富美實 (FMC) 2008 Q1 法說會逐字稿

Good morning, and welcome to the first quarter 2008 earnings release conference call for FMC Corporation. Phone lines will be placed on listen-only mode throughout the conference. After the speakers' presentation, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you, I'll now turn the conference over to Mr. Brennen Arndt. Mr. Arndt, Sir, you may begin.

Thank you, Mandy, welcome everyone to FMC's first quarter 2008 conference call and webcast. Bill Walter, Chairman, President and Chief Executive Officer will begin the call with a review of our first quarter performance. Bill will then turn the call over to Kim Foster, Senior Vice President and Chief Financial Officer for a report on our financial position. Bill will complete the call with a discussion of our outlook for the balance of 2008. We will then take your questions.

A reminder that 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 2007 Form 10-K, most recent Form 10-Q and other SEC filings. This information represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties. During the conference call, we will refer to certain non-GAAP financial terms. On our 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 I've provided you our 2007 outlook statement.

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

Thanks, Brennen, good morning everyone. As you saw in our earnings release we had a record first quarter, a great start to what we expect will be another record year for the company. Summarizing our results, sale of $750 million increased 11% versus the first quarter of 2007. Earnings before restructuring and other income and charges were $1.19 per diluted share, an increase of 29% versus the first quarter of 2007. We achieved double digit sales and earnings increases in all of our operating segments.

Specifically, in ag products, sales of $278 million increased 12% and earnings of $82.9 million increased 17% versus a year ago, driven by higher sales in Latin America, Asia and Europe and continued supply chain productivity improvements. In Specialty Chemicals, sales of 184 million and earnings of $39.5 million both increased 11% versus the year-ago quarter. Higher selling prices and volume growth in biopolymer and lithium specialties drove the performance gains. In Industrial Chemicals, sales of $290 million increased 11%, and earnings of $35.6 million more than doubled versus the year-ago quarter, driven primarily by higher selling prices in volumes across the segment as well as improved power market conditions in Spain.

Our strong first quarter results were achieved despite the combined effect of higher raw material and energy costs across the businesses. Versus the prior year, raw material and energy costs unfavorably impacted earnings by $0.13 per share in the first quarter. Raw materials were the primary driver, as energy costs had a very modest impact relative to a year ago. Currency translation favorably impacted earnings by $0.02 in the quarter. On a GAAP basis then, we reported net income of $93.9 million or $1.23 per diluted share. Our GAAP earnings in the current quarter included a net gain of $0.04 per share versus net charges of $0.33 in the prior-year quarter. With that reconciliation, our non-GAAP earnings were $1.19 per diluted share in the current quarter, an increase of 29% versus the $0.92 we earned in the first quarter of 2007.

Let me now take a more detailed look at the performance of each of our businesses in the quarter. Moving first to ag products. Sales of $278 million increased, as I said, 12% as gains were realized in Latin America, Asia and Europe. In Latin America, sales growth was particularly strong in Brazil, as we continued to benefit from the country's robust architectural economy. We experienced demand growth across our entire product portfolio and all crop segments. But particularly in sugar cane, cotton and soybeans. In Asia, the sales increase was also broad based. Performance gains were achieved in many countries but were particularly strong in the rice market in India, and the winter cereal market in Australia. In Europe, our growth was driven by favorable early season weather conditions and some new product introductions. Ag products earnings of $82.9 million were 17% higher than the record year-ago quarter, reflecting the broad based sales gains and continued supply chain productivity improvements which more than offset higher raw material costs, particularly chemical intermediates and solvents.

Moving on to Specialty Chemicals, revenue of $184 million and earnings of $39.5 million both increased 11% versus the prior-year quarter. Driven by higher selling prices and volume growth in biopolymer and in lithium specialty. Continued manufacturing productivity improvements were largely offset by higher raw material costs. In biopolymer, the combination of strong are commercial performance in both our pharmaceutical and food ingredients businesses and continued productivity improvements more than offset higher specialty wood pulp, seaweed and fuel costs. In pharmaceuticals, we benefited from continued growth in demand for oral tablet drugs. Sales in Europe and Asia and to generic drug manufacturers across all regions, were in the quarter. In food ingredients our performance was driven by higher selling prices and continued volume growth in Asia and Latin America, temporarily in the dairy segment. In lithium, earnings growth was the result of higher prices and volume growth for specialty lithium compounds, particularly into the pharmaceutical market.

Moving on to still Industrial Chemicals, revenue of $290 million increased 11% versus the prior-year quarter, driven by higher selling prices and volumes across the segment. Segment earnings of 35.6% more than doubled versus a year ago, as a result of the higher sales and improved power market conditions in Spain. The gains more than offset the higher raw material costs experienced in the segment. In soda ash, market conditions remain tight as all U.S. soda ash producers continue to operate at full capacity. Both our domestic and export soda ash businesses benefited from new contract terms put in place the beginning of the year as higher selling prices were the primary driver of earnings growth. Our North American peroxygens business also performed well in the quarter, realizing higher selling prices and volume growth across both hydrogen peroxide and our specialty peroxygens business. And in Foret, achieved significantly improved performance relative to a year ago. Higher prices, particularly in phosphates, hydrogen peroxide demand growth and improved power market conditions were the primary drivers of earnings increase, which more than offset the higher recall material costs, particularly phosphate rock.

Moving onto the corporate items, corporate expense was $11.9 million as compared to $13.1 million a year ago. Interest expense net was $8.7 million versus $8.4 million in the prior-year quarter. On March 31, 2008, gross consolidated debt was $615 million and debt net of cash was $545 million. For the quarter, depreciation amortization was $31 million, and capital expenditures were 32.6. That's the review of the segments. I'd now turn the call over to Kim Foster to report on our financial position.

(technical difficulties).

All right. Thank you.

You're welcome. (technical difficulties)

Thanks, Kim. Looking ahead, we're confident of delivering another year of record performance. Specifically regarding our outlook for the full year 2008, we have raised our outlook for earnings before restructuring and other income and charges to $3.90 to $4.10 per diluted share. In ag products, we expect full-year segment earnings growth in the low to mid teens, driven by good sales growth across all regions and product lines, and further supply chain productivity improvements. In Specialty Chemicals, we project full-year segment earnings growth in the mid single digits, as strong commercial performance in biopolymer and lithium specialties and the benefit of continued productivity improvements are partially offset by lower selling prices for primary lithium compounds and higher export taxes in Argentina. And in Industrial Chemicals, we anticipate full-year segment earnings growth of 60 to 70%, driven by aggregate price and volume benefits across the segment.

In each of our operating segments, we expect to achieve these results despite -- or in the face of increasing raw material costs. And despite this increasing headwind, however, we have raised our outlook for 2008, a clear reflection of our confidence and continued strong commercial performance and further productivity improvements across all of our businesses. In 2008, we will once again derive significant benefit from our global footprint, the noncyclical nature of our end use markets and our limited exposure to rising petro chemical costs. Moving now to the second quarter of 2008, we expect earnings before restructuring and other income and charges of $1.10 to $1.20 per diluted share underwritten by strong commercial performance in all of our operating segments, only partially offset by higher raw material costs. Specifically, in ag products we expect segment earnings to increase 10 to 15%. In Specialty Chemicals, earnings are projected to be up in the mid single digits, and Industrial Chemicals we expect second quarter earnings to increase 80 to 90%. With that, I thank you for your time and attention and I'll be happy to take your questions. Operator?

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

Congratulations on a good quarter. Some of us may have missed Kim's comments, and I was just wondering whether he had indicated anything about the asset sale that I believe we were thinking might occur in the second quarter?

Yes, Mike. Apparently we had some transmission difficulties in the midst of Kim's remarks. I'm going to ask Kim to go back through those remarks in their entirety right now.

(technical difficulties).

Your next question comes there the line of Kevin McCarthy with Banc of America.

Morning, Bill. I'm not sure if we're connected to Kim, I could not hear on my end. But I was wondering, given the land sale in Princeton and your already strong free cash flow generation prospects for this year, if either you or Kim would comment on the potential to accelerate share repurchase activity?

Yes, Kevin, there have been no decisions taken with respect to an expanded or enhanced share repurchase program. That'snot to say there won't be a decision, but at least at the moment, none has been taken.

Okay. And then with regard to ag, ongoing strength in that business, the North American planting season seems to be off to a bit of a show start, given some wet weather out there, and I was wondering if you could comment on whether you think that will have any impact on 2Q or any timing issues in that business we should be thinking about for modeling purposes?

Kevin, we did see what you described, a slow start in North America to Q1. And that slow start probably will result in -- probably resulted in some sales slipping from Q1 into Q2. I think we have adequately incorporated that slippage into our guidance.

Great. And then finally, I guess it was on last quarter's conference call, you educated us a bit regarding the volatility of phosphate rock and some of the upward pressure there. Can you give us a new update, Bill, on what you're seeing in your efforts to pass along increases to your industrial chemical customers?

Yes, first of all, Kevin, we've seen no diminishment in that volatility. In fact,, we continue to see upward pressure on our phosphate rock costs. I think as Michael said in the fourth quarter conference call, three months ago, that we have had our supply of rock that's true entire calendar year but the suppliers are only willing to fix price a quarter at a time. We obviously, Q1's behind us, we have prices fixed for the second quarter. And I would characterize our success at passing those cost increases through as very positive. We have been successful to date in passing through to our customers 100% of the phosphate rock cost increases we've seen. The uncertainty is going forward. Again, with our supplier not quoting rock prices beyond the current quarter, we're not quoting to our customers prices beyond the second quarter, and so we've got a negotiation here now every quarter rather than just once a year.

Excellent. Thank you very much.

Your next question comes from the line of Robert Felice with Gabelli.

Hi guys, congratulations on a nice quarter. A couple of quick questions. Did you realize any savings in the quarter from the Baltimore facility closure?

Rob, we did. The savings were, I think, as we have quantified in previous quarters, the savings in the way of reduced depreciation in the magnitude of $3 million in the quarter. We experienced that, we had the benefit of that in the last two quarters of last year and again the first quarter of this year.

Okay. And then on the separate front, but still on ag, there's been a lot of talk lately about a potential ban on carbofuran and I know that's not an insignificant piece of your business, I was hoping you can address the situation, and discuss what the potential risks are right now as well as where we stand in the process.

I think as everybody knows, the CPA issued -- there's a technical term to what they issued here several -- a year or more ago about a potential intent to -- an interim reregistration eligibility decision, decision that said it was their intent to at some point to cancel all U.S registrations of carbofuran. We've been engaged with a process with them we will onto a year to try to influence that decision in a positive way for us. That process continues. The U.S. Department of Agricultural has weighed in on our behalf, informing the agency, the EPA that there are significant benefits to the ongoing use of carbofuran. How this is going to play out, Rob, is unknown to us, the EPA and the USDA at this point. However it plays out, it will have no impact on our business in '08, and I think absolutely no impact on our business in '09. We intend to fully defend the registration on these products even to the point of going through to a legal proceeding, against the EPA assuming they come to a wrong decision.

Assuming it does have a negative impact, what is the magnitude of the earning stream at risk and do you have any alternative products to help dampen that impact?

Well, Rob, as I think you can appreciate, we don't get that granular on individual products, but carbofuran is a relatively small product for us in North America. And it has relatively low margins. But that the impact, the direct impact in our U.S. business should be minor. We do have other are products. Bifenthren pyrethroid can be substituted for carbofuran in some of our current applications, not all of them. We continue to try to find other products that we could substitute.

Okay. That's helpful. Switching gears over to specialty, I was hoping you could comment on pricing along the lithium chain, both year-over-year and sequentially.

Yes, let's take -- we're going to have to talk about the whole value chain here. And let me abbreviate it by talking about everything downstream from lithium chloride. Pricing there remains strong, demand growth remains very strong. To the extent that are are pricing issues in lithium, it's in limited to the primary compounds of carbonate hydroxide and chloride. We did see as expected, pricing pressure in the first quarter across all three of those molecules. As we sit here today, that pressure seems to have stabilized. And we are optimistic on a going-forward basis that we'll see no further impact, no further negative impact on the price front. Exactly what -- quantifying that pressure on a year-over-year and sequential basis, I just -- I'm not sure I even have that -- those facts with me. I'm not sure if I did, I'd disclose them anyway.

Well, I guess taking it from a more qualitative perspective as you look out over the next 18 to 24 months, how would you characterize the supply/demand balance as you see it right now?

It should improve. We've had at least announced capacity coming online by Kematol SQM and CITIC in China, that essentially is all online now. With the demand growth of 6, 8, 10% a year, obviously as you move forward in time from the present, capacity utilization rates ought to tighten. I would think we will once again see the upward pressure on pricing.

Okay. And I guess, Bill, what, if anything, would worry you as you look out over the next 18 to 24 months in terms of pricing along the lithium chain?

A global depression. Rob, I'm not sure had else it would be. I mean, there are only a handful of competitors. Their capacity expansions are known. I guess what -- let me be less flippant. Irrational behavior on the part of a single producer trying to place all of their expanded capacity into the market in a very short period of time. I don't think that's going to happen, but that would be the concern. And you ask, well, why would it not happen? Don't hold me to these exact numbers but SQM's got 60 million pounds of CE's in the market right now. They can't afford to take an action as I describe. Kematol's got 50 million-pounds of CE in the market right now, they can't afford to move. The Chinese, specifically CITIC, doesn't have a cost position, doesn't have the quality of product and doesn't have the distribution logistics capability of moving the product out of China. So I feel fairly confident what might keep me awake at night is theoretically correct, practically, I don't think it's going to play that way.

So it sounds like you're very comfortable at this juncture with the announced capacity additions in the marketplace and the competitive positioning of FMC relative to those.

Yes.

Great, thanks for taking my questions.

Your next question comes from the line of Frank Mitsch with BB&T Capital Markets.

Good morning, gentlemen. Bill, can you comment on the situation in the soda and market what, if any, impact did you see on results due to the issues in the Portland facility, I think that had appear impact on some of the export business there. Sticking with soda ash, we've seen a couple of ownership changes of the -- of domestic assets. Are you seeing any impact in the market domestically or in other particular geographies with those changes?

Yes first of all, for those that aren't familiar with what Frank was talking about, the Green River basin experienced extremely cold weather conditions in the first quarter 2008, and Union Pacific had a large mudslide on a almost mile-long section of track on the mainline from Green River to Portland, Oregon, the point of exit for virtually all U.S. soda ash from the U.S. UP declared force majeure, ANSAC had to declare force majeure, the cold weather in Green River curtailed some production by, I think, all of the producers, certainly us. The net result, Frank, is that we lost volume in the quarter relative to what our expectations had been. And that volume is largely lost for the year. We're sold out. It will be largely impractical for us or impossible for us to try to make up that volume. I'm not sure I could quantify for you, Frank, the impact that had in Q1, but it was a negative.

Yes.

And in terms of the ownership change, no, we have seen no behavioral changes whatsoever, either domestically or in the international market as a result of the sale of SQM and OCI.

Okay. Great. And just switching gears, more strategic, obviously with your solid balance sheet, you also -- and your desire to grow your continuing looking at M&A opportunities, with the current credit markets the way they are, taking private equity out of the equation to a large extent, are you finding a more favorable environment for you such that you might be able to take advantage of some opportunities here in 2008?

Yes, I would say yes, Frank, but only slightly. I'm not sure sellers' expectations have come back to the reality of today's market. And I think that's witnessed, in part, by -- well, I'll just stop at that. I think expectations still have a way to fall before we get back to what I think are more reasonable valuations.

All right. Terrific. Thank you.

Your next question comes from the line of Dmitry Silversteyn with Longbow.

Good morning, gentlemen. A couple of questions. First of all to follow up on the force majeure at ANSAC, and the export business, do you expect any carryover into the second quarter or has the force majeure been lifted and your inventories basically back in line?

ANSAC has not lifted their force majeure conditions yet. But our expectation is they will fairly quickly and should have little to no impact on us in the quarter.

Okay. So going forward, you basically are back to normal as far as operations are concerned?

We certainly hope so.

Excellent. Second question, you talked about lithium primarily saying pricing being down, but the specialty lithium still being up. Net-net was your pricing in the lithium business, average selling price, up or down this quarter?

Oh, wow, Dmitry we don't even calculate an average selling price for lithium because the wide range in pricing from a couple dollars a pound to $50,000 a pound.

Okay. So lower -- let me ask you a specific question. The lower prices of primary lithium were not -- were or were not a significant impact on the profitability of the business in the first quarter?

Were not.

Were not. Okay. That's what I'd d to know. Third question, kind of tying back to your Baltimore plant closure, that was kind of your last manufacturing facility in North America that you closed, you're now fully outsourced. Can you talk about productivity gains continuing to drive prohibit of the ag and chemicals be. At which point should we be looking at kind of the anniversarying of the major drivers of productivity improvements such as outsourcing if are we kind of coming to the end of this development, or do you still have several years where you think you can improve productivity and continue to rage margins?

Dmitry, the anniversarying is going to occur several years from now.

Okay.

We still have opportunities. I just sat through a review yesterday that the ag team reviewed with me, and I'm not going to quantify it, but a number of other opportunities that we still have.

Okay. So the margin expansion story in the ag business sounds like it's still intact.

I need to point out, it not unique to ag, we are seeing's significant raw material cost pressures and so we've got to be able to increase productivity, probably at a rate even higher than what we have done historically if we want to continue to see margin expansion will have okay.

I got you. Thank you very much.

Your next question comes from the line of Dennis Delafield with Delafield Asset Management.

Good morning, I never heard a word that Kim said so just back to the question on Princeton, did you actually sell the land or is that still to come?

Dennis, this Kim, I hope you can hear me now, I had to change mics.

Yes, we can hear you now.

Yes, we sold it, yes, the proceeds were as we told you, approximately $60 million.

Thank you ever so much.

Your next question comes from the line of Mike Judd with Greenwich Consultants.

Yes, congratulations again on a great quarter.

Thanks, Mike.

Your net debt to total capital at the end of the quarter was around 32% and I guess we're projecting in our model that it should be below 20% by the end of the year. I kind of wanted to combine a couple of questions, others have asked, Kevin McCarthy and Frank Mitsch, in terms of what your strategic direction should be. Now, this is a great problem to have, I suppose. And so would you say that, in thinking about what the board's approach will be with what to do with the cash flow here, do you think that if there aren't any attractive acquisitions that come up in the next six months or so, that there would be a greater willingness to step into the market and buy back more of the shares or are there other things that we should be thinking about?

Mike, I'm not sure what the other things would be. If we can thought intelligently and profitably reinvest your cash in either internal opportunities or in acquisitions. The only alternative, from my perspective, is to return cash to shareholders. The board hadn't taken that decision. The board has not set a timeline to take a decision. But I would think that's the direction in which they would ultimately move.

The shares look incredibly inexpensive here so congratulations on a great job.

Thanks again, Mike.

(OPERATOR INSTRUCTIONS). We'll pause for just a moment. Your next question comes from the line of Kevin McCarthy with Bank of America.

Just a few brief followups on soda ash, Bill. I think there are a few expansions planned expansions going on outside of China in places like Kenya and Turkey. Do you have any thoughts about the time lines of those projects? And looking ahead to 2009, the Chinese trade balances have been very much under control. Do you expect that to remain the case in '09? In other words, no increase in Chinese export activity next year versus this year?

Yes, Kevin, first with respect to expansions outside the U.S. and outside of China, the Magoti expansion in Kenya has been ongoing and about to start up for some period of time, it's actually running, still not running well. The Turkey project, Beypazari project should be online sometime in the next 12 to 18 months. The Indians have announced a small expansions that dedicated to the domestic Indian market and I'm not aware of anything else that's going on. Before I jump into China, I think the global demand growth for soda ash is more than adequate to absorb those two or three expansions without any market impact. Now, to China, I think as we have said, we don't expect Chinese capacity occasions in '08 to enable the Chinese to expand their export business at all, and that seems to be playing out. That is our current expectation for 2009 as well. Although I must admit there's less certainty to that statement than the comment around '08 simply because it's still a year or more out.

Okay. Thank you very much.

Mr. Walter, do you have any closing comments?

I do. And thanks for reminding me, Operator. We obviously completed another strong quarter with all three segments performing well, and as you heard and is reflected in our revised full-year guidance, we expect this level of performance to continue through the balance of the year resulting in our fifth consecutive year of record results. That strong performance reflects, I think, the fundamental quality of each of our businesses, their broad geographic scope and the attractiveness of the end use markets that they serve. And despite what may be a weakening global economy and clearly rising input costs, we remain very confident in our ability to continue to grow and deliver outstanding results. Not just this year, but in the years to come. Again, let me say thank you for joining us, and for your continued interest in FMC. I appreciate it.

Thank you. This concludes the FMC Corporation first quarter teleconference. You may now disconnect.