FMC Corp. Q2 2009 Earnings Call Transcript

Jul.31.09 | About: FMC Corporation (FMC)

FMC Corp. (NYSE:FMC)

Q2 2009 Earnings Call

July 30, 2009 11:00 am ET

Executives

Brennen Arndt - Diretor of IR

Bill Walter - Chairman, President and CEO

Ted Butz - VP and General Manager, Specialty Chemicals

Kim Foster - CFO, SVP

Analysts

Rosemarie Morbelli - Ingalls & Snyder

Frank Mitsch - BB&T Capital Markets

Douglas Chudy - KeyBanc Capital Markets

Dmitry Silversteyn - Longbow Research

Kevin McCarthy - Banc of America Merrill Lynch

Amy Norflus - Pilot Advisors

Jay Harrish - Goldsmith and Harris

Operator

Good morning, and welcome to the second quarter 2009 earnings release conference call for the 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)

I will now turn the conference over to Mr. Brennen Arndt. Mr. Arndt, Sir, you may begin.

Brennen Arndt

Thank you, and welcome, everyone to FMC's second quarter 2009 conference call and webcast. Bill Walter, Chairman, President and Chief Executive Officer, will begin the call with a review of our second quarter performance. Bill will turn the call over to Ted Butz, Vice President and General Manager of Specialty Chemicals, who will give us an in-depth review of our Lithium and BioPolymer businesses that form our Specialty Chemicals group. Ted will turn the call over to Kim Foster, Senior Vice President and Chief Financial Officer, for a report on our financial position. Following Kim, Bill Walter will provide our company's outlook for both the third quarter and the full year 2009. We'll complete the call by taking your questions.

Just a reminder today that our discussion will include certain statements that are forward-looking and subject to various risks and uncertainties concerning the specific factors summarized in FMC's 2008 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 upon these risks and uncertainties.

Also, during the conference call, we'll refer to certain non-GAAP financial terms. On the FMC website, available at fmc.com, you will find the definition of these terms under the heading entitled, Glossary of Financial Terms. In addition, we have provided our 2009 outlook statement and a reconciliation to GAAP of the non-GAAP figures that we'll use today.

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

Bill Walter

Thanks, Brennen. Good morning, everyone. As you saw in our earnings release, our second quarter results reflect strong performance from our businesses that serve end markets with low correlation to the broader economy. Our businesses sensitive to the economy, however, were impacted by reduced volumes. The result of weak underlying demand, and in some businesses, continued inventory destocking among their customer supply chains.

Summarizing our second quarter results. Sales of $700 million were 13% lower than the second quarter of 2008. Earnings before restructuring and other income and charges of $1.10 per diluted share were 15% lower than the second quarter of last year.

In Ag Products, sales of $252.4 million declined 9%, while segment earnings of $90.5 million increased 7% versus the year ago quarter as a result of strong performance in North America, favorable supply chain performance, and lower selling and administrative expenses.

In Specialty Chemicals, sales of $192.7 million were flat with prior year, while earnings of $40.5 million declined 2%. Strong performance in BioPolymer was more than offset by lower volumes in our lithium business.

In Industrial Chemicals, sales of $256.2 million declined 24%, and earnings of $13.5 million were 70% lower than the year ago quarter. Lower volumes across the segment and a higher raw material costs more than offset higher selling prices in most businesses.

Across the company, raw material and energy costs favorably impacted earnings by $0.01 per share in the quarter. While currency translation negatively affected our year-on-year revenues, it had no material effect on our earnings in the quarter.

On a GAAP basis, we reported net income of $69.3 million, or $0.94 per diluted share. GAAP earnings in the current quarter included a net charge of $11.3 million after-tax, or $0.16 per diluted share, versus a net charge of $14.5 million after-tax, or $0.19 per diluted share, in the prior year quarter.

Most of the charges in the current quarter relate to our decision to permanently close the silicates and sulfur derivatives plant in Spain and the ongoing restructuring of the Alginates business we acquired last year.

With that reconciliation, our non-GAAP earnings were $1.10 per diluted share in the current quarter, a 15% decrease versus the $1.29 per diluted share in the first quarter of 2008.

Let me now take a more detailed look at the performance of each of our operating segments in the quarter. First, Ag Products. First quarter sales of $252 million were 9% lower than the prior year quarter. Sales gains in North America were more than offset by lower sales in Europe and Asia as well as unfavorable currency impacts.

In North America, the sales increase was driven primarily by strong herbicide sales, new product introductions, and the impact of price increases. In Europe, sales declined in the quarter due to unfavorable currency impacts, coupled with the timing of sales, some of which were advanced in the first quarter of this year as well as some delayed into the third.

In Asia, the favorable impact of price increases was more than offset by unfavorable currency impacts and reduced sales due to lower pest pressure and softer market conditions in some countries compared with the strong results of a year ago.

In Latin America, sales were essentially level to a year ago as improving market fundamentals in Brazil were offset by weak sales in Argentina due to poor weather conditions.

Near the end of the second quarter, we acquired the proprietary fungicide Benalaxyl from Isagro. This is the second bolt-on acquisition for our Ag Products group this year. Both acquisitions are consistent with our growth strategy for the business. Benalaxyl product line is an excellent fit with our focus market segments as an Annex I listing in the EU and is registered in more than 50 countries. We expect to see a benefit from this acquisition in the third quarter.

Segment earnings in the quarter of $90 million increased 7%, driven by the strong results in North America, favorable global supply chain performance, and lower selling and administrative expenses.

Moving on to Industrial Chemicals. Sales of $256 million declined 24% from the prior year quarter, as lower volumes and unfavorable currency translation more than offset higher selling prices in soda ash and peroxygens. Volumes were down relative to a year ago in each business in the segment. Volumes in the quarter were also down versus our earlier projections due to weaker than anticipated economic conditions.

Segment earnings of $13.5 million were 70% lower as reduced volumes and higher raw materials costs, primarily but not exclusively phosphate rock, more than offset the higher selling prices.

In soda ash, higher domestic and export selling prices continued to benefit earnings in the quarter. Year-to-date, we have realized an overall soda ash price increase in the mid-teens versus the year 2008. Soda ash volumes in the second quarter, though improved versus the first, were weaker in the current quarter than they were a year ago. Volumes were particularly soft in Asia, due both to weak demand and aggressive Chinese exporting.

Chinese producers benefited in the quarter from the reinstitution of the 9% VAT rebate on export volumes, which they fully passed along to customers. The VAT export rebate was reinstituted by the Chinese government as part of a broader fiscal stimulus program. Nevertheless, ANSAC is now reporting success in recapturing share in Asia, albeit at lower prices. ANSAC now expects its fourth quarter 2009 sales to return to its 2008 run rate.

ANSAC's early success is reflected in our second quarter results. Our soda ash sales via ANSAC in the second quarter were up 30% over the first quarter and are expected to improve progressively for the balance of the year.

Early in the second quarter, we curtailed production at our Granger facility to take full advantage of Granger's inherent flexibility to match supply to demand. We will continue the curtailment of Granger for the balance of 2009, and we'll continue to monitor the recovery of the domestic and global soda ash demand and restart Granger when there is sufficient, sustainable demand to warrant its capacity.

As you know, higher asset utilization is integral to maximizing profitability in this business, and we intend to enter 2010 with our assets fully utilized.

Moving to North American peroxygens. Industry's trends experienced in the first quarter continued into the second. Higher selling prices in both hydrogen peroxide and specialty peroxygens businesses were more than offset by volume declines, particularly in the pulp and paper market.

Our growth initiatives in the business continue to progress on schedule, and we saw marked volume improvement in existing specialty applications late in the quarter. We expect these positive trends to continue in the second half and should see a seasonal pickup in peroxygens demand in the third quarter.

Moving on to Foret, our wholly-owned European subsidiary. Revenue declined as a result of lower volumes, reduced phosphate selling prices and unfavorable currency translation. As in North America, hydrogen peroxide volumes in Foret declined as a result of soft pulp and paper market conditions. In phosphates, reduced volumes were realized across the product line, driven by lower demand, product reformulation, and product substitution.

Foret's profitability versus the prior year quarter was also impacted by higher raw material costs, particularly phosphate rock and to a lesser degree higher energy costs. Sequentially, however, phosphate rock prices are declining and will become a benefit to the earnings in the balance of this year. However, in comparison to the third and fourth quarter of 2008, phosphate selling prices will also be substantially lower, more than offsetting the benefit of lower raw material costs.

Sodium tripolyphosphate prices in particular have been rapidly driven lower by Chinese exports. The prices now appear to have bottomed at approximately the cash cost of the Chinese producers. Overall, Foret's earnings for the second half of 2009 will be significantly better than in the first half of this year, yet will lag the superlative performance of the second half of 2008.

Moving to corporate items. Corporate expense was $10.3 million, down from $13.1 million a year ago. Interest expense, net, was $6.5 million as compared to $8.3 million in the prior year quarter. On June 30, gross consolidated debt was $634 million, and debt, net of cash, was $567 million. For the quarter, depreciation and amortization was $31 million, and capital expenditures were $41 million.

For discussion now on Specialty Chemicals, let me turn the call over to Ted Butz. Ted?

Ted Butz

Thank you, Bill, and good morning, everyone. Pleased to be with you today to report on the current performance and outlook of our Specialty Chemicals group.

Revenue of $192.7 million was level with the prior year quarter. Strong commercial performance in BioPolymer and the favorable impact of the acquisitions of ISP and CoLiving Ingredients were more than offset by lower lithium demand and the unfavorable impact of currency translation.

Segment earnings of $40.5 million were 2% lower than prior year as favorable commercial performance in BioPolymer and the benefits of productivity initiatives and last year's acquisitions were more than offset by significantly lower volumes in lithium, temporary plant curtailments taken to reduce inventories, and unfavorable currency translation in BioPolymer.

In our lithium business, lower end use demand and customer inventory destocking drove revenue decline. However, overall price levels remain consistent with the prior year. Lithium earnings were significantly lower than prior year quarter, due primarily to the lower volumes and the temporary curtailment of production to reduce inventory levels.

BioPolymer second quarter revenues increased significantly, driven by higher pricing across all business areas and the inclusion of ISP and CoLiving acquisitions which closed in the third quarter of 2008.

Partially offsetting these gains were unfavorable currency translation and the decision to selectively drop lower margin business in both food ingredients and pharmaceutical excipients to support our pricing initiatives and better optimize production capacity. BioPolymer earnings improved significantly over prior year driven by higher selling prices and the benefit of acquisitions and the ongoing productivity initiatives.

On a year-to-date basis, revenues for Specialty Chemicals were down 2% driven by the lower lithium results and weaker currencies. Earnings declined 3% over prior year as lithium earnings decline was more than offset by the gain in BioPolymer.

Looking at the outlook for the full year, we expect another record year for Specialty Chemicals with earnings growth in the mid-single digits. This implies a stronger second half led by improving demand in lithium and continued growth in BioPolymer.

Third quarter earnings are expected to also be up in the mid-single digits, reflecting continued strong performance in BioPolymer, partially offset by lower lithium results.

Let me now turn to a more detailed review of each business and the strategies that we're focused on to continue our profitable growth.

Staring with Lithium, their division is a global supplier of value-added lithium chemistries. We are the second largest supplier in terms of revenue with a broad presence in both upstream primaries and downstream performance markets.

Industry growth over the last five years has been in the 5% to 6% range per year led by strong demand in secondary batteries and healthy growth in pharmaceutical synthesis and other markets. However, starting in the fourth quarter of last year and continuing through the first half of 2009, the industry witnessed a substantial decline in demand across most segments. In addition, many customers took the opportunity to reduce their inventory levels.

We estimate that the overall industry shipments will be down approximately 25% this year with inventory destocking programs accounting for approximately half of the decline. To counter the downturn, most lithium suppliers have taken capacity offline to reflect the lower demand and an effort to reduce their own inventories.

Over the last couple of months, we've started to see early signs of stabilizing demand and believe that most of this decline is behind us. We are seeing improved conditions in our primaries business in Asia and also in the majority of our downstream performance products. However, we expect that it may take 12 to 18 months for volumes to return to pre-recession levels.

The longer term outlook for the industry remains favorable. We expect that post-recovery, demand growth in traditional markets should return to historical levels driven by continued growth in non-automotive battery applications, and to a lesser extent, other markets. In addition, new demand driven by hybrid and electric vehicles should add significantly to the overall growth of the market over the next 10 years.

How significant end market demand will be remains a major question and depends on a number of variables. In our estimates, lithium usage for hybrid and electric vehicles could represent from just under 20% to around 50% of total industry demand by the year 2020. This would translate into additional 2 to 7 percentage points of annual growth for the industry.

As a potential for lithium use in electric vehicle grows, concern over industry supply has increasingly made the headlines. We believe that it will be sufficient supply over the long-term. Current industry capacity, combined with the ability of current suppliers to expand, and to a lesser extent capacity from newer sources in China or South America, have the ability to meet the likely demand of this segment.

We are encouraged by the increasing level of activity focused on using lithium ion technology for electric vehicles. We continue to develop key relationships to build our position in this segment. Although, the potential impact of these efforts will likely be minor for several years, we believe that we're in an excellent position to reap the longer term rewards of being a critical supplier in this segment.

FMC's lithium business is also well-positioned to benefit as the economy recovers. We have established a strong beachhead in the fast-growing Asian market with the startup earlier this year of our new butyllithium plant in Zhangjiagang, China outside of Shanghai. In tandem, with our investment in a similar facility in India in 2007, we are in a leading position to capitalize on the emerging demand in this region.

Finally, our internal productivity initiatives to streamline costs and improve efficiencies are paying off and we'll continue to pay dividends over the long-term. All of these initiatives should lead to an attractive lithium growth story over the next several years.

Let me now turn to our larger division, BioPolymer, which accounts for about over 70% of the Specialty Chemicals revenues. We have two established market-oriented businesses focused on food ingredients and pharmaceutical excipients. In addition, we have an emerging growth business called Healthcare Ventures.

We are the global leaders in three primary product lines in this business; microcrystalline cellulose, carrageenan, and alginates. Over 90% of BioPolymer revenues are accounted for by products where we are number one in the respective markets.

The end markets for BioPolymer historically have grown around 4% per year, and are not highly sensitive to economic conditions. However, we saw a slowdown in demand in the first half in both our food ingredients and excipients businesses.

In food ingredients, inventory destocking and softer demand in several regions impacted results in the first quarter. During the second quarter, we saw a return to more normal order patterns. We expect stronger growth in the second half of the year in North America and in Asia, however, demand in Europe and Latin America is expected to remain sluggish.

In excipients, softer demand reflects trends seen throughout the industry related to lower number of prescriptions being filled as a result of the weaker economy. This has primarily impacted the North American and European markets. As the economy recovers, we are expecting demand for excipients to increase.

As mentioned earlier, we also took the opportunity in both businesses to reduce lower margin business to support pricing initiatives and better optimize capacity utilization. Throughout the first half of this year, BioPolymer has delivered strong earnings growth as a result of higher pricing, ongoing productivity initiatives, and the benefits of the acquisitions of ISP and CoLiving Ingredients.

Successful implementation of broad-based price increases that were initiated mid last year and continued through the first half of this year have allowed us to offset the majority of raw material and energy cost increases over the last 18 months.

Integrating last year's acquisitions has been a top priority. We've completed the integration of the commercial organization for both ISP and CoLiving Ingredients into BioPolymer, and the consolidation of alginate operations is on track for completion later this year. Customer response has been favorable, and earnings are ahead of plan for both acquisitions. We remain encouraged to the potential that both these acquisitions bring to BioPolymer.

BioPolymer has a great franchise, which we will continue to exploit through internal development and acquisitions. We are advancing new concepts in the health and nutrition area in addition to our ongoing efforts in Healthcare Ventures.

During the first half of 2009, we have signed several new customers for our proprietary capsule technologies related to gelatin-free capsules that serve both the pharmaceutical and nutritional markets. In our NovaMatrix line of advanced biopolymers, new customers are using materials for ophthalmic and dermal filling applications.

During the third quarter of 2009, we plan to open a new research center outside of Princeton, New Jersey. In combination with six other technical labs throughout the world, we are in an excellent position to develop innovative concepts to serve our expanding global customer base.

On the acquisition front, we continue to evaluate a number of potential targets that would fit nicely with our current portfolio of products and capabilities. Although, we will remain disciplined in our approach, I am encouraged that acquisition multiples for potential deals appear to be coming down relative to prior years.

In conclusion, I remain bullish on the outlook for Specialty Chemicals. We expect to deliver another record year of earnings during 2009. Longer term, our outlook remains very promising. As the economy recovers, we should benefit from the leverage on volume growth in both lithium and BioPolymer.

In addition, savings from our current productivity initiatives and further synergies from the operational integration of our acquisitions will be positive factors benefiting 2010.

With that, I thank you for your interest and would be happy to answer any questions at the end of this conference call. I now will turn over the call to Kim Foster who'll report on our financial position. Kim.

Kim Foster

Thanks, Ted, and good morning, everyone. This morning I'll review our balance sheet and liquidity profile, provide our cash flow forecast, and update you on our share repurchase program.

As Bill said, our net debt at the end of June was $567 million down from $613 million at the end of March. We're right in our target range of net debt of between $500 and $600 million.

Our liquidity profile remains strong. As of June 30th 2009, we have available funds under our committed credit agreements of $447 million and cash on hand of $67 million. In addition, we have no significant maturities until late 2010.

We expect free cash flow this year to be approximately $75 million. This compares to the $175 million of free cash flow I outlined last quarter. The reduction is attributed to a lower profit projection and restructuring costs as we adjust capacity and spending to market conditions in Industrial Chemicals and for the spending of the acquisition of a proprietary fungicide in Agricultural Products.

Regarding our share repurchase program, in the second quarter we repurchased approximately 297,000 shares at a cost of $15 million. As we begin the third quarter, we have $210 million remaining under our existing share repurchase authorization.

As I do each quarter, I'll remind you that our repurchase program does not include a specific time table or price targets and maybe suspended at any time. Our 2009 guidance assumes that we do not repurchase any additional shares.

To summarize our view, we remain in a strong financial position with full flexibility to execute our strategies. We'll continue to look for opportunities to grow the company through a combination of internal and external investments. However, we will preserve our strong balance sheet and maintain our solid liquidity profile.

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

Bill Walter

Thanks, Kim. We expect the economic environment to remain challenging for us throughout the second half. Despite this, we're fairly confident we're delivering another year of very good performance.

Specifically regarding our outlook for the full year, we have revised our expectation for earnings before restructuring and other income and charges to $4 to $4.20 per diluted share.

Relative to the first half of the year, we anticipate improved business conditions in the second half with our performance benefiting from volume gains in nearly every business, improving agricultural markets in Brazil, and lower raw material costs particularly in Foret.

For the third quarter of 2009, we expect earnings before restructuring and other income and charges of $0.85 to $0.95 per diluted share. In Ag Products, we look for third quarter earnings to be up 30% to 35% driven by improving conditions in Brazil and lower raw material costs.

In Specialty Chemicals, as Ted has just mentioned, we expect earnings to be up in the mid-single digits, reflecting continued strong performance in BioPolymer, partially offset by lower lithium sales.

In Industrial Chemicals, we expect earnings to decline 55% to 65% as higher selling prices, primarily soda ash and improving raw material costs are more than offset by lower volumes across the segment and reduced selling prices in phosphates. We expect Industrial Chemicals earnings, however, to improve sequentially in the third quarter and again in the fourth quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rosemarie Morbelli from Ingalls & Snyder. Your line is open.

Rosemarie Morbelli - Ingalls & Snyder

Bill, you did talk a little bit about the improvement in the demand in volume, but could you give us a better feel as to which markets are showing some improvement? Do you have a shorter window in terms of seeing the improvement of the new orders than you did in the last few quarters? Hello?

Bill Walter

Rosemarie, I'm sorry. I forgot to turn my microphone on. I'm going to have to walk through by segment to answer your question. We've already begun to see demand improvement in hydrogen peroxide, both in North America and in Europe, as destocking has completed, as Chinese pulp demand has increased, and as just the seasonal demand in the peroxide business is on us.

In soda ash, we are seeing stable domestic demand, and we've seen good results from ANSAC's share regain strategy. As a result, the book of business for the third and fourth quarter there looks pretty solid. Finally, in Industrial Chemicals, phosphorus business in Europe we're really seeing no material change in the demand outlook there.

Moving on to Specialty, Ted just walked through with you. Demand growth in both food and our pharmaceutical business stable, and some improvement in the primary lithium business currently. Something that we expect will continue as the year progresses.

Then finally in our Ag Products business, as you can infer from the guidance that we've provided for the segment, volumes are expected to strengthen as the year progresses, primarily in Latin America and primarily in Brazil as we see much improved market conditions for our products, particularly those going into the sugarcane, corn, soybean markets.

So that's a long-winded answer, Rosemarie, to the question. I think we've got pretty good visibility currently to the demand outlook, and have conservatively reflected it in our current guidance. To the extent there is uncertainty, though, in it, it's probably in Brazil. The season is still ahead of us. It really is just starting down there, but early indications are very encouraging.

Rosemarie Morbelli - Ingalls & Snyder

Did you see an improvement in the credit market in Brazil, which would allow people to plant more and process more of the sugarcane?

Bill Walter

Cleary, the credit markets for the growers down there has improved materially from the fourth quarter of '08 and the first quarter of '09. Commodity traders are back in the business. They had backed out largely in the first quarter. No, the credit situation is noticeably better currently than it was as recent as six months ago.

Rosemarie Morbelli - Ingalls & Snyder

At least I could ask one unrelated question. Could you address the fact that your inventories actually increased versus year end in this environment while every other company has been generating cash from lowering their inventory levels?

Bill Walter

A great question, Rosemarie. I'm going to let Kim answer it.

Kim Foster

This is Kim Foster, the CFO. You've certainly correctly observed the higher inventories. They are largely attributed to the fact that for our planning purposes across many of our businesses, we were expecting higher volumes in the second quarter, as Bill outlined, than we saw.

You may also remember in Ted's comment, and it's largely related to all the restructuring we're doing and the restructuring charges. We're taking making adjustments to our capacity in order to bring those inventories back in line with the revised outlook that we have for the remainder of the year.

Operator

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

Frank Mitsch - BB&T Capital Markets

Bill, I wanted to spend a moment or two on the soda ash side of the business. One of the gentlemen who works in that business for you was quoted recently as saying that he anticipated that the industry would see operating rates of 95% average over the back half of the year. I'm wondering how is that in the second quarter. If the industry is operating at 95%, one would suspect that the low-cost producer would be running at 100%.

Bill Walter

Is there a question in there, Frank?

Frank Mitsch - BB&T Capital Markets

Yes. Do you anticipate the industry running at 95% in the back half of the year? If so, do you anticipate you guys running at 100% in the back half of the year as one would anticipate?

Bill Walter

Based on ANSAC's current outlook for the balance of the year, we would expect the U.S. industry to operate on average for the full year at approximately 95%, and operate in the third and fourth quarter at the 98%/99%/100% level and we'll be operating at the same level.

Frank Mitsch - BB&T Capital Markets

So that would almost argue that you probably need to bring Granger back sooner rather than later.

Bill Walter

I think as you understand, Frank, where the lever is in this business, and we will not bring it on prematurely. We need to see the sustained demand there before we make a decision to bring it back on. Right now, we have decided to keep it offline for the balance of 2009.

Frank Mitsch - BB&T Capital Markets

All right, great. Can you give me an idea, obviously, I think you suggested that the domestic soda ash price was remaining stable, but the export price was under pressure with some of the export tariff rebate that the Chinese had had put in. Are prices in the export market continuing to slide in soda ash?

Bill Walter

No. I think they have stabilized here over the last 30 to 60 days. The Chinese pricing has stabilized. Chinese currently are net backing to their plant at or below their cash cost and at the domestic Chinese price. So again, I think we've seen a stabilization in the export price right now. Export prices over the course of 2009 will end up essentially flat with where they were in 2008. So we've obviously had to trade price for volume to fill up the plants.

Frank Mitsch - BB&T Capital Markets

Then can you give an update that there is an uptick in the market buying back stock in the first quarter, you acted in a smaller fashion I guess here in the second quarter. As you look at the primary uses of cash for FMC right now, paying down debt is not one of them. What can we anticipate FMC doing in the back half of the year with its ample cash balances?

Bill Walter

Frank, I think as you know, we don't comment on our share repurchase plans, and so I'm not going to answer that part of the question directly. My preference certainly would be to make some bolt-on acquisitions, but as I've said and I'll continue to say, to the extent we're unsuccessful in doing that, there is only one option left to us and that is to return the cash to the people that it belongs to our shareholders.

Operator

Your next question comes from the line of Douglas Chudy from KeyBanc Capital Markets. Your line is open.

Douglas Chudy - KeyBanc Capital Markets

As we look outward for soda ash, can you talk a little bit about your confidence that pricing can be renegotiated at favorable rates heading into next year?

Bill Walter

Sure, Doug. You have to start with answering the question that Frank asked, which is where is the industry going to be operating when the contract season is upon us? Unless we're wrong, the U.S. producers will be operating essentially sold out late in the third quarter and on through the fourth quarter of 2009. In a sold out condition, we remain optimistic that we will see price increases in the domestic market in 2010.

The domestic market, just as an aside, has you can almost say benefited over the last couple years with an average price well below the world market price that U.S. producers did not pass on to U.S. customers the full value of the price that I think they could have been able to. So, again, sold out condition, prices in the domestic market ought to go up.

As I said just a few minutes ago in an answer to another one of Frank's questions, the export pricing in Asia has stabilized and has stabilized at the cash cost of the Chinese producers. So I see little risk of further price degradation there. The Chinese can operate over a period of time below their cash cost, but they can't operate indefinitely. They are going to see upward pressure on their input costs, which is going to I think provide some upward pressure on upward support for pricing.

So that's a long-winded answer, Doug, to your question. We're going to have to see how it plays out and unfortunately, it's going to be as it always is late fourth quarter, early first quarter next year before we really know the outcome.

Douglas Chudy - KeyBanc Capital Markets

Secondly, with the recent announced closure of your Barcelona facility, do you think now your manufacturing footprint is aligned with current market conditions from a facility standpoint, or do you see other areas for rationalization there?

Bill Walter

I don't think we'll ever be in a position, where we ought to conclude that we have got our footprint properly aligned with demand. Demand is constantly changing. We need to be constantly reviewing our manufacturing operations. So I feel good about where we are now, but I wouldn't want to at the same time for you to walk away from this conversation believing that we're never going to change going forward.

Douglas Chudy - KeyBanc Capital Markets

Just one final question. Kind of taking a longer-term look, what would be needed to for you to get your Industrial Chemicals profitability back to 2008 levels? Are there certain levers you see needed on the volume and price front to get there?

Bill Walter

Sure, clearly. I mean to get back to 2008, we'd need 2008 conditions to be back. We need volumes back where they were. Volumes in our soda ash business should be there in 2010. I'm not sure they will be in our peroxygens business. We'd need the phosphate volumes in Europe to recover and then we're going to have to also see higher prices particularly in the phosphate business. Last year was an exceptional year for our European phosphate business. We're going to have to get both volume and prices back.

Operator

Your next question comes from the line of Dmitry Silversteyn from Longbow Research. Your line is open.

Dmitry Silversteyn - Longbow Research

A couple of questions, and some of these may have been asked in a different fashion, but I'm going to go back and maybe over the same ground again. Clearly, the volumes in the second quarter did not come back to the level that you were looking for, so the results in the quarter were, at least in Industrial Chemicals, significantly below your expectations.

As you look at your guidance for 2009 versus your previous guidance and you lowered it by about $0.50. Can you give us an idea of kind of what changed between three months ago and now that would account for this $0.50 change? Is it the phosphate prices? Is it slower recovery in volumes in soda ash or having to give up more pricing in soda ash? Kind of what has changed in a world that you're operating into account for lower guidance?

Bill Walter

The difference between our current full year guidance and the guidance we gave three months ago is almost exclusively, I might say entirely in our Industrial Chemicals segment. That in turn is two things; one is lower soda ash pricing. We had built into our guidance a quarter ago an assumption with respect to the price at which ANSAC was going to have to go to regain share. Embedded in that assumption was a price that we thought the Chinese was going, Chinese were going to be selling at.

The Chinese have continued to lower price through the quarter and ANSAC has had to chase that price down. The other one is pricing in our phosphorus business. Pricing is weaker than what we had expected a quarter ago, again, as a result of aggressive Chinese competition in Foret's traditional phosphate export markets.

Dmitry Silversteyn - Longbow Research

So if I kind of use the old sensitivity analysis that you've provided for us as in the change in soda ash pricing with respect to earnings, am I right in saying that pricing in Asia is about $20 lower than you thought it would be?

Bill Walter

I don't know. You may be right on, but I don't know the answer to the question. I'm looking around the table and I'm getting kind of blank stares as well.

Dmitry Silversteyn - Longbow Research

We can talk about that offline. That's fine. Then just a follow-up on the comments you made about Asian price expectations for 2009. You said the prices in Asia, if I remember correctly, were going to be flat with 2008 levels given the prices that you had to give up to get the incremental business with ANSAC. My recollection was that pricing in Asia was flat to begin with at the start of the year, and that the price increases you got were mostly Latin America and in the U.S. Am I misremembering how the pricing dynamic worked at the beginning of the year?

Bill Walter

I must have misspoke if that's what you heard, Dmitry. I had intended to say that ANSAC pricing was going to be flat year-over-year; not ANSAC Asia pricing.

Dmitry Silversteyn - Longbow Research

I got you. So in other words, the Asian price declines will offset the Latin American gains. Okay, I understand that. In talking about the Industrial Chemicals business, you mentioned raw material prices being up year-over-year. Phosphate rock prices I think you said were flat year-over-year. So, which industrial chemical input cost, since hydrogen as far as I know is also down for the hydrogen peroxide business, which pricing in the raw materials are giving you problems here in the second quarter with respect to year-over-year comps?

Bill Walter

First of all, I've got to correct your assumption regarding phosphate rock prices. While phosphate rock prices have come down, the prices that are flowing through our P&L in the second quarter of 2009 are higher than the prices that flowed through our P&L in the second quarter of 2008. So phosphate rock prices going through the P&L are higher, although phosphate rock purchase price is going down.

The other one are sodium carbonate in Europe, the cost of soda in Europe. I guess those are the primary ones. Yes, those are the primary ones in Industrial Chemicals.

Dmitry Silversteyn - Longbow Research

Then your Specialty Chemicals business, at least on the operating profit line, did better versus your guidance. Was that a faster recovery in lithium or stronger performance in BioPolymer? Which business kind of did a little bit better than you thought in the quarter and how sustainable that level of business is in the second half?

Bill Walter

Yeah. It was a combination of both, Dmitry. Both Lithium and BioPolymer performed better than our expectations. As you see in our full-year guidance for the Specialty Chemical group, we expect that to continue through the balance of the year.

Operator

Your next question comes from the line of Kevin McCarthy from Banc of America Merrill Lynch. Your line is open.

Kevin McCarthy - Banc of America Merrill Lynch

Bill, if I look at your guidance for Industrial Chemicals, I take the midpoint of down 60%, that would point us to approximately $26 million in the third quarter or roughly double what you did in the second quarter. I was wondering if you could help me understand the drivers behind that sequential improvement. It sounds like you clearly expect to be selling more soda ash. Is that the bulk of it or will you get meaningful contributions from peroxygens and phosphates there?

Bill Walter

It's a combination of both soda ash volumes and phosphorus operations in Foret. My comment just a minute ago in answer to Dmitry's question, the phosphate rock cost flowing through the P&L in the third quarter of '09 will be lower than the phosphate rock costs that were flowing through the P&L in the third quarter of '08.

Kevin McCarthy - Banc of America Merrill Lynch

As I think about phosphates sequentially then, am I right in understanding that the relief you mentioned sequentially in rock costs will be more than whatever change you would anticipate in selling prices, such that you have a higher profitability in 3Q versus 2Q?

Bill Walter

That's correct.

Kevin McCarthy - Banc of America Merrill Lynch

Then on Ag, I thought you posted significantly better results than some of your peers, looking across the global crop protection industry. I know you don't like to get terribly granular with the disclosure, but I thought you might enlighten us a little bit as to what you were seeing in terms of volume, price, and currency, trying to disentangle the sales trends that you saw there.

Bill Walter

Currency was a negative. On the topline, probably 4% to 5%. We did realize higher average pricing throughout the segment versus a year ago. Volumes would have been down versus a year ago. Very strong second quarter last year in Europe. Some timing issues this year in Europe. A strong second quarter a year ago in Asia. Lower pest pressures. There were some weather conditions in Asia affected that. Lower volumes in Argentina due to weather.

So let me resummarize. FX was a negative 4% to 5%. Volume was down the balance. I think the segment sales were down 9%. So that says that volume was down something like that. Pricing was up modestly.

Kevin McCarthy - Banc of America Merrill Lynch

Then finally, if I may for Kim, I look at page four of your press release where you give the segment data. You show a line for other expense. It looks like it was about $9.2 million in the quarter. That was a much larger expense than you had in 1Q. I was wondering if you could just comment as to what is in that line item, and what we might expect there going forward.

Kim Foster

What's in the line item generally is pension expense, LIFO expense, foreign exchange, and a number of items like that. What droves the change quarter over quarter sequentially was we have forecasted a higher LIFO expense for the full year given what we currently now anticipate to be the inflation rate in the inventories that will be on our books at the end of 2009. So because of that reestimation, we have upped our LIFO expense and to remind you, that's a non-cash charge, but LIFO expense for the full year. That explains the majority of the change.

Bill Walter

Kevin, let me add to what Kim just said. I mean as you look at the, what do we call it, our outlook statement. you'll have noticed that you don't have the outlook statements yet. Okay, I'm just told. You do have it. I'm told by somebody else. You'll notice that other income and deductions for the full year 2009, we're currently forecasting up $11 million over our prior forecast. That's all LIFO. It's all what Kim just talked about. As Kim said, it's a non-cash item. I don't want to get into accounting with all of you here, but that ought to come back into income in 2010.

Operator

Your next question comes from the line of Amy Norflus from Pilot. Your line is open.

Amy Norflus - Pilot Advisors

Bill, from what I understand, the big shortfall in the Industrial Chemical is the phosphate business. I mean because you're saying soda ash was fine or okay. Can you talk about more where this business is going? Is it core to FMC and what happens with it? Because it had a huge swing on a year-over-year basis, and it's very hard for all of us to analyze it.

Bill Walter

First of all, the first part of your question, Amy, I think had to do with the second quarter, and if not, straighten me out right now before I start babbling.

Amy Norflus - Pilot Advisors

No. Correct.

Bill Walter

The majority but not all of the second quarter shortfall vis-à-vis our expectations in the Industrial Chemicals group was in our phosphorus business, but not entirely. The soda ash volumes were weaker than we had expected.

Back to phosphorus. What happened there was the Chinese export prices came down far more rapidly than we had expected. Input costs basically played out the way we thought, but pricing was much weaker.

As you sit here now thinking about the balance of your question, where is it going from here? Is it core? Those are some pretty fundamental questions that we're asking ourselves right now. We are guardedly optimistic that the demand or volume in that business will recover. We are fairly certain, at least for the near term, that the input cost issues that have been in the business are behind us.

What we have to get comfortable with is the pricing environment going forward from here. So I don't want to commit one way or the other right now about that business in the portfolio two or three of the (inaudible). We've got a lot of questions yet to answer.

Amy Norflus - Pilot Advisors

Can you remind us what the energy swing in 2010 should be from hedging all the energy and what it should be in 2010? The benefit from energy costs?

Bill Walter

Amy, I can't. I'm looking around the table and we've got a bunch of people looking at their shoelaces. It's a tailwind, but I can't tell you what it is, Amy. We'll have to get back to you.

Operator

(Operator Instructions) Your next question comes from the line of Jay Harris from Goldsmith and Harris. Your line is open.

Jay Harrish - Goldsmith and Harris

Thanks for taking my call, my question. I'd like to get a review of your bank lines, when they mature, and what your debt management strategy is going forward.

Kim Foster

The first part of your question I'm sure I could address. I'm not sure what you mean by debt management strategy, but we have a European credit facility which matures in December of 2010. The facility amount, it's in euros, but the facility amount at the current exchange rate is $310 million. The amount that's drawn is $146 million. We have a domestic credit facility which matures in 2012.

The rest of the long-term debt is mostly in the form of IRBs which mature in various years, but all subsequent, essentially all subsequent to 2012. As far as debt strategy, maybe you could help me understand a little bit more what that question means to you.

Jay Harrish - Goldsmith and Harris

Well, I don't think you're going to wait until November 29th to renew the $310 million line. What are you doing?

Kim Foster

At the moment, we're not doing anything. Now that I understand your question, we understand and you understand what's happened to rates. We will not wait until December to do anything with it. However, from our current cash flows, we would have the ability to pay off that from cash flows, and that's assuming, as an earlier question to Bill was asked, that we don't want to, we don't have any acquisitions or don't do any more stock buybacks.

I think what you could expect us to do was somewhere within the next six months to probably do a refinancing to term out some of that maturity that comes due in 2010, as well as maturities that are further out in 2012, and term it out and probably in the bond market.

Jay Harrish - Goldsmith and Harris

What magnitude open bank lines are you interested in maintaining going forward?

Kim Foster

We'll retain the U.S. domestic credit facility going forward. Whether or not we maintain a European credit facility going forward is still a little bit up for conjecture.

Jay Harrish - Goldsmith and Harris

I presume that you're very comfortable with the current actual debt level on the books, so that the magnitude of your debt is not likely to change materially going forward.

Kim Foster

Jay, once again, we've targeted our net debt at somewhere between $500 million and $600 million, which as you know would give you a leverage ratio just slightly over 1. That is a very strong balance sheet from an investment-grade company. We maintain that leverage ratio in order to keep the financial and strategic flexibility that Bill has talked about to do acquisitions going forward. So in the environment where we believe we can continue to execute on the strategies, then we're comfortable with that level of debt.

Operator

There are no further questions at this time. I'd like to turn the call back over to Mr. Walter for closing remarks.

Bill Walter

Thank you, Operator. I'm not sure how many of you have had a chance to read some of the pre-releases that the sell-side put out before this conference call. For those of you who did not, I'd add that I think you guys mostly got it right.

Ag is going to have another record year with earnings in the mid to high teens over 2008, which implies even a stronger second half for our business that had an outstanding first half.

BioPolymer, as Ted said, continues to perform well; well enough to offset the volume weakness in Lithium. For the full year, this segment is expected to report record earnings with volumes in lithium strengthening as the balance of the year progresses.

Industrial Chemicals is the issue and is weaker than expected. Several things here in this segment are at play. First, the global economy has proven to be weaker than we expected, which has affected demand across all of the businesses.

Second, ANSAC's share regain strategy has taken a little more time to be put in place than we expected, but it is now there. Foret, it should be obvious by now, is caught in what I call a price-cost squeeze in its phosphorus business, which it's going to take at least another quarter yet to play out and work its way through.

As I look beyond the third quarter, Industrial Chemicals results should improve. Soda ash volumes will be up, and the industry will be sold out. Peroxide demand is recovering with the seasonal demand changes, supply chain destocking completed, and Chinese pulp demand growing.

In Foret, sodium tripoly prices will bottom out in the third quarter. They are at the Chinese cash cost. The decline in phosphate rock prices finally works through our P&L, we ought to see better results in Foret.

The net result of all of which is a fourth quarter forecast for Industrial Chemicals which should be sequentially much stronger than the second or the third, and leave that segment in a good position as we move into 2010.

I feel comfortable with the entire portfolio. I feel comfortable about the outlook for the Company for the next few years.

With that, let me again say thank you for joining us. I look forward to talking to you in the weeks ahead. Thank you, Operator.

Operator

Thank you. This concludes the FMC Corporation second quarter 2009 earnings release conference call.

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