Just a reminder that 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 the FMC website, available at FMC.com, you'll find a definition of these terms under the heading entitled Glossary of Financial Terms. We have also provided a reconciliation to GAAP of the non-GAAP figures we will use on the call today, as well as provide you our 2007 outlook statement.

It is now my pleasure to turn the call over to Bill Walter.

Thanks. Good morning, everyone. As you saw in our earnings release, we delivered a strong fourth quarter that capped off another very good year for the Company. Let me summarize our fourth-quarter performance. Sales of $588 million were up 13% versus the fourth quarter of '05. Earnings before restructuring and other income and charges of $1.24 per diluted share increased 15% over the fourth quarter of last year.

Ag Products' earnings of $23.2 million were significantly higher than expected, up 15% versus a year ago. Better than expected sales growth in South America, particularly in Brazil due to strong market conditions in sugarcane and cotton, and additional supply chain productivity improvements were the primary drivers of the year-on-year growth.

Specialty Chemical earnings of $24.5 million increased 7% years versus the year-ago quarter, driven by higher selling prices for primary lithium compounds and improved performance across our biopolymer businesses.

Industrial Chemical earnings of $21.2 million increased 8% versus the year-ago quarter as higher selling prices in all businesses and volume growth in soda ash more than offset significantly higher energy costs, particularly in Spain, and higher raw material costs. Michael will review this segment's performance with you in more detail in a moment.

Energy and raw material costs were significantly higher than a year ago across the Corporation. Versus the prior year, energy and raw materials unfavorably impacted earnings by $0.29 per share in the fourth quarter. At the same time, currency translation had a modest favorable impact on earnings of $0.01 per share in the quarter.

on a GAAP basis, we reported net income of $12.9 million or $0.33 per diluted share. GAAP earnings for the quarter included a $0.50 per share charge related to discontinued operations and a $0.41 per share net charge for restructuring and other charges, including tax effects and other adjustments. With those reconciliations, our non-GAAP earnings, as I said, were $1.24 per diluted share versus $1.08 a year ago.

Let me move now into a little more detail on the operating segments. In Ag Products, sales of $196 million increased 16% versus the prior year, driven by strong sales growth in Brazil. In last quarter's call, I communicated the industry's expectation that planted acres in sugarcane and cotton in Brazil would increase, but the general market conditions would be less favorable compared with the strong conditions -- relatively strong conditions in the prior year.

In the fourth quarter, market conditions turned out to be more favorable than we had expected due to a number of factors, including rising commodity prices, a stable exchange rate and increasing optimism in the agricultural sector, especially sugarcane. We clearly benefited from the growth in cotton and sugarcane, where planted acres were up 21% and 12%, respectively, versus last year, and our sales into these segments exceeded our expectations. Sales in North America and Asia were modestly higher, while sales in Europe declined slightly.

Ag Products' earnings of $23.2 million, as I said, were up 15% over a year ago, largely due to the strong sales growth in Brazil, partially offset by unfavorable geographic mix, increased selling expenses and higher development spending associated with our growth and innovation initiatives. We are beginning to see the top- and bottom-line benefits of our new innovation model, and I'll speak more about this when I share the 2007 outlook for Ag Products.

Moving, then, to Specialty Chemicals, sales of $146 million grew 8% versus a year ago. Higher sales across food, pharmaceutical and nutraceutical markets in biopolymer and selling prices for primary lithium compounds drove the top-line increase during this quarter.

Specialty Chemical earnings of $24.5 million were 7% higher than a year ago as a result of the higher sales, improved performance in the food ingredients business and the benefit of continued productivity improvements. These were partially offset by higher energy and raw material costs, less favorable mix and an increased spending on growth initiatives.

That is it for Ag Products and Specialty. For a discussion on Industrial Chemicals, I'll turn the call over to Michael Wilson. Michael?

Thank you, Bill. Good morning, everyone. It is a pleasure to be with you today to highlight our Industrial Chemicals segment, review our fourth-quarter and full-year 2006 performance, and provide you with our 2007 outlook.

Last year, I began my presentation with a detailed profile of each of the businesses which comprise our Industrial Chemicals segment, namely our alkali chemicals or soda ash business; North American peroxygens, which is comprised predominately of hydrogen peroxide; and Foret, our wholly owned Spanish subsidiary, which participates in both peroxygens and phosphates, in addition to some smaller product lines serving predominately the detergents market.

As I believe most of you on the call are already familiar with these businesses, I do not intend to go into the same level of background detailed this morning. Instead, I'll go straight to the results of our fourth-quarter and full-year 2006 performance and then to the outlook for the group for 2007. Along the way, I will comment on the specific issues and opportunities that the three businesses have before Foret them. If you require additional background information, please follow up with Brennen after the call and we will be happy to provide it.

For the fourth quarter of 2006, revenue in Industrial Chemicals was $248 million, an increase of 14% from prior-year quarter, driven by higher selling prices across the group and volume growth in soda ash. Segment earnings of $21.2 million increased 8% as a result of the higher sales and despite higher energy costs, particularly in Spain, and higher raw material costs across the segment.

While the higher energy costs were in line with our expectations at the beginning of the quarter, Foret experienced unexpected additional deterioration in cogenerated electricity selling prices during the quarter and some unanticipated volume weakness in phosphates. We pushed hard for price gains. I will elaborate further on our view of the energy situation in Spain in my comments regarding Foret's 2007 outlook.

For the full year 2006, revenue in Industrial Chemicals was $991 million, an increase of 14% versus 2005. The soda ash business accounted for the majority of the increase due to significant improvements in both domestic and export soda ash selling prices and solid volume growth. Our North American hydrogen peroxide business also benefited from substantially higher selling prices and energy surcharges.

Segment earnings of $96.7 million increased 15% due to the sales gains and despite substantially higher energy and raw material costs that impacted each of our businesses, but particularly Foret. Prior to its divestiture in November 2005, Astaris contributed approximately $11 million of income to FMC. Excluding Astaris from 2005 earnings, Industrial Chemicals segment earnings grew 33% for the full year. With this strong 2006 performance, the segment has now delivered three consecutive years of substantial earnings growth.

Let me now shift to our 2007 outlook. As in 2006, the biggest levers on profitability for Industrial Chemicals segment would be selling prices and energy and raw material costs. 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 2007.

We realized strong price improvements in our North American soda ash business and capitalized on the favorable market environment to enhance contract terms going forward. Contract pricing results in our other businesses however, did not meet our expectations, especially in light of market conditions and ongoing cost pressures.

Overall, we expect aggregate price and volume benefits to contribute approximately $30 million to improved earnings for this segment in 2007. Unfortunately, energy and raw material costs are expected to rise by a similar amount. Let's review each business more specifically, starting with soda ash.

As you know, soda ash is a cyclical business, driven by the supply side, not the demand side. North American demand has moved in a narrow range, around 7 million tons per year, for the last 20 years. In the developing regions of the world, soda ash demand tends to grow with GDP, which, in the case of Asia, can result in growth rates in the mid- to high single digits. The combination of level demand in North America and good export demand growth has resulted in overall growth rate for U.S.-produced soda ash of 1% to 3% per year for the past decade. We expect to see this continue going forward.

As we begin 2007, market conditions remain tight in North America, and all U.S. soda ash producers are operating at full capacity. As a result, the industry remains in the midst of a very favorable market environment. We believe the favorable market dynamics are sustainable for three reasons. First, due to growth in the export markets, demand for North American soda ash will continue to increase.

Second, we do not foresee any near-term change in U.S. supply. Our Granger, Wyoming, plant represents the lowest cost and most capital-efficient potential capacity in the industry. The facility is now running at an annual rate of 500,000 tons, leaving us still holding approximately 800,000 tons of idle capacity at Granger. We will restart that capacity only if and when export demand warrants.

Third, though returns have improved for all producers with the price increases of the last two years, cost pressures on all producers, particularly for energy and transportation, primarily ocean freight, continue to favor a rising price environment.

In North America, soda ash price increases varied by customer depending upon contract provisions, timing and the amount of increase previously accepted. Overall, we realize an average increase of approximately $10 per ton. In addition, we restructured our longer-term contracts to preserve the price and volume gains of the last two years while providing for potential price upside in 2008 and beyond. All of our multi-year contracts now allow for freight and energy surcharge pass-throughs.

In the export markets, the Wyoming producers serve Asian and Latin American markets through ANSAC. In Asia, ANSAC's primary competition is the exporting Chinese producers, of which there are only eight out of more than 50 Chinese producers in total. To a lesser extent, ANSAC competes with Indian and African production in Asia.

In our view, the long-term outlook for ANSAC in Asia remains favorable due to a number of factors. First, ANSAC is the lowest-cost, highest-quality supplier to Asia, ex China. Second, Chinese domestic prices are 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 energy inflation as competing industries chase limited BTUs within the country; increasing environmental pressures, which plant relocations have manifested; continued tightening of the credit and lending practices, which should lead to less capital available for unprofitable expansions; and the continued reevaluation 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 the major Chinese producers, we expect that Chinese exports will remain flat in 2007 and grow only marginally thereafter.

Nevertheless, ANSAC's pricing actions in Asia during the 2007 contract season were not satisfactory. The results were a consequence of several near-term factors. First, while it is our expectations that currently balanced supply/demand conditions in Asia will tighten significantly over the course of 2007, the Chinese exporting producers continued to export at sufficient rates during the fourth quarter of 2006 to leave customers with the impression that price availability would not be an issue.

Second, there has been some market effect from the preselling of the 300,000 metric tons of new capacity coming online in Magadi, Kenya, even though the startup of this capacity has seen some delays. And third, ANSAC continues to be impacted by rising ocean freight costs.

In Latin America, ANSAC continues to hold the favored cost position, but the majority of volume there is still under legacy contracts, which will not become open until 2008. The net result of all of this is that ANSAC is currently forecast to realize a modest average net price decline in 2007. However, we remain optimistic that tightening supply conditions during the course of the year may provide ANSAC the opportunity for some midyear price actions.

Nevertheless, the domestic price and export volume benefits to our soda ash business will be more than sufficient to offset the disappointing outcome and export pricing and higher energy costs, resulting in a third year of earnings growth in the business.

Moving now to North American peroxygens, hydrogen peroxide represents 75% of this business' 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 demand. During 2006, North American demand for hydrogen peroxide grew approximately 1% to 2%. And our expectation for 2007 is for demand to grow at the same rate. Growth will continue to be driven by the trend toward higher-brightness papers and non-pulp market applications.

Supply conditions are expected to remain reasonably tight, with capacity utilization in the low 90 percentile range of effective capacity, with some seasonal fluctuations. This is down from the mid-90 percentile range in 2006 as a result of Arkema's expansion into Quebec during the fourth quarter.

The primary raw material 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. Selling prices moved up steadily over the past few years, especially in 2006, and as you may recall we implemented significant energy and transportation surcharges in 2006.

You may also recall from our conversation last year that I indicated in light of market conditions and the projected slow demand growth that the announced fourth-quarter 2006 capacity expansion by Arkema would be ill-timed if it came to fruition. This turned out to be exactly the case.

The capacity addition, though only 40 million pounds, led to unfavorable market dynamics during the recent contracting season. As a result, hydrogen peroxide pricing in North America on average is expected to be flat to marginally lower in 2007. Further, as a result of our lower natural gas prices, a significant portion of the energy surcharges have dropped from our contract, even though our hedging policy will results in increased gas prices versus the prior year. Consequently, due to the combination of higher energy costs, yet lower energy surcharge benefits to selling price, peroxygen's earnings are forecast to be down versus 2006.

Turning to our European hydrogen peroxide business at Foret, in 2006 demand in Western Europe is estimated to have grown approximately 5% and our expectation for 2007 is for demand to grow by close to 4%, driven by pulp and paper industry demand. Relatively tight market conditions have prompted a number of minor hydrogen peroxide capacity additions in Western Europe over the past couple of years. In aggregate, these additions have approximated the growth in demand over the same period, resulting in a relatively tight industry operating rate of approximately 95% of effective capacity.

In light of the tight supply conditions, coupled with the rising cost environment, especially for energy, hydrogen peroxide prices in Europe have increased significantly in recent years, and we anticipated the same would be true in 2007. This has not turned out to be the case. Competitive rivalry among the market leaders has resulted in some customer churn and share defenses, which in the end have preempted adequate cost recovery in 2007.

Foret's phosphorous chemicals products are used in a wide range of applications, including detergent, feed and industrial uses. Demand growth for phosphorous chemicals, which tends to mirror GDP, improved in 2006 with the strengthening of the economy in Europe. In 2007, 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 phosphorous chemicals. As a result, Foret's European-based purified phosphorous assets and phosphorous salts business realized price gains in 2006. However, a significant portion of Foret's sodium tripolyphosphate sales are in the Middle East and Mediterranean Rim, where Foret competes with companies who sell in U.S. dollars, which weakened 10.3% against the euro year over year, and where imports from China are significant.

China increased its exports of STPP in 2006 by approximately 12%, pressuring prices throughout the year. Though Chinese exporters have moved to increase prices over the last few months, due to rising costs and the appreciation of the yuan against the U.S. dollar, the increases have been only marginal. While we expect to see more significant price increases from Chinese exporters going forward, there was not adequate pricing momentum during the 2007 contract season. Consequently, we are conservatively expecting some price erosion in phosphates for the year.

I will now turn to the energy situation in Spain. As we communicated in the last quarterly call, we expected a recovery in the electricity selling prices beginning in the first quarter of 2007. Already, in January, we saw prices bounce off the lows seen in the fourth quarter of 2006. In part, this has been driven by the Spanish administration's actions, returning Iberdrola back to the daily electricity pool. You may recall that Iberdrola, one of Spain's largest electricity generators and distributors, withdrew its demand from the daily pool late in the second quarter of 2006 as a means of protesting the Spanish administration's changes to energy market regulations. Iberdrola's withdrawal led to a significant decline in the wholesale pool price.

It is our expectation that higher electricity prices will offset higher cogeneration natural gas costs in 2007. However, Foret will experience a significant year-over-year negative impact to the first-quarter earnings due to the unfavorable comparison to high electricity selling prices realized during the first quarter of 2006. As the year progresses, we expect electricity prices to become favorable versus the year-earlier comparisons. Meanwhile, Foret's natural gas costs will remain unfavorable year over year through the first half of 2007.

Overall, for the full year, we expect Foret's earnings to be more or less level to 2006 as increased volumes, primarily in peroxygens and phosphates, and improving electricity prices offset substantially higher energy and raw material costs.

At an Industrial Chemical segment level, we expect energy and raw material costs to be approximately $30 million higher in 2007 versus 2006, with energy, especially Foret, expected to account for the vast majority of the increase.

With that outlook for the primary levers of group profitability, let me summarize our overall view for the Industrial Chemicals segment in 2007. We expect full-year 2007 earnings to be approximately level to 2006 as aggregate price and volume benefits are offset by higher energy and raw material costs. However, first-quarter 2007 segment earnings will be down 30% to 40% versus the first quarter of 2006, driven by higher energy costs across the segment, particularly at Foret, and much lower cogenerated electricity selling prices at Foret.

Looking forward, despite the unexpected outcome of our pricing actions and the result of lack of earnings growth for the whole of 2007, we remain optimistic. Fundamental market conditions and energy cost trends are such that Industrial Chemicals will regain earnings momentum during the second half of the year and will deliver significant earnings growth in 2008.

I look forward to taking your questions during the Q&A period. And with that, I would like to turn the call over to Kim Foster. Kim?

Thanks, Michael, and good morning, all. Since the beginning of 2006, we have been forecasting a free cash flow of approximately $150 million. The actual free cash flow for 2006 was $154 million. The major drivers of free cash flow were in line with our expectations.

Regarding the uses of our free cash flow, during the fourth quarter of 2006, we repurchased $20 million or 278,000 shares, bringing the full-year total to $90 million or 1.4 million shares at an average price of $63.63 per share. And during the quarter, we distributed $7 million in cash dividends, bringing the total for the year to $21 million.

Our book tax rate is a combination of U.S., federal and state tax rate of 38% and generally lower tax rates from numerous foreign jurisdictions. Over the past few years, our tax rate has been increasing as the percentage of overall profits derived from U.S-sourced income has been increasing.

Throughout 2006, we had been projecting a book tax rate on earnings from continuing operations before special charges of 27% as compared to a book tax rate of 24.1% in 2005. While the actual mix of U.S.-sourced income was higher in 2006, the level of U.S.-sourced income was lower than we anticipated, and the mix of foreign-sourced income was different than our assumptions. The consequence was a full-year tax rate of 25.4%. The lower tax rate contributed $0.11 per share to the quarter and the full year.

However, the factors which drove a higher tax rate in the past few years will continue into 2007. In addition, 2006 will be the last year of the export tax credit, or EIE, which will increase our book tax rate by approximately 100 basis points in 2007.

Taken together, these two factors should drive our book tax rate to 27.5% in 2007. The impact of the higher tax rate in 2007 will reduce earnings per share by $0.16 per share. Let me remind you, however, that we pay minimal U.S. taxes due to our net operating loss carryforwards, and consequently, this change will have essentially no impact on free cash flow.

For the full year 2006, we had projected other income and expense at $2 million of income. As we have discussed in the past, the major driver of this line item for the past few years has been a LIFO income adjustment. This accounting adjustment is a consequence of our focus on reducing inventory levels. The actual result for other income and expense for 2006 was $3 million of income. The favorable variance was primarily due to more LIFO income.

For 2007, we are projecting other income and expense as $5 million in expense. The year-over-year change is driven by lower LIFO income. While we continue to focus on reducing inventory levels, the rate of reduction is slowing, and therefore the LIFO benefit is decreasing. The impact of lower LIFO income will reduce 2007 EPS, or earnings per share, by $0.18 per share. Let me remind you, however, that the LIFO adjustments are non-cash charges and consequently do not impact free cash flow, given our domestic tax position.

Let me now address the restructuring and other charges during the quarter. First, we booked an after-tax charge of $19.5 million for legacy environmental liabilities. Secondly, we booked $11.1 million for deferred tax adjustments. And lastly, we booked $5 million for various business restructuring initiatives and legal reserves related to previously discontinued operations.

Regarding our outlook for 2007, we expect free cash flow of approximately $200 million. Improving earnings are the principal driver behind the increasing free cash flow. Earnings, as measured by EBITDA, should improve by approximately $30 million in 2007. We also expect to benefit from improved working capital efficiencies and lower legacy environmental spending. We expect capital spending to be up slightly from 2006, driven primarily by our soda ash business, and the largest specific item is a new longwall miner.

Regarding the intended uses of our free cash flow, our cash dividend program will use $28 million at the current dividend rate. We continue to evaluate attractive growth opportunities outside the Company such as product acquisitions, end-licensing deals or development ventures in Agricultural Products and bolt-on acquisitions in Specialty Products. We hope to consummate a number of transactions this year. And finally, we have $60 million remaining on our share repurchase program.

We have said many times that we have the patience and will exercise strategic and financial discipline when executing our growth initiatives. We do not, however, intend to systematically deleverage FMC's balance sheet. We continue to believe that from a capital structure perspective, maintaining $500 to $600 million of gross debt over time optimizes our cost of capital and provides us with the financial flexibility that we require to execute on our growth initiatives.

With that, I will now turn the call back to you, Bill.

Thanks, Kim. Looking ahead, while Industrial Chemicals is facing a difficult environment in the first quarter, we remain highly confident of delivering another year of strong performance. With respect to our outlook for 2007, we expect earnings before restructuring and other income and charges of $5.70 to $6 per diluted share, which at the midpoint of the range represents an 8% increase above 2006.

In Ag Products, full-year revenue is expected to be up in the low to mid-single digits as a result of new product introductions, continued label expansions and volume growth in herbicides. Full-year segments in Ag are expected to increase approximately 10%, driven by the sales growth and further supply chain productivity improvements, offset in part by increased spending on our growth initiatives and higher raw material costs.

In Specialty Chemicals, we expect full-year revenue growth in the mid-single digits, as higher volumes and higher selling prices in both lithium and biopolymer drive the top-line growth. Full-year earnings growth of approximately 10% is expected in the segment as a result of the sales growth and the benefit of continued productivity improvements, offset somewhat by higher energy and raw material costs.

And as Michael has just reviewed for you, in Industrial Chemicals, we expect full-year revenue growth in the mid-teens as a result of higher domestic soda ash selling prices and volume growth in Foret, and with full-year segment earnings level to prior year, as aggregate pricing volume benefits are offset by higher energy costs, primarily in the first half of the year in Spain, and higher raw material costs.

Let me move now to the first quarter. For the first quarter, we expect earnings before restructuring and other income and charges of $1.60 to $1.70 per diluted share, as continued growth in Agricultural Products and Specialty Chemicals and higher soda ash selling prices are more than offset by the higher costs for energy, particularly in Spain, and higher raw material costs.

In Ag Products, segment earnings are expected to increase approximate 10%, primarily as a result of strong results in Brazil and Europe, offset in part by increased spending on our growth initiatives and higher raw materials.

In Specialty Chemicals, first-quarter earnings are also expected to increase by approximately 10% as a result of the increased sales, partially offset by higher energy and raw material costs.

And as Michael has just reviewed with you, in Industrial Chemicals, we expect earnings to be 30% to 40% lower than the first quarter of 2006.

Let me close before I turn it over to the Q&A with a couple of concluding comments regarding our outlook for 2007. Our growth momentum continues in both the Ag Products and Specialty Chemicals segments, with earnings forecast to be up 10% year over year in each and we continue to look for additional investment opportunities in both.

Industrial Chemicals will resume its earnings momentum once we get through a tough first quarter. A number of good things happened in the segment that give us confidence about its future. We did realize a significant price increase in our North American soda ash business, and we secured further contract changes that will improve the longer-term outlook for the business. The soda ash export market environment, as Michael described, will improve as Chinese capacity is constrained, and in Latin America, most of the legacy contracts, which have limited pricing actions, will expire in the course of 2007.

And while we may be frustrated that it didn't happen sooner, the electricity pricing issue in Spain appears to be on its way to being fixed. I share Michael's confidence that despite the short-term operating environment, Industrial Chemicals will be back on track, building considerable momentum by mid-year and deliver strong earnings growth in the second half and on into 2008.

With that, I thank you for your time and attention, and we will be happy to take your questions.

(OPERATOR INSTRUCTIONS). Robert Felice, Gabelli & Company.

That is a surprise, to be first on the call. I have a couple of questions on the soda ash side. The $10 per ton increase was good -- it wasn't as good as I would have anticipated. I know that a couple of months back, there had been some thought that some of your competitors had ceded on pricing to lock up contracts over a longer length of time. I was hoping you can comment on that dynamic, the length of contracts, now as you look out and how that might be playing out.

This is Michael Wilson, and with regard to the soda ash contracts, yes, I think the increase that we got was pretty much in line with our expectations in North America. We did run into a number of competitive dynamics. I think some up what you indicated is true, in that there were some competitors that are out looking at longer-term contracts. One of the things that we were pleased we were able to do is to maintain in our contracts the energy surcharge pass-throughs and freight transfer pass-throughs that others also ceded.

I guess what I am wondering is relative to that dynamic, was that the majority of the reason for $10 as opposed to $12 or $15? Are you seeing any softness in demand in North America? Is the slowdown in domestic GDP starting to have an effect on the demand side of the equation?

No, it's really not a demand issue. The industry remains sold out in North America. All producers are producing full-out. In fact, I would say that the North American producers probably shorted ANSAC a bit in 2006 because we didn't have product to be able to provide. So it's not a demand issue. I think it was just an issue of competitive dynamics as the contract season played out.

Then obviously, I am turning over to the export market -- the pricing there was a bit disappointing. Are you shelving your incremental capacity, 250,000 tons that you would normally bring on at Granger at this point, or are you still planning on bringing that incremental supply to market?

We have already brought the incremental capacity up. We are running at the 500,000 ton rate that we had indicated previously. We really don't think that that had an effect on the export pricing, however. If you look at where we saw the most impact from an ANSAC standpoint, it was really in Asia. And ANSAC's shipments to Asia were actually down in 2006. We also believe that 2006 domestic production was down despite the additional Granger volume as some of our competitors had production problems throughout the year. But at this point, the 500,000 tons is up and running. But we have no plans at this point to bring any additional increments on.

But you don't feel like at this point you need to pull any of that supply off the market to close any tightening in the export market?

No, we do not. We would be shorting ANSAC to do that.

I guess next question is then what gives you the confidence that the export market will tighten up and allow for price increases, looking out to 2008?

It is really when we look at the global supply/demand picture. As we have indicated, we think that demand growth in China is going to outstrip supply growth during the course of 2007. That is going to further tighten up China. Of course, we've got good demand growth in other regions of the world, in Asia and also Latin America.

Is there any chance of getting incremental pricing midyear through ANSAC into the export market? Or is that not a dynamic that I should expect?

As I alluded to in my prepared comments, there is a possibility of that. Whether that comes to fruition or not, we'll have to wait and see. We definitely believe that the market is going to tighten during the course of 2007, this being the global market. So hopefully, ANSAC will be able to exploit some opportunity.

And then I guess finally, Kim, you had mentioned in your prepared remarks that you are comfortable with the current leverage. But you didn't make any mention as to what the incremental free cash flow that you generate this year would go toward. Barring any acquisition, I guess Bill and Kim, are you prepared to comment on where that cash flow or what that cash flow would go toward?

Well, Kim did not comment on it, and I am not either. That decision has not been taken. We have not reviewed it with the Board. And about all I'm going to say right now is what I have said to you and others here for the last six to nine months, and that is that you're going to have to wait and see. When we make a decision, we will communicate it.

Mike Judd, Greenwich Consultants.

A couple of questions. I just wanted to make sure I understood this correctly. In describing the pricing dynamics for hydrogen peroxide at Foret for '07, it sounded like the prices were either going to be flat or down. Which is it, please?

This is Michael Wilson. I think that overall we're probably going to see flat pricing. But of course, you know we had energy cost increases, so we were hoping to get increases more than sufficient to offset this.

And then secondly, the other question is on your Ag business. You guys have done a great job in Brazil. I just have a question about the U.S.-based business. I understand that you have a significant business in insecticides in cotton in North America, as well as in Brazil. I'm just wondering, given the talk about increased corn acreage, whether there could be some sort of interesting dynamics in terms of cotton acreage -- in other words, is it possible that some cotton acreage could be basically cannibalized by additional soybean or corn acreage? Or is there anything there that you are aware of or are you having forecasts along those lines?

And just as a follow-up to that, if that is the dynamic that is actually occurring, could you talk a little bit about some of the new products that you're rolling out, which crops they go into, and how that mix change impacts the business as we think about North America for '07?

Mike, farmers' planting intentions are still -- I would characterize them in the developmental stage. And it's a little difficult to see how much growth we're going to see in corn acreage in '07. I think it's safe to say that we will. Various people have talked about 5 to 10 percentage point increases in acreage. Some of that is going to come from marginal land that has not been in production.

But I think clearly at the same time, there is going to be a diversion of production from certain crops to corn. And I think it may affect a number of them -- soybeans, cotton, predominately. To the extent that that happens, it is probably a net-net negative to FMC, but I think we have incorporated that negativity into our outlook for our Ag business.

With respect to new products, I think Milton has talked about them in the past -- new insecticide, new fungicide, some pre-mixes with our herbicides -- they're all being directed at what we have targeted as our market focus segments. Those segments at the end tend not to be the major row crops. They tend to be the cash crops, the top fruit, vegetables, sunflowers, rice, etc.

Kevin McCarthy, Banc of America.

Actually, Marshall Reid filling in for Kevin this morning. Just a related question on Ag -- if we assume that weather and insect pressure are basically held constant, what kind of volumetric benefit might we expect from higher crops prices in 2007?

I'm sorry, Marshall, what kind of volumetric--?

What kind of pickup in volumes in your Ag Products business could we expect from higher crop prices, both corn and soybeans, and wheat, to a lesser extent?

I don't know what the direct correlation is between crop prices and volume demands for crop protection chemicals. I would be going out on a limb with a saw behind me if I answered that question. If it's important, we can chase it down and you can follow up with Brennen later.

A couple other questions -- first, can you break out the components of the $30 million incremental increase in energy -- how much is Spain versus how much is higher natural gas prices?

This is Michael Wilson, and we just don't break it out beyond the segment level.

I think you alluded to it in your comments, but higher natural gas prices, based on your hedges, will be a penalty for you in '07?

Yes.

And then lastly, for Kim, on the free cash flow guidance, does the $200 million forecast include proceeds from land sales?

This is Kim. No, it does not.

Frank Mitsch, BB&T Capital.

Michael, I think you guys broke out for the third quarter that the Spanish situation was roughly negative $4 million to you. And I am teasing out that the situation in Spain is going to be roughly $9 to $10 million negative for you in the first quarter. Should I assume a sequential straight line for the negative for the fourth quarter that is being caused to you?

Frank, you have to consider two things. The number that you're referencing is the impact of the higher natural gas costs. What I indicated in my prepared comments was that what was unexpected in the fourth quarter is we saw a significant deterioration in the electricity selling price for that quarter. So you got that additional impact in the fourth quarter. As we go into the first quarter, we not only have higher energy, but we have a very bad comparison year over year because the first quarter of '06 had the highest electricity selling prices of the year, so we've got a bad comparison there.

So that negative $10 million year over year, first quarter to fourth quarter, is a combination of the nat gas and the selling prices. And part of the nat gas, at least for the Company overall, is due to these unfavorable hedges that are in place. When do those unfavorable hedges roll off?

We hedge forward on a 12-month basis, so we are covered right now for all of '07, for 80% of our requirements. You're really talking about '08 before that phenomenon gets behind us. It is a strategy, Frank, that has worked -- it's a hedging strategy that has worked in our favor as natural gas prices have gone up over the last three or four years. But obviously, the reverse happens when prices start declining.

That is fair. Obviously, over time, that should equal out. On the ANSAC export prices, you indicated that you thought that would be lower. Is that on an absolute basis, or does that include the higher shipping costs, ocean freight costs, that you mentioned?

We are expecting prices to be down modestly, including the additional freight costs, so on a net basis.

So on a gross basis, prices are probably up, but on a net basis, they are down.

They would be down by a bit more on a net basis.

Understood. And then lastly, Bill, you indicated confidence in a reacceleration of earnings growth in your Industrial Chemicals segment, second half of this year as well as 2008. What are your thoughts with respect to the Ag business and the Specialty Chemicals business, looking out the same time frame?

Frank, first of all, I'm not going to give anything discrete for any of the segments, let alone the Corporation, but we remain very positive about both Specialty and Ag. Exactly what rates of growth we're going to see in '08, '09, in those businesses is yet to be seen, but they will grow.

So you're looking at roughly double-digit growth in '07 for both of those businesses, and at this particular point in time, there is nothing that you would urge caution for '08 in those businesses?

Nothing that I can see at the moment.

Dmitry Silversteyn, Longbow Research.

A couple of questions. Number one, you talked about lithium pricing being a positive impact in the fourth quarter, as well as for your outlook for 2007. Can you give us a little bit of color on what's happening with lithium volumes and whether or not the mix shift in this business is being positive or negative for you in terms of earnings?

Dmitry, I missed the very end of that, so if I don't answer the question as asked, jump back in here again. The strength in lithium pricing has primarily been in the primary segments in the first few molecules on the value chain -- carbonate hydroxide specifically. We are seeing good, good being GDP plus growth rates, in both of those -- volume growth rates. And there's no reason to expect that that is going to change through the course of '07.

It's the last part of the question that I missed, Dmitry.

The last part had to do with if there was anything mix-wise going on that would be either positive or negative for your earnings in the lithium business -- one area growing faster than the other that that may have a richer or poorer mix?

No, '07 versus '06, I don't think there's a noticeable or significant mix shift.

And on the Ag business, you gave us first-quarter expectations or annual expectations, first quarter obviously driven by Brazil, to a large extent. Is it too early to talk about fourth quarter '07 and what you see out there as the impact from Brazil? Is the fourth quarter going to be particularly tough to comp against, given the fourth quarter of '06? Or do you look at a fairly steady progression in earnings growth through the quarters in '07?

It is tough to forecast fourth quarter '07 Brazil at this point. I will be honest, Dmitry -- I don't remember the quarterly calendarization of Ag's earnings. They are up 10% in the first quarter. They're up 10% for the year. I would assume, but it is only an assumption, that that pattern ought to be seen generally through the year.

On the Specialty Chemicals business, I know that for the last couple of years there were some issues with energy pricing being up, as well as raw material pricing and quality pricing being up, but quality being down. Are we kind of back to normal when it comes to sourcing of seaweed? Or are there still some market disruptions or quality issues remaining?

I think the quality issues are largely behind us. And I think from a price standpoint, what we have found is that seaweed prices have stabilized, but at a higher level than where they had been historically. We are not forecasting any significant changes in seaweed raw material prices through the course of '07.

And just a quick question on share repurchases. You have about $60 million left, so you are about two-thirds of the way through from what you initially announced in your initial $150 million. Is there some thought being given to expanding this program, or conversely, what are the thoughts on completing the current authorization?

Let me answer the second half first. As -- I think as Kim said, we aren't giving any discrete guidance with respect to the remaining $60 million. And with respect to the first question, I will answer that the same way I did -- I think it was Rob's, about what are we going to do with the $200 million worth of free cash flow. We haven't made that decision yet. And when we do, we will communicate it.

And then a couple of bookkeeping questions. I'm sorry -- I think you said something about it, but I missed it. It was given quantitatively -- what was your guidance for CapEx for '07?

$120 million, Dmitry.

Bob Goldberg, Scopus Asset Management.

I had a couple of questions, one on Industrial Chemicals. I just wanted to try to clarify the situation with the Spanish electricity and what impact it is going to have on '07. It seems like it's obviously going to have a -- most of the negative impact is going to be in the first half of the year, particularly in the first quarter. But do you expect the situation to be neutral to the second half in your guidance, or is there a point in the second half where it could possibly become a positive comparison, maybe by the fourth quarter? How are you viewing that?

For the full year, we believe that the electricity price improvement will more than offset the increases in the energy input costs to produce that electricity for the cogeneration side. It is going to be negative in the first quarter, probably close to neutral in second, and then improve throughout the second half of the year.

In your guidance, it assumes a positive variance in the second half.

Yes.

And on Ag, Bill, I was just wondering if you could help me understand -- I was very impressed with your guidance, not only for the year, but especially for the first quarter in Ag, because last year, if I remember correctly, you had a fair amount of I thought pull-forward of sales from 2Q into 1Q. And 1Q '06 was really a blockbuster type quarter. And then you are saying you're going to be up 10% from that. So what is going on in the Ag business in the early part of the year? Is it a strong Brazilian market or your Europe or Asia -- or where are you seeing strength 1Q '07 versus 1Q '06?

Bob, first of all, it is only the 6th of February, or 7th of February -- all we have is January results. And we saw very strong Brazil in January and a reasonably strong North America.

I know you don't have much in the way of numbers, but you are giving guidance for the quarter. It is pretty strong guidance, given that you had -- am I correct that you had a pull-forward in 1Q '06?

Correct. And we are standing by our guidance.

In any particular crop? Is this in Brazil? Is this sugarcane primarily, or sugarcane and cotton?

Sugarcane and cotton.

And anything in terms of the European and Asian businesses that you're looking at for '07 in terms of growth?

A return to normal weather conditions in Europe. You may not remember, but Europe was very hot and very dry last year, not particular conducive to the demand for a number of our products. And assuming normal weather conditions, we ought to get a boost from that.

And lastly, are the end-licensed products meeting your expectations or exceeding them? How are they coming along?

They're on target.

Bill Young, Credit Suisse.

Most of my questions have been answered already, but I guess I am kind of dense, but -- so Mike, if soda ash is sold out and you don't want to pull back because you might shortchange the ANSAC commitments, why is pricing more competitive than one might have expected in such a situation?

Again, I assume you're referring to the pricing in North America. And no, I can't explain it. There's competitive rivalry. There's some churn in terms of customers. But sometimes it's hard to explain somebody else's actions. As I indicated, we were a bit frustrated that in some cases, we couldn't believe that things like energy surcharges and freight people weren't naturally passing along as part of the contract. So we ran into some of that. I can't speak for other people's motives, however.

Does that mean there's too much inventory in the system, or some of the other producers, without officially adding capacity, are going to be able to churn out more from their mines?

It's certainly not an inventory issue. As I said, the industry was sold out for most of the second half of last year, third quarter, fourth quarter. There was a lot of delayed shipments across the industry. So that's not the issue.

Maybe the second part -- maybe there's more availability or maybe output a little higher.

Bill, I think you're barking up a wrong tree.

Good, that's what I wanted -- an explanation.

There's not inventory in the system. There is not additional capacity the competitors are bringing on. And I'm going to characterize it -- no, I won't -- I was going to call it irresponsible (multiple speakers) -- I am not going to do that.

Some of our competitors, I will call it cherry-picked customers during the year, customers that we had -- or attempted to cherry-pick some of our higher-priced customers. And that limited our ability to move pricing up with those specific customers. And there was a little bit of churn. We lost volume at OCI. Several new accounts came on that people got more aggressive than they should have in trying to capture -- all of which, when added together, constitutes this competitive environment that Michael and I can't really fully explain. But it is the reality of the situation.

It has happened in the past. It's happened virtually every year since prices started going up in 2003. We have yet to fully realize the full value of the announced price increases. And the only reason we have failed to realize them is competitive activity. It is not expansions. It is not inventory. It is not a sloppy, loose market.

I didn't mean to say it was expansion capacity -- I just thought a little bit more can be gleaned from your mining operation, which is not exactly the same thing, but, okay, we will have to wait a little longer and see if we can get a better answer on it.

And second, your results in Ag have been very impressive; in fact, your operating margins around 20% for 2006 -- they are higher than Monsanto's operating margins. Granted, Monsanto puts a lot more money into R&D. But is there a natural limit? You are looking for margins up again in 2007 based on the guidance that I heard. Is there a natural limit to this, or do you think it just continues to move up indefinitely?

I don't think it can exceed 100%.

That's good. I am glad to hear you say that. But do you think you can get 25%, 26%? Do you think that is reasonable, going a couple of years out?

I think there is an opportunity for improved margins over time. I am not going to commit to a number.

And last but not least, Kim, I might have read a little bit too much into what you said, but it sounded like you were maybe a little further along in negotiations on some kind of a deal, maybe getting access to a product line or a bolt-on or something like that. You sounded a little more optimistic than you had in the past. Did I read too much into that, or are you maybe a little bit further along than you have been historically?

Bill, this is Kim. I think you read -- I tried to craft the words right. I am amazed that it came through. But we are more optimistic now. We have more irons in the fire. Several of them are further along. But as you know, Bill, from watching this and seeing this, until the deal is done, the deal is not done. But we have a number of good ideas. Our teams are working diligently through various stages of the process. And we are very anxious to be able to report to you some successes. And I'm confident we will this year.

David Binns, Seminole Capital.

I just had a quick question about your hedging policy. You've got these energy pass-throughs in your contracts at what the current costs are, but you're hedging out for a year. Could you explain why this makes sense?

Why hedging makes sense?

Why hedging makes sense when you've got the energy pass-throughs happening in the current energy prices.

We don't have energy pass-through at 100% of our business. Michael talked about having it in our domestic hydrogen peroxide business and our domestic soda ash business, but in the rest of our businesses, we don't have it.

Do you ever reassess your hedging strategy in light of expectations of what you think natural gas prices are going to do?

If you do that, you're not hedging.

Jim Stanley, Merrill Lynch.

I just wanted to get back to Ag for a second. I am a little bit confused with some of the issues Michael asked you about the impact that you might see from increased corn acreage and increased soybean acreage or whatever on your business, which is not really tied to corn and soybean. So I just wanted to sort of go over that again and understand it a little bit better.

So I think what you said there, in the U.S., anyway, I guess, is that you're going to see some substitution from other crops into corn. We don't know how much; like you said, the estimates are up 5% to 10% acreage, maybe something like that. And so net-net, that would be a negative to you. You tell me if I am wrong. And I assume that this is obviously due to the ethanol thing and all that. But you are obviously benefiting net-net down in South America from sugarcane, I assume.

So net-net, it's a negative in the U.S. or North America, and a positive in South America. And net-net, maybe you can sum that up for me if you know or choose to, but do I understand that correctly as far as how--?

You do. Net-net, in the U.S., it's probably a negative. Net in South America, it is positive. Net in Europe, it's a positive. There's a fairly rapidly developing biodiesel fuel business over there, based upon oilseed rate. And so that globally, net-net, it is a positive for us. But I was answering the question as asked about North America.

Correct -- that is what I wanted to understand. So in North America, it's somewhat of a negative, but globally, you still think you shake out pretty well because of your sugarcane exposure and other exposure, I guess?

Correct.

And again, you also said that as far as the North American impact, you think that -- you factored in some acreage reduction from cotton into your forecast, I suppose?

Exactly.

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

There are; thank you, operator. And let me again thank all of you for joining our call today. There are a couple of messages that I would like to leave with you, if they haven't come through so far. One, our growth momentum continues. And while 2007 is now shaping up to come in below our earlier expectations, our longer-term outlook is unchanged.

Industrial will recover in the second half, and that should continue into 2008 and beyond. Specialty's earnings should continue to grow, given the attractive market space served and the significant market positions that we hold. And Ag Products, we are increasingly confident of the success of our focused market and innovation strategies.

And then second, our cash flow generation is expected to be even more robust in 2007 than it was last year.

During the course of 2006, we did close some of the undervaluation gap that existed in our stock price when the year began. But a lot more remains, and we are committed to realizing the full value of that for our shareholders.

With that, let me again say thank you.

This concludes today's FMC fourth-quarter earnings release for 2006 analyst conference call. You may now disconnect.