富美實 (FMC) 2007 Q3 法說會逐字稿

Good morning, and welcome to the third quarter 2007 earnings release conference call for FMC Corporation. Phone lines will be placed on listen-only mode throughout the conference. After the speakers presentations there will be a question and answer period. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Mr. Brennen Arndt. Mr. Arndt, you may begin.

Thank you, and welcome, everyone, to FMC's third quarter 2007 conference call and webcast. Bill Walter, our Chairman, President and Chief Executive Officer, will begin the call with a review of third-quarter performance and Bill will then turn the call over to Milton Steele, our VIce President and general manager of Agricultural Products, who will provide everyone an in-depth review of the performance and growth prospects for our agricultural products business. Milton will then turn the call over to Kim Foster, Senior Vice President and Chief Financial Officer, for a report on our financial position, and then Kim will turn the call back over to Bill Walter who will provide our outlook for the balance of 2007, and then we'll complete the call by taking your questions.

As a reminder our discussion today will include certain statements that are forward looking and subject to various risks and uncertainties concerning specific factors summarized in FMC's 2006 Form 10-K and most recent Form 10-Q and other SEC filings. This information represents our best judgment based on today's information. Actual results may vary based on these risks and uncertainties. During the conference call we will refer to certain non-GAAP financial terms. On the FMC website, available at FMC.com, you will find 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 today on the call, as well as have provided you our 2007 outlook statement.

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

Thanks, Brennen, and good morning, everyone. As you saw in our earnings release, we delivered another record quarter, continuing the momentum we've created throughout the year. Let me summarize our third-quarter results. Sales of $627 million were up 10% versus third quarter a year ago. Earnings before restructuring and other income and charges of $0.69 per share increased 35% over last year's third quarter earnings of $0.51 per diluted share. Ag Products again delivered strong performance, with earnings of $39.2 million, up 38% versus a year ago, driven by a strong Ag economy, which resulted in higher sales in all regions, the benefit of new product introductions and continued supply chain productivity improvements. Specialty Chemicals earnings, $33.5 million, increased 24% versus the year-ago quarter as a result of higher selling prices and volume growth in lithium, strong commercial performance in BioPolymer, and continued productivity improvements. Industrial Chemical earnings of $24.6 million were 15% higher than a year ago, driven by higher selling prices in soda ash, and higher export volume across the group.

Energy and raw material costs were higher than a year ago across the Company. Versus the prior year energy and raw material costs unfavorably impacted earnings by $0.06 per share in the third quarter. Currency translation had no impact on our earnings for the first time in several years. On a GAAP basis we reported net income of $37.1 million dollars, or $0.48 per diluted share. GAAP earnings for the quarter included a $0.15 per share charge for restructuring and other charges, including the tax effects, which was primarily related to the previously-announced closure of our Baltimore agricultural chemicals facility and a $0.06 per share charge related to discontinued ops. With those reconciliations our non-GAAP earnings again were $0.69 per diluted share versus $0.51 per share a year ago.

Let's take a more detailed look at the performance of our businesses in the quarter, moving to the segments. First, Specialty Chemicals. Revenues of $164.8 million increased 12% over the prior-year's quarter, while earnings increased 24%. Lithium and BioPolymer both delivered strong performance. In lithium earnings growth was driven by higher prices for primary lithium compounds and higher volumes in pricing and downstream products. Although pricing in most markets continue to be driven by a tight global supply demand balance, new capacity and excess inventory has led to some recent softening of prices in China. in BioPolymer good commercial performance in pharmaceutical include ingredients markets, as well as continued productivity improvements, drove the earnings increase, and more than offset higher pulp prices and spending on growth initiatives. In pharmaceuticals we realized good volume growth as a result of continued strong global demand for dry tablet binders and [disinigers]. And in food ingredients we realize good volume growth in our core product lines, particularly in the emerging markets of Asia and Latin America.

Moving to Industrial Chemicals, sales of $269.9 million increased 10% versus the prior-year quarter as a result of higher volumes and selling prices in soda ash, volume growth at Foret, and favorable currency translation. Segment earnings of $24.6 million increased 15% versus the year-ago quarter, as the revenue gains and the benefit of higher electricity selling prices in Spain more than offset higher energy and raw material costs across the group. In soda ash, market conditions remain tight and all U.S. soda ash producers continue to operate at full capacity. Increasing demand in the export markets remains the major driver of volume growth. Regarding the energy situation in Spain, as we expected on September 1st our cogen plants began to benefit from the new regulations enacted by the Spanish government, which provide cogen electricity producers the option of selling electricity into the grid at an established tariff price instead of the more volatile daily price of wholesale electricity. The tariff price will be adjusted quarterly and is indexed primarily to the average cost of natural gas cogen producers in the preceding quarter. The favorable impact of the most recent changes to energy regulations in Spain is consistent with the expectations included in our guidance.

Moving on now, to corporate items, corporate expense was $12 million compared to $11.3 million a year ago. Interest expense net was $8.6 million versus $7.5 million in the prior-year period. And on September 30, 2007 gross consolidated debt was $572.1 million and debt net of cash was $456.2 million. For the quarter, deappreciation and amortization was $32.3 million and CapEx was $31.9 million. That's Specialty Chemicals, Industrial Chemicals. and corporate, and now for a discussion on Ag Products I'll turn the call over to Milton Steele. Milton?

Thanks, Bill, and good morning to everyone. Today I'll be reviewing Ag Products 2007third quarter and year-to-date financial performance, as well as highlighting the opportunities we foresee to continue to profitably grow our business. First, let me provide a brief profile of our Agriculture Products business and current global industry dynamics in which we operate. We're a focused competitor in the global agriculture chemical crop protection market. Over the last 12 months, our sales totaled $856 million, of which approximately 65% is insecticides and the remaining 35% predominantly herbicides. We compete globally and enjoy relatively strong niche positions in agricultural and non-agricultural market segments in North and South America, Europe and Asia.

We differentiate ourselves in several ways, namely: We have created a unique low-cost manufacturing operation in which we source most of our key raw materials and technical active ingredients from our supply chain partners who are established in low-cost manufacturing locations. This strategy, we believe, makes us globally cost competitive with any of our competitors. Second, we recently changed our innovation paradigm by exiting new active ingredient discovery spending. We continue, however, to invest between 8% to 10% of our annual sales in shorter term, product differentiating innovation and these investments are paying off. Approximately 20% of this year's gross profit will come from products that we introduced in the past three years. Our commitment to innovation means that we continuously look for ways to provide unique value to our customers, and in several of our focus segments our products and service offerings are regarded by many of our customers as best-in-class.

Third, we are highly disciplined in our focus on selected geographic and crop segments, realizing that given our relative size we cannot compete in all global crop protection markets. Fourth, over the past few years we have successfully implemented and expanded our market access alliances, which allow us to competitively market and distribute our products in our focus crop and non-crop segments. A great example of this is our western European distribution joint venture with (inaudible) Crop Protection in Ishihara [sanctio] of Japan. Our low-cost sourcing, customer-driven innovation, disciplined focus and market access strategies make us one of the most profitable competitors in the industry, with an LTM EBIT margin of 23%. While we expect to have our fourth consecutive record sales and EBIT performance in 2007, there's no room for complacency. The global chemical crop protection market has been highly dynamic over the past several years, and we expect this to continue in the future.

Based on our evaluation of the industry, the following trends and opportunities are projected to be in play. The technology and financial returns involved in discovering new pesticidal active ingredients are maturing. As market spaces for new chemistries have declined, fewer new molecules are being invented and commercialized, and these tend to be smaller in value, while consis -- while costing significantly more to register, develop and commercialize. Further, many pesticidal molecules have lost patent protection and others will do so over the next several years. Global environmentalism has made more costly to register new discoveries increase the risk that a new biologically-effective pesticide will not be registrable.

In addition, older chemistries face the risk of being deregistered, resulting in companies having to spend significant resources to maintain existing registrations. We face both of these challenges in our business today. Ag biotech, also known as GMO infiltrate, is substituting for chemical crop protection chemistries. ,Since Ag biotech's introduction in 1996, we estimate that the chemical crop protection market value has devalued by $6 billion to $7 billion. The emergence of several global generic competitors has led to significant price erosion on many off-patent molecules, and in several instances competitive rivalry appears to be intensifying, especially for large recently off-patent molecules.

And finally, the recent growth of biofuels has significant potential impact from crop prices, planted acres and global crop protection markets. It is unclear at this time how the competition between food versus biofuels will eventually be resolved. One thing is for sure, though, as agricultural crop commodity prices increase, farmers are incented to increase spending on inputs to maximize farm yields, including the use of pesticides. We have experienced these challenges first hand with issues such as (inaudible) patent expiration and our (inaudible) reregistration challenges in the U.S. and DEU. And notwithstanding these challenges, we have grown our business with record sales and profit performance over each of the last four years. We have accomplished this by proactively implementing strategies to capitalize on the opportunities and mitigate the threat in the industry, and we have leveraged our strength in order to realize profitable growth.

Let me share a number of examples with you. We made a decision to begin implementing a low-cost [acid-like] manufacturing strategy in 1999, several years before the global generic competitor threat became the reality it is today. Eight years later we are continuing to drive productivity gains in our manufacturing supply chain and global selling and administration costs, plus competitiveness across our value chain remains an essential element of our strategy. As you know, last quarter we announced a large manufacturing restructuring project, which is on track to deliver approximately $30 million in cost reductions by 2009. Another example of leveraging strength is our long-standing focus on Brazil. Long before the ethanol boom we began investing in creating sustainable long-term traction with our customers and has developed a customer intimacy and loyalty in Brazil's (inaudible) crop segment that today serves us better than most. As Ag biotech continues to grow the value of seed input and output trades is likely to grow, and accordingly, the need for and value of protecting these higher-value seeds will grow. These treatment technologies are one of the key growth opportunities that we have identified and we are actively engaged in looking for and developing opportunities this projected future-growth area.

By exiting new active ingredient discovery and changing our innovation paradigm, we are now focusing innovation investments on product differentiating technologies that should reduce our innovation cycle from 12+ years to approximately four years. These product differentiating technologies can be applied to a wide range of pesticides, with a goal of economically differentiating leads in the marketplace. For example, in the last year, we gained exclusive access to two technologies that are now in the proof of concept stage and early results are encouraging that we can materially alter the way an existing pesticide performs and, thereby gain proprietary positions from the changes we create by applying these technologies. As you can tell from these examples, our Ag Products team is proactively pursuing strategies that will take full advantage of industry trends and opportunities and that we believe will enable us to continue to generate profitable growth and enhance shareholder value.

We're also in the process of pursuing a series of small products and technology acquisitions for our focused market segments in Brazil, Europe, North America and Asia. If successful, these efforts will have the potential to add $100+ million in sales and $25+ million in EBIT within the next few years. For the longer term we remain watchful for larger strategic opportunities aimed at further enhancing Ag Products long-term prosperity and sustainability. These will include alliances, joint ventures and Company acquisitions aimed at creating a scale advantage, global business that supplies cost-effective differentiated chemical crop protection solutions to [technified] farmers. In summary, the successful execution of our strategy has been fundamental to Ag Products financial performance over the last four years.

With this overview of our industry and Ag Products strategy let me now review our third-quarter performance. Third quarter sales of $192.7 million were up 7% compared with the prior-year quarter. We experienced sales increases in all regions, led by Europe, Brazil and parts of Asia. In Europe sales benefited from more favorable weather conditions than a year ago, increased demand for biofuel crops, and the growth from new product introductions. Brazil will continue to benefit from increased planted acres in key crops. Sales in Asia increased on the strength of cotton, rice and sugar cane markets, as well as more favorable weather conditions. Segment earnings in the quarter of $39.2 million increased 38% driven by broad-based sales growth, continued manufacturing productivity gains and lower selling, administrative and research spending. Our year-to-date performance has been exceptional. Year-to-date sales were $660.2 million, an increase of 16% from the first nine months of 2006. Earnings of $175.1 million were 37% higher than last year.

These results were driven by several factors including: Continued strong performance in Brazil, due to the strong Ag economy; increased planted acres in cotton and sugar cane, as well as high commodity prices; continued improvement in our European business, driven predominately by our market access joint ventures in western and eastern Europe, as well as new product introductions and growth in key high-value crops, such as oil, seed, grapes, potatoes and vines; and finally, better-than-expected growth in Asia, particularly in China and Indonesia. Throughout 2007 we have realized improvements in our manufacturing cost structure and productivity, although higher raw materials, energy, solvents and packaging costs offset a portion of these gains. Looking to the fourth quarter, we believe that fourth quarter earnings the be up 35% to 45% due to continued good market conditions in Brazil and lower manufacturing costs. In closing, we look to record financial performance in 2007 for the fourth consecutive year. We are well on the way in implementing our focused growth strategy and are confident that we will continue to deliver sales and earnings growth to our shareholders.

Thank you for your time, and I look forward to taking your questions during the Q&A session, and I would now like to turn the call over to Kim Foster.

Thanks, Milton. Our free cash flow guidance in last year's conference call was $160 million for the full year of 2007. We're now revising this estimate to $140 million, as a result of our decision to build inventories in our Agricultural Products group. As Milton has just discussed, our Ag business continues to outperform our expectations. The higher sales require an increased in investment in inventories in order to meet our customers' delivery requirements. In addition, we've decided to temporarily increase inventories associated with products produced at our Baltimore, Maryland facility. We are on track to shut down the Baltimore facility in the second quarter of 2008, but believe that a temporary inventory build is prudent in the dynamic agricultural environment that exists today.. As I have mentioned on previous calls an item not included in our free cash flow projection for 2007 is the proceeds of the sale of our Princeton, New Jersey property. We still anticipate the sale to close in early 2008. Proceeds from the sale are estimated at approximately $60 million.

Regarding the intended uses of our free cash flow, our dividend program will use $30 million during 2007 and our stock buyback program, on a year-to-date basis, has totaled $80 million, including $30 million in the third quarter. Since February of 2006, the inception of our share repurchase programs, we have repurchased 4.7 million shares on a split adjusted basis at a total cost of approximately $170 million. As a reminder, our stock buyback program does not include a specific timetable and may be suspended or terminated at any time. However, we expect that the current program, authorized in April 2007, will be accomplished over a two-year period. Also, let me remind you that our earnings guidance does not assume that we repurchase any shares under the share repurchase program in future quarters. We remain very confident in FMC's free cash flow generating capabilities. As I have said over the past year, we will continue to balance the cash requirements of our growth initiatives with the alternative of returning cash to shareholders.

Bill will be giving you an update of our expectations for the fourth quarter at the end of my remarks; however, I want to take a moment here to discuss two corporate items that will negatively impact our fourth quarter comparisons. First, in the fourth quarter of 2006 we booked an adjustment to our full-year tax rate. The result was a fourth quarter tax rate of 19.5%. For 2007 we have forecasted a tax rate of 28.5% for the full year and the fourth quarter. The result is a nine percentage point increase for the tax rate for fourth quarter. The higher tax rate reduce our earnings per share in 2007 by $0,08 when compared to the fourth quarter of 2006. And as a remind he, we are not a U.S. taxpayer and therefore the higher book tax rate does not impact free cash flow.

Second, as a result of our long-term initiatives to improve our supply chain and reduce inventories, we recorded LIFO income in the fourth quarter each of the last several years. In the fourth quarter of 2006, this amounted to approximately $15 million of income. In the fourth quarter of 200, we expect to book LIFO expense of approximately $2 million, as our domestic inventories are expected to increase and provide transition inventory for the shutdown of our Baltimore Ag Products facility. The net result is a year-over-year change in LIFO of $17 million, which reduces our earnings per share by $0.16 when compared to the fourth quarter of 2006. Once again, due to our U.S. tax position, this charge does not impact free cash flow in 2007.

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

Thanks, Kim. Regarding our outlook for the full-year 2007, we remain confident of delivering another year of record earnings. Based on our strong year-to-date performance and our outlook for fourth quarter, we are reaffirming our guidance for earnings before restructuring and other income and charges of $3.10 to $3.20 per diluted share. At this midpoint of this range this represents a 15% increase above 2006. Regarding our outlook for the fourth quarter, we expect earnings before restructuring and other income charges of $0.60 to $0.70 per diluted share. Segment earnings are expected to grow 35% to 40% over the fourth quarter of 2006. This continued strong operating performance is expected to be offset in large part by the change in noncash LIFO expense and higher book tax rate that Kim just described. Again, these two total $.024 a share.

Moving to our earnings expectations for each of the operating segments, in Ag Products, as Milton said, fourth quarter segment earnings are expected to be up 35% to 45% due to continued good market conditions in Brazil and the benefit of further supply chain improvements. In Specialty Chemicals, fourth quarter earnings are expected to be up approximately 40% as a result of good commercial performance in BioPolymer -- BioPolymer and lithium and the benefit of productivity improvements. And in industrial Chemicals, we expect fourth quarter earnings to increase 30% to 35% as aggregate price and volume benefits and higher electricity selling prices in Spain more than offset higher energy and raw material costs across the group. Our strong fourth quarter and full-year results reflect, I think, the fundamental strengths of the Company; our global footprint, the noncyclical nature of our end-use markets, and the absence of any significant petro chemical exposure. These have permitted us to grow at strong double-digit rates for the last four years and bode well for future growth as well.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mike Judd.

Congrats on a good quarter.

Thanks, Mike.

Couple questions, one on Brazil, and in particular I guess the sugar cane acreage there, it looks like it's continuing to increase. I'm just wondering if you could talk a little bit about the various crops that you guys primarily serve in Latin America and maybe give us some sense of what growth projecteries you expect for those particular crops in terms of acreage and/or usage?

Hi, Mike, it's Milton. In Brazil we think sugar cane will be up somewhere around 0.5 million Hectors, about 8%. [Cotton] will be up about 5% to 8%. We think soybeans will be up about 5% to 10%. Those would be the main crops that we're looking at in Latin America and Brazil is the big one for us.

Can you remind me just to which quarters the volumes -- the heaviest volumes are for you in Latin America?

The fourth and the first and then it would be -- the lowest volume would be the second quarter and then the third would be the third.

Okay, great. And then just switching over to -- actually, lithium for a minute. My understanding is that some of the other producers evidently are facing at least higher costs related to Argentinean natural gas in Chile, anyway. And I'm just wondering if -- or lack of availability, I suppose -- if you have any comments about your relative position, as I believe you produce in Argentina, right, so you don't necessarily have any supply issues or could you just elaborate please?

Yes, Mike. First of all you're right, we do produce in Argentina. At least to date we have had no curtailment of gas supplies whatsoever to our lithium operations. What the government may do going forward from here is unclear to us. Our expectation, however, is that we will continue to have sufficient gas to run our operations.

Thanks for the help.

Our next question comes from the line of [Robert Sillit].

Hi, guys, congrats on a nice quarter. Just a couple of quick questions, I guess first on soda ash. FMC and its competitors have now announced, I want to say, $25 or $30 of cumulative price increases, and I know you're just starting to get underway with the negotiations, but given the relative strength of the soda ash market this year, would you anticipate getting more than the historical 50%?

Robert, Bill. I give you credit for your persistence and consistency here in trying to understand how the soda ash pricing is going to work out in this contract season. And like I said to you last quarter, I wish I could provide more clarity on your question than I can at the moment. Until these contracts are negotiated and signed, to speculate on how they're going to come out I think is just inappropriate. We do have $30 on the table. We have had $30 on the table in previous years and not got all of it. There have been years when we got everything we had on the table. Again, I wish I could help you here, but I just can't.

Maybe we can go about it a little different. The market is quite strong. You've seen the repeal of the Chinese export tax rebates, some issues with one of the facilities in Kenya. As you look at the environment today, under what scenarios would you envision not getting the bulk of that? What could occur to effectively limit the amount of pricing that you get?

Robert, first of all, your characterization of the environment, I think, is at least directionally correct. It is a stronger and better environment today than it was 12 months ago at the same time. What could limit the realization of the full or a significant portion of the announced price increase? It's competitive behavior. As we sit here today, the domestic soda ash price is significantly higher than the export price. And our competitors -- you ask what could happen. Our competitors could pursue a strategy of moving volume into the domestic market and away from the export in an effort to upgrade their mix and margin, and in the process of doing that, limit the amount of price increase we could get.

Okay. Is that something that worries you or something that you've seen in past years by some of the competitors?

Worry may be too strong. It's certainly is a possibility. It's been a long time, Robert, since we've had the differential between domes -- as long a differential between the domestic price and prices and the export prices as we have today. Hard for me to comment about historical performance or behavior, because we just haven't had this set of circumstances.

Okay, no, that's helpful, though. And then I guess flipping gear to the peroxygen side of business, that's had a tough year so far due to some incremental capacity that I want to say Arkema brought on line. Can you comment as to how this supply/demand balance has evolved over the last nine months? And then looking to the fourth quarter and into '08, would you expect the domestic market to support price increases and perhaps a modest rebound in profitability there?

Yes, again I think, Robert, you've characterized the environment fairly well. It's been a tough year for the hydrogen peroxide -- North American hydrogen peroxide business, at least. Supply/demand situation has improved marginally in the course of the last nine months. The Arkema expansion did come on in late '06. There has been no further additions brought on by anyone else. Demand has grown in the course of 2007. North American hydrogen peroxide demand is probably up 1% to 2% over a year ago. So that (inaudible) imbalance is more favorable today than it was a year ago, however, it still remains at at an absolute level, but at least historically has not supported significant price improvement. Again, having said all of that, we are in the early stages of negotiating the '08 contracts, and I think there's $0.04 a pound price increase on the table and we're just going to have to see how that works its way out.

How much of the $0.04 would you need to get to make up the lost profit from this year to get you back to neutral relative to '06?

Well, not very much, Robert. I mean, I'm not going to get that granular, but our hydrogen peroxide profits, '07, '06 are down only marginally.

Okay. Fair enough. And then finally, if I look at your guidance for the full year in Industrial Chemicals, it looks like you're still expecting segment earnings to be down by 5%, and yet third quarter operating income came in above your expectations for the third quarter. So I guess in light of some increased prices through [Adsac] and what we're seeing from [Forette], what's changed?

Again, Robert, you've done good homework. We had guided the third quarter for the Industrial segment earnings level to a year ago and they ended up approximately 15%. Largely timing related, Robert, the movement of plant outages from the fourth quar -- or from the third quarter, as we had expected they would occur 90 days ago, to the fourth quarter, and that's causing the quarter-to-quarter shift, but leaving the full-year forecast unchanged.

Are you talking about the shift of the mining equipment?

No, I'm talking about plant outages. We've got a persulfate plant outage, we got a hydrogen peroxide plant outage, we've got two plant outages in Spain. No, this is not the long-wall mining equipment.

Okay, okay. Fair enough. Thanks for taking my questions.

Okay.

Your next question comes from the line of Frank Mitsch

Good morning. Kim, you talked about the negative $0.16 LIFO year-over-year delta in the fourth quarter, any thoughts on how 2008 might look on that topic?

Frank, this is Kim. We're not going to get into specific guidance about 2008, but what I would ask you to consider, as you think about that question, is our view that the business will continue to grow, and to the extent that the business does continue to grow, then we would not be expecting to have a big return to the LIFO income days of the past three years.

Fair enough. Milton, you've been able to put together four quarters in a row of double-digit top-line growth. That ended here in the third quarter. Can you talk about some of the factors as to why that is and when might we see a resumption of double-digit growth in the Ag Product sector? Obviously your margins were very strong. The strongest I think they've been in the third quarter for a while, but just wondering about the top line.

Hi, frank, you're talking about top-line growth going to double-digit in the future?

Yes, you -- you posted between 12% and 20% top-line growth each quarter the last four quarters, this quarter came in at 7%.

Yes. The major drivers for our top-line growth is been the healthy global agriculture economy, the growing demand for biofuel crops and increased planted acres, such as sugar cane, cotton in Brazil, and the benefits of new product introductions. Earnings growth has also been driven by sales growth and further supply chain improvements. I think we will continue to grow the business but not at the same rate as we have over the last year. And this will be continued demand from biofuels, the introduction of some of our new products that we're launching, and new label expansions in our focus segments.

So the top line you're looking upper single digits and the bottom line will be greater than that due to the productivity gains?

Let me jump in here, Frank. We're getting to what I would consider guidance and until we get to the next quarter conference call, I think it's inappropriate for us to talk about '08 specifically, let alone any other year.

All right. Fair enough. And Bill, you talked about electricity pricing in Spain, I believe you said taking effect September 1. I was under the impression that you were going to get some relief starting August 1. Did it just come in the last month? And can you give any order of magnitude -- or rough order of magnitude as to what the improvement was there?

Good memory, Frank, I think we did say in the second quarter conference call that we expected to get the revised tariff pricing beginning August 1 and it did not happen until September 1. I'm trying to remember what we have said previously, Frank, about the effect of electricity pricing in Spain. I think what we have said is that it's been -- depending upon the cool price of electricity, it had an effect of $3 million to $5 million a quarter on our results, unfavorable. This new set of regulations does not take us all the way back to the pricing that was in effect in the second quarter of '06, but does get us a long way back there. All of which is a long winded way of saying that the impact in the third quarter, because we only had one month of the benefit, was probably less than $1 million year over year.

Terrific. Thanks, guys.

Your next question comes from the line of Dmitry Silversteyn

Good morning. Very nice quarter, couple of questions since most of them have been answered. Just to make sure I understand correctly what happened in the quarter. You talk about foreign exchange of not being a benefit to you in earnings in this quarter for the first time in a long time. Can you give us a little bit more detail as to why. Was it just a mix of business. Was it something specific happened?

Yes, we're scrambling, Dmitry, to figure out who's going to try to handle this one. Bear with us.

No problem.

Dmitry, this is Kim. Part of the issue at times is mix. And, when -- for example, one of the largest operations that's impacted by our foreign currency change is our Spanish [thread] operation. They have a different level of profitability than some of our other businesses. So as the currency changes, we need to look at our export businesses in combination with those businesses which -- who's functional currency in this particular case is Euros.. And it was largely a mix issue, because I think what you're driving to is in the past a weakening dollar or a strengthening Euro has provided some incremental benefit to us and that's the reason it didn't in the quarter.

Okay. And your soda ash exports are all done in dollar denominations, correct?

That's right.

Your interest expense has gone up pretty steadily each quarter in the first nine months of this year, despite the fact that your debt is coming down and your cash balance is piling up. What should we expect going into the fourth quarter and what's driving the increase quarter to quarter in interest expense -- in net interest expenses. Is there some other things netted out of there that we're not aware of ?

Dmitry, this is Kim. There aren't any other things that are netting out of there. The net debt level at the end of this quarter, September '07, is roughly the same as the net debt at the end of the third quarter in '06. We had a different timing of cash flows in '06 than we did in '07. Slightly different timing.

Okay, but I'm just talking about sequential during this year.

Sorry?

I'm just talking about the sequential growth during this year. Last quarter you did $10.8 million. This quarter you're doing $11.9 million on what is a lower that debt number and in the first quart he you did $9.9 million. You've experienced a $2 million increase over the two quarters of interest expense, while your interest rate is -- or while your debt -- total debt is going down, and net debt is going down. So I'm just trying to understand, are your interest rates increasing or is there a substantial portion of your debt that's tied to variable rates going up?

Dmitry, this is Kim, I don't recognize the numbers you're quoting, I'm sure they're correct. I think what I'll need to do is get back to you with an answer on that. But the one thing I can say -- and you go back to the comment that is Milton made about the strength of the Ag business this year -- a large part of the strength of the Ag business this year has been in Brazil, and we do a lot of financing in Brazil, and the interest rates in Brazil are higher than the interest rates in the United States.

Okay.

So you do have a mixture impact. I just actually don't recognize the numbers you're talking about, so I don't want to misspeak about anything any more granular than that.

Okay, Kim, that's fine. And then switching gears to the Specialty Chemicals business. You mentioned in your prepared remarks lithium prices coming down a little bit, I guess, because of -- is it just in China or does it have to do with your competitors bringing on capacity outside of China? Can you give us a little bit more detail what's going on with lithium prices currently and what do you expect for the fourth quarter?

Yes, Dmitry, first of all, globally we saw lithium prices continue to improve in the third quarter. In late third quarter there with a additional capacity brought on in China, capacity for carbonate only brought on by Sidic and my comment was intended, I guess, to foreshadow some uncertainty as to how that may play out in China. But I'm fairly confident that however it does play out, it's going to be limited to carbonate and limited to China at this point.

Okay. Do you actually buy carbonate or do you manufacture that.

We manufacture carbonate and I think we still have a small supply agreement with one of the other -- or one of the Chilean producers.

Got you, okay. And then in biopolymers, you talk about salt pricing going up, impacting your raw material costs. Can you give us an idea of what's going on with raw material in the fourth quarter, both on the pulp side and the two seaweeds, the cold water and the hot water -- and the warm water seaweeds?

Yes, first the seaweeds, there's nothing special going on there, Dmitry. I was be surprised if you heard me comment on it three months from now.

Okay.

Continue to see, however, upward pressure on hardwood pulp globally. From our perspect -- we're a minor, obvious, purchaser of pulp. But from our perspective, it's being driven primarily by China.

Okay.

Most of our pulp sourcing comes from North America. With the weak dollar, the U.S. pulp producers have been able to participate more extensively in the export market to China, which has provided a upward pressure on our prices.

Okay. Okay. Thank you very much.

Your next question comes from the line of Bob Goldberg.

Good morning. Milton, I had a question for you on the agriculture business. I was just curious what -- if you could give us a little bit more depth of what you're seeing in the order patterns to cause you to make the decision to build inventory going into the end of the year. Is this something very recent in orders as you've seen them develop? And also maybe a little bit on whether it's a global phenomenon or if there's one particular region that you're seeing the stronger order patterns? Just curious on a little more color there.

Hi, Bob. I think Kim made the point that as we transition out of Baltimore and given the strong demand for our products, we want to make sure that we have a transition stock. While we're on track to start up our various production facilities in China, if there are any delays, we want to make sure that we don't short our sales and our customers, and that's really all that's going on. Last season, at the end of last year, product was short in Brazil, and we want to make sure that this doesn't happen this year, and we've increased our coverage to make sure we can take care of any unanticipated demand. That's really what's going on, Bob.

Okay. I just wanted to clarify something. The acreage increases that you quoted earlier in the call, Milton, were those for the upcoming year? Sugar cane, cotton and soy, you'd mentioned some acreage increases in Latin America.

Yes, that is for the '07, '08 season and that is beginning in September and ending in the following 12 -- for the following 12 months.

Okay. Has your expectation changed over the course of this year for those numbers or has it improved or is it basically in line with what you had been think?

Basically in line with what we thought, yes.

Okay. Great. Switching gears, Bill, I wanted to ask you about the soda ash issue. I know you had a question on it earlier on it and I know [Ansack] is going to be working aggressively to close that gap between domestic prices and export prices. I just was curious what you're seeing in the spot market today with what's going on in China, with the export rebate being eliminated?

Bob, I think as we have said in -- at least in the last conference call, if not each of the last two, Ansack has very little spot business, that over the course of the last several years, they have moved to a contracting process and season that's more aligned with what we have here in North America. So to answer the specific question of what we're seeing in the spot market, there's not enough out there for us to see a pattern that's developing. Having said that, we do see the Chinese producers having -- doing two things. One, reducing their amount of exports, pretty much in line with our previous expectations, and they have increased their export prices by the full amount of the reduction in the export tax rebate..

Okay. And again to follow up, anything new on the situation with some of the capacity additions that were supposed to come on, I think the one in Kenya and other -- there've been issues in India with production. Are there continuing issues with supply out of -- out in Asia?

Yes, China is playing out as we'd expected. The two major facilities were delayed. The Kenya facility continues to have -- I'll just characterize it as start-up problems, quality problems with the ash they're producing, although some of it is finding its way in the marketplace. The Indians are adding capacity, although one of their plants has been struggling due to some operational issues here over the last quarter. I think the net result is a supply situation globally that has improved marginally over where it was a year ago, while the demand side of that equation has increased -- has improved a little bit more.

Net resulting a little bit tighter overall market?

Correct.

And just lastly again, I know you certainly don't want to give 2008 guidance on this call, but qualitatively, what is your expectation on the energy cost front as we look forward? I know you have quite a bit of your energy hedged the last -- this year. In 2007, you had a very significant headwind from energy, I'm just curious as to what your thoughts are looking out in terms of the energy impact on FMC?

Yes, I think at this point, Bob, we are fully hedged up to our hedging policy for '08. And while I'm not going to quantify it ,as you asked me not to, I can say that our net hedged natural gas costs for '08 will be below our net hedged natural gas costs for '07.

Great. Thank you, Bill.

Your next question comes from the line of Ethan Steinberg.

Hi, I just wanted to make sure I understood something on the LIFO charge. Was that factored into the segment operating profit guidance for Q4?

This is Kim. No, it is in -- when you look at our segment reporting data, it's in what we call other income and expense.

Okay. So it's below there? And is it -- is the benefit that you'll get from having this cost this year factored into the $30 million or so you talked about from the benefit from closing the plant in Baltimore next year?

If I understand your question correctly, the answer's no.

So if there's not a LIFO charge next year, that's an additional benefit, too, from whatever other benefits you were talking about from closing the plant?

Ethan, let me jump in here, I think to an earlier question on LIFO, year over year '07, '08, impossible really for us at the moment to -- given where we are in the budgeting process, impossible for us to quantify what direction LIFO is going to move next year versus this year. So I don't think we can answer your question as I understood it. Let me just say --

Just so you know what it is. Okay, I got you. And then also, from the past couple conference calls, when you had talked about the overall -- the full number for '07, were you factoring in this headwind in LIFO or did that -- did that surprise you and you're still getting to that -- the same EPS numbers?

Ethan, this is Kim. We have been factoring that in all year long in our guidance. However, as a result of the increase in inventory build that I mentioned, which was associated with the Ag business, there has-- there is a smaller increase in LIFO expense in the fourth quarter than we -- than we had historically anticipated. But we have been anticipated, in a large part, this change year over year in LIFO expense all year long.

Let me be a little more specific. Our view on LIFO expense for '07 is now $2 million higher than it was when we provided guidance a quarter ago.

Okay. That's helpful. All right, thanks, nice quarter.

Your next question comes from the line of [Gary Beuhliss].

Hi, Bill, I have some lithium questions. I know last quarter and the quarter before you didn't want to discuss issues of a competitive nature, but I wondered if you could give us a couple broad-brush ideas here. One of them is regarding the status of the type and quality of lithium that FMC produces and whether you think it's consistent with the needs of the auto companies? At the Tokyo Auto Show last week, several of the companies announced plans for plug-in lithium ion cars in the 2011, 2012 time period. Are you working with these companies, the auto companies and/or the battery companies, and are you producing or capable of producing the kind of lithium that they're going to need for those batteries?

Gary, because of commercial arrangements, we cannot talk about the specific battery companies and/or automobile companies that we may be supplying material to. Having said that, we are -- I think it's safe to say the preferred supplier to the Japanese battery manufacturers. The quality level -- quality defined as purity of our lithium hydroxide given the way we have to produce it, is superior to anything else on the market. So I think coming out of the gate we are in a preferred position to serve what we think is going to be a growing lithium ion hybrid electric vehicle market.

Okay. I know in last quarter's call, we talked about this being far off in the future in terms of having any dramatic effect on your earnings. Are -- am I too optimistic, or are the auto companies too optimistic to be thinking in terms of 2011, 2012 as a range, knowing that there's these thermal runaway issues and so forth that have yet to be totally dealt with?

I think as I said, Gary in the last conference call, that it's two to five years away in our judgment, yet -- the technology -- two to five years away from being incorporated in commercial production of automobiles. Having said that, I would defer to the automobile manufacturers' judgment. They're a lot closer to -- they've got the liability, not us, and I would defer to their judgment as to when the technology has developed sufficiently, such that they could live with the liability.

I understand. One follow-up question, and that is regarding -- and I know you're a little sensitive talking about it for competitive reasons, but just generally, regarding capacity increase in terms of the (inaudible) or the raw material and also processing, what kind of time frame -- lead times do you need if you start to see this demand come on-stream, and are you able to meet -- will you be able to meet that anticipated demand from South American facilities?

We've got the capability, Gary, of doubling our capacity within 12 to 18 months of having made a decision, and that's all lead time on equipment. We have sufficient ore reserves to -- well, support the current level of production for the next 70 to 100 years.

Yes.

So any surge in demand that comes from incorporation of lithium ion batteries in the automobile industry, I think we can handle, both from a timing standpoint and a raw materials supply standpoint.

Bill, thank you very much, that's very very helpful.

Your next question comes from the line of Kevin McCarthy,

Yes, good morning. Most of my questions have been answered, but I just wanted to clarify a couple of angles. With regard to the Ansack soda ash pricing net backs, Bill, what is the differential between those and the domestic net backs in today's market?

Kevin, I'm not sure we've gotten all that granular. I think what we have said is the domestic market is now around $110, I believe. The Ansack average market price is in double-digits, closer to the low 90s.

Okay, so it sounds like maybe $15 to $20 a ton?

I think your math is pretty good.

All right. And then a question for Milton, if I may. You mentioned in your prepared remarks, Milton, $100 million in incremental sales with associated incremental EBIT of $25 million. What is the timing associated with that, and what are the key steps that you are taking to achieve that target.

Kevin, I'm not going to be that granular, but we talked about the next several years. We're looking at a whole number of small opportunities, small as individuals, but when you add them together could certainly reach the numbers I shared with you. And they come from many sources. There are alliances, product swaps with other companies, development of premixes, expansion of labels of existing products, and so on. So the next few years and they come from multiple sources.

Okay. Thank you, gentlemen.

Your next question comes from the line of [Andrew Shirley].

Hi, I was wondering, when you said that the impact of new lithium carbonate capacity would be limited to China, can you explain what that means exactly?

The capacity is being brought on by a Chinese producer. The capacity that is being brought on is limited in size, and the capacity is not particularly globally cost-efficient. And I guess the fourth factor I would add in there is that the internal demand growth in China is sufficient to probably absorb that capacity. The net of those four factors is what leads us to the view that we have, which is that there is prob -- it's unlikely there'll be a spillover effect outside of China.

I see. And what percent, if any, of your product do you sell in China?

Well, the question should be, what percentage of our lithium carbonate product do we sell in China? We sell only about -- probably less than five million pounds globally, maybe a million pounds in China, at most. It should have -- it should not have a material effect on our results.

Okay. Great, thank you.

Last question, here, operator.

Your last question comes from the line of Richard O'Reilly.

Good afternoon, now I guess, gentlemen. Kim, I'm sorry, I'm going to ask you another LIFO question. What is your estimate for the full year for LIFO income and what was it in '06?

In '06 we have disclosed LIFO in our Q -- in our K, I'm sorry, and as I mentioned in my remarks, the LIFO income in '06 was approximately $15 million.

For the full year?

For the full year.

Okay.

Okay. Now, as it relates to '07, we haven't specifically, as Bill mentioned, given a forecast of LIFO, but Bill did mention that the increase in OID that we are forecasting, which is $2 million, is largely LIFO expense associated with the inventory build in Baltimore. Those two numbers are the difference that I referred to in my remarks.

Okay. Okay. Okay. And second, you give a corporate expense now for the year of $53 million. Beginning of the year you used a $45 million estimate, and I'm just going to ask, what's the difference or what goes into corporate that would add to that sizable increase for the year?

Richard,Bill. We had two things. One is a decision to bring in house a lot of our human resource payroll and benefits processing activities that have previously been outsourced, and that required an investment that was not anticipated when the year began. The second -- and this is good news, bad news -- is that our long-term incentive compensation program is performance based and it's tied to the increase in our shareholder return vis-a-vis a peer group of chemical companies. And the good news is that we continue to outperform that universe; the bad news is, we've had to book additional expense related to it.

Okay. Good. Always a tough thing to have, right? Okay. That's it, then. Thank you.

Well, thank you, operator, and let me thank all of you for your continued interest in FMC. As you heard, we had another record quarter and expect one in the fourth quarter, as well, with very strong operating performance in all three segments. And while we're still in the early stages of our budgeting process, we're bullish about 2008, as well. The Ag economy remains healthy, end-use demand growth across all of our specialty businesses is strong, and the global environment in our industrial businesses should be even more favorable next year than it has been so far this, all of which should lead to another record year next year. With that, let me end and say, thank you, again, for joining us.

This concludes today's call. You may now disconnect.