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FMC Corporation (NYSE:FMC)

Q2 2010 Earnings Call

July 29, 2010 11:00 pm ET

Executives

Pierre Brondeau - President & CEO

Milton Steele - VP and General Manager, Agricultural Products

Kim Foster - SVP & CFO

Ted Butz - VP & General Manager, Specialty Chemicals

Michael Wilson - VP & General Manager, Industrial Chemicals

Analysts

Scott Levine - JPMorgan

Hamzah Mazari - Credit Suisse

Jonathan Ellis - Bank of America

Corey Greendale - First Analysis

Bill Fisher - Raymond James

Richard Skidmore - Goldman Sachs

Michael Hoffman - Wunderlich Securities

Operator

Good evening, and welcome to the second quarter 2010 earnings release conference call for FMC Corporation. Phone lines will be placed on listen-only mode throughout the conference. After the speaker’s presentation, there will be a question-and-answer period. (Operator Instructions). Thank you. I'd like to turn the conference over to Mr. Brennen Arndt. Mr. Arndt, you may begin your conference.

Brennen Arndt

Thank you very much. Thank you, and welcome everyone to FMC’s second quarter 2010 conference call and webcast.

Pierre Brondeau, President and Chief Executive Officer, will begin the call with a review of our second quarter performance. Following Pierre, Milton Steele, Vice President and General Manager, Agricultural Products will report on AG product second quarter performance, third quarter outlook and then provide an in-depth review of the differentiating strategy.

The group is employing to sustain growth while delivering operating margins well ahead of industry averages. Milton will then turn the call over to Kim Foster, Senior Vice President and Chief Financial Officer, for a report on our financial position. Pierre will then provide our outlook for the third quarter, full year 2010, and we’ll complete the call by taking your questions. Joining Pierre, Kim, and Milton for the Q&A session will be Ted Butz, Vice President and General Manager, Specialty Chemicals; Michael Wilson, Vice President and General Manager, Industrial Chemicals; and Mark Douglas, Vice President, Global Services and International Development.

A reminder to everyone 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 2009 Form 10-K, our most recent Form 10-Q, and other SEC filings. This information represents our best judgment based on today’s information; actual results may vary based on these risks and uncertainties. During the conference call, we will refer to certain non-GAAP financial terms. On the FMC website available at fmc.com, you will find the definition of these terms under the heading entitled Glossary of Financial Terms. In addition, we have provided our 2010 outlook statement and a reconciliation to GAAP of the non-GAAP figures that we will use today

It's now my pleasure to turn the call over to Pierre Brondeau, Pierre?

Pierre Brondeau

Thank you, Brennen, and good morning, everyone. As you saw in our earnings release, we did strong second quarter performance, better than our expectations. We realized strong sales growth in agricultural products and specialty chemicals and demand recovery in additional chemicals. Our second quarter earnings increased 16% to $1.28 per diluted share before structuring and other income and charges on revenue of $770 million, which increased 11%.

In Agricultural Products, sales of $294 million increased 60% while segment earnings of $18 million were down 12%, slightly better than expected. In Specialty Chemical, sales of $215 million increased 11% and earnings of $51 million increased 26%. Industrial chemical, sales of $269 million, increased 5% and earnings of $30 million, more than double up 121%, which was above our expectations. On a GAAP basis, we reported net income of $66 million or $0.90 per diluted share. GAAP earnings in the current quarter included a net charge of $28 million after tax of $0.38 per diluted share versus a net charge of $11 million after tax or $0.16 per diluted share in the prior year quarter.

With that reconciliation our non-GAAP earnings were $1.28 per diluted share in the current quarter, an increase of 16% versus $1.10 per diluted share in the second quarter of 2009. Going forward, our outlook is for the strong performance to continue in the third quarter and for the full year. In the third quarter, we expect earnings of $1 to $1.60 per diluted share before restructuring and other income and charges, 21% increase at midpoint of this range. For the full year, we have raised our outlook to $4.65 to $4.80 per diluted share before restructuring and other income and charges. The 13% increase at midpoint of this range.

Let's now take a more detailed look at the second quarter performance in each of the operating segments. First, in Specialty Chemicals, revenue of $215 million was 11% higher than the prior year quarter, driven by a robust demand recovery in Lithium Primaries and higher volumes in selling prices in Biopolymer.

Segment earnings of $51 million, increased 26% above the prior year as a result of the strong commercial performance in Biopolymer and higher volume in lithium primaries, partially offset by higher raw material cost. In Lithium, our upstream primaries business continues to experience a V shaped demand recovery, driven largely by growth in battery and metals markets in Asia.

Second quarter Lithium Primaries volume increased substantially versus prior year, while selling prices have stabilized in recent months at a level lower than last year. A downstream lithium business contributes to top line growth through higher selling prices. Lithium earnings in the quarter increased substantially versus last year as a result of the sales gain in the margin leverage on this top line growth.

In Biopolymer, second quarter revenues also increased driven by broad based sales gain across food, pharmaceutical and healthcare businesses and higher prices for food ingredients. Biopolymer earnings were essentially level to a year ago as the strong commercial performance was offset by higher costs inventory related to a year ago and higher raw material costs.

Moving now on to industrial chemicals, sales of $269 million increased 5% from the prior year quarter. Gains in soda ash especially in export markets the preoxygens and phosphates were partially offset by reduced selling prices in many businesses and lower electricity sales due as a divesture of a Spanish cogeneration pathology in the third quarter of 2009. Segment earnings of $30 million more than doubled versus last year, up 121% as the result of the broad based demand recovery and lower raw material and energy costs. In soda ash volumes continued to rebound significantly above last year. In the domestic markets are mid single-digit volume growth year to date is in line with the demand recovery being experienced in flat glass detergents and chemicals.

In the export markets of Asia and Latin America, demand growth is even more robust, up approximately 50% versus last year resulting from both higher market demand and the success of Anzac share recapture strategy. Anzac’s primary competitor in the export market chain these potash exporters reduced have reduced export volume in the first half by approximately 40% versus last year. Our view, however, is that uncertainty remains in regard to the soda ash export volumes which could increase in the second half. Presently in China and in our parts of Asia has increased generally consistent with input costs increases in the Chinese soda ash products.

This strong rebound in domestic and export markets has moved US producer to near full utilization. We expect tight conditions to continue across the balance of the year. In reflection, this industry conditions FMC announced a $10 per ton price increase in May for the domestic market effective July 1. However, given the full nature of our domestic contract pricing, no marginal increase was achieved prior to January 1 next year.

Late in the second quarter, we exchanged an operational issue at one of the coal-fired boiler at our Greenriver facility. The boiler has been repaired and is now back on stream. Though we did experience unplanned down time early in the third quarter. During the down time we supplemented products by bringing on incinerator gas fired boiler capacity. The financial impact of these occurrences will be reflected in our single half performance. We project an earnings impact in the range of $4 million to $7 million with the majority of that occurring in the third quarter. This impact is already included in our fully revised guidance for the year.

Our peroxygens business performed well in the quarter, delivering a significant earnings increase driven by higher volumes in all product lines and improved mix due to growth in our specialties business. In specialties our environmental soil remediation, food safety and all sealed businesses all contributed strongly to the earning increase. In Europe, a Forest subsidiary benefited from energy and lower raw materials cost, particularly phosphate rocks. Volumes in phosphate and hydrogen peroxide improved both versus a year ago and compared to the first quarter. Lower prices in phosphates and hydrogen peroxide partially offset the performance improvement.

Now moving to corporate items. Corporate expense was $15 million as compared to $10 million a year ago. Interest expense net was $9 million versus $7 million in the prior quarter. On June 30, 2010 gross consolidated debt was $638 million and debt net of cash was $476 million. For the quarter depreciation and amortization was $33 million and capital expenditures were $28 million.

Now I'll turn the call over to Milton Steele for a review of the performance and strategy of our agricultural product segment. Milton?

Milton Steele

Thanks, Pierre, and greetings to everyone. Global agriculture in the midst of a long-term growth cycle as the agricultural outlook stated last month, international commodity prices are anticipated to average higher in the next decade compared to the decade before the price spike of 2007 and 2008.

So while there maybe seasonal challenges of pricing and weather, which have affected several key markets this year. The fundamental trends for global agriculture remain positive driven by factors such as diminishing arable land and water supply, growing populations increasing demand for more protein, feed, fiber and fuel and relatively limited increases in farmers yield.

Over the long term, these trends will drive continued growth for agricultural inputs including crop protection chemical. In this growth environment, FMC remains committed to providing unique solutions to our customers and continuing to maneuver sales growth and profit margins ahead of industry averages.

We will do this by maintaining our crop focus strategy, finding ways to extend the life cycle of products, accessing new products and lowering the cost of producing them all while sustaining highly focused relationships with our customers. As a result of our strategy, we're expecting another strong year of AG products but with a different quarterly pattern, that is, lower earnings in the second quarter followed by stronger third and fourth quarters.

So what was our financial performance in the second quarter? Second quarter revenues increased 16% to $294 million driven by higher sales in Latin America, North America and Asia. In Latin America which is dominated by Brazil sales increased reflecting improved marketing conditions and growth in new and recently introduced products. Sales also improved in Argentina and Colombia.

Sales in North America increased due to strong demand for our proprietary herbicides, growth from new and recently introduced products, particularly our newly acquired herbicide and NATO improving market conditions in some non-crop segments. Asia sales were up with gains in most key countries reflecting better market conditions and the introduction of new products including (inaudible) China, another new herbicide for which we acquired exclusive access.

As expected, sales in Europe declined driven mostly by the shift and by pension sales from the second quarter to the first quarter which we reviewed with you in last quarter's call. Segment earnings of $80 million were 12% lower in the quarter. This is better than we projected in our last outlook statement. As we explained in the first quarter call, there were a number of reasons for our earnings to be down versus the prior year even with the higher sales.

Please consider, similar to the first quarter as we have stated in our last earnings call we had higher cost inventory compared with the prior year quarter. This higher cost inventory is now fully liquidated and will not impact our third and fourth quarters.

We have paid import duties in the United States as duty suspension legislation had not yet been renewed this year. We are less favorable geographic mix and finally we increased our spending on growth initiatives. Tackling these challenges head on we have laid the foundation for strong second half relative to last year and it is all based on our strategy of how are we going to continue growing FMC's AG business profitably.

For many years there's been a strategic paradigm in the global chemical crop protection industry which is generally followed by most, if not all, of our competitors. Simply stated this paradigm is one can either be a new active ingredient discover and market or one can be a genetic competitor.

In other words, one can compete in technology investing in R&D with expectations of earning higher margins or one can compete in price and through lower costs also earn acceptable margin. Indeed this paradigm is mostly played out along these two paths but with two exceptions. The first exception is that consistently attractive margins have not resulted for many competitors who pursue either path and the second exception is FMC's agricultural products group.

We broke this paradigm and proceeded in a uniquely different strategic direction. Several years ago we concluded that a company does not have to be either discovered new chemistries or a generic competitor to flourish in this industry. Instead we remain committed to innovation, though not new active ingredient discovery and have carved out a unique market position that consistently produces high margins. We call our strategy growing innovation where FMC this entails acquiring and developing technologies and making selective investments in innovation to extend product life cycle.

Driving for global cost competitiveness by our virtual manufacturing operation and creating sustainable relationships with customers based on mutuality. The key enabler of our strategy has been and will continue to be our investments in people development, and our ability to create and develop an agile and empowered organization. As a result of our strategic paradigm shift and these key tactics, we have delivered six consecutive years of record EBIT performance with EBIT margins consistently among the best in the industry. Furthermore, we remain on track to deliver another record EBIT performance in 2010.

Let me now share with you the strategy, by which we have consistently delivered industry leading margins and superior returns in net assets and more importantly, how we will continue to deliver profitable top line growth while sustaining current EBIT margins. FMC has a proven ability to consistently deliver strong returns. We have done this by carving out unique spaces in the market, investing in new formulations and mixes and sustaining value in a way that generic competitors do not yet appear to have mastered.

How does FMC does this, and how will we continue to do this? The first element of our strategy we call aggregating technology. FMC has developed a sophisticated scouting operation that seeks technologies that have the potential to improve the performance of existing active ingredients whether these are FMC's molecules or competitor's molecules. In other words, we gain access to technologies that someone else has invented, and we use our innovation and ingenuity to apply these technologies to make our products perform better and, thereby, provide more value to our customers.

As an example, we currently are developing several novel technology platforms that have the potential to expand the length of control of various pesticides. In this way we create opportunities to renew and/or extend the life cycles of all our chemistries by our infantries technologies that are patent protected and, which invariably exclusively able to FMC.

We also have extensive programs focused on extending the life cycle of our key proprietary chemistry. These include accessing new products in premix partner, to extend our product offering always with the goal of ensuring better returns for FMC and our customers.

Recently we announce the acquisition of Herbicide from Kumiai, which we market in North America as cadet. In addition, we very recently obtained the rights to contest and development Kumiai’s unique new herbicide is in premixes. These new herbicides premixes will provide Canadian and Latin American farmers with highly efficacious herbicide solutions in several key crops such as soybean, corn and wheat.

Importantly these premixes will provide outstanding control on most of the weeds that are showing significant resistant to herbicides like. We estimate that this family of premixes has the potential to generate patent protected trials for FMC in excess of $150 million at maturity with attractive margin.

Furthermore, we expect that our annual investment of $75 million in innovation will result in a stream of differentiated products that increase the attractiveness of our product offering, strengthen our relevance in key focus markets and complement our current product portfolio.

We believe that products currently in development and newly commercialized have the potential to generate $300 million to $400 million in new sales within the next five years.

Approximately 25% of FMC's gross profit will be earned on products that were introduced over the past five years. By 2015 we expect 30% to 40% of our gross profit to come from products introduced in the preceding five years. In other words, we do not discover new active ingredients, but we invest in innovation to make active ingredients, whether ours or others, into new and unique solutions to meet customers' needs.

The next element of our strategy is competitive sourcing. FMC's low-cost virtual manufacturing operation enables us to be highly cost competitive and relatively immune to volume swings. FMC's manufacturing cost structure is approximately 95% variable and most critical products and raw materials are sourced from multiple suppliers. Global cost competitiveness has been a cornerstone of FMC's profitability for the past decade.

Our accumulated expertise in running this global, virtual manufacturing operation has enabled us to continually reduce manufacturing costs, improve efficiency, as well as to reliably and competitively source materials and products from multiple suppliers.

Another benefit of our manufacturing strategy is the low levels of capital expenditures required to sustain our operation. Even though our virtual manufacturing operation is the envy of many in the industry, we are willing to rely solely on our past successes. We are in the process of reinventing our supply chain by investing in state-of-the-art systems and more skilled people.

These investments will ensure that we meet our customers' needs by industry leading performance on right first-time order fulfillment. In addition, we expect that these investments will lead to further improvement in inventory turns and working capital efficiency, thereby freeing up cash for other profit generating investment.

These supply chain investments will also allow to us grow more effectively and sustainable over the long-term. Finally, we are in the process of looking for and developing the next generation of low-cost manufacturing opportunities that could manifest in the future. The third element of our strategy is customer intimacy, which for FMC means focusing on key customers, markets, crops and products, and delivering on our customers' needs better than our competitors. For FMC, delighting our customers is not only a passion, but it is a mission critical for ensuring long-term sustainability and profitability.

Over the past several years, FMC has developed strong and in some cases leading positions in he various crops, for example, sugarcane in Brazil. We have also established sustainable positions in other important agricultural crops, such as corn, soybeans and sunflowers in North America, and several crops in Europe and Asia.

So whether it is in the Australian structural pest control market, Brazil's rapidly growing sugarcane market, or North American corn and soybean weed control, FMC works closely with customers to build leading market positions and to leverage market access.

And we work relentlessly to ensure that our relationships with our customers are based on mutuality. That means they win and we win. We're always looking for ways to create value to our customers, knowing full well that this year's unique FMC customer program could be imitated by competitors tomorrow. Today, we have an extensive idea of pipelines and concepts, all aimed at created sustaining, superior customer intimacy in our key markets for many years to come.

So now let me talk about future growth. As I've just explained FMC has carved out its own distinctive place in the market transforming its AG business into a globally cost competitive segment focused unique solutions provider.

While aggregating technologies, competitive sourcing and developing superior customer intimacy have been keys to our past successes and will we believe continue to remain essential elements of our strategy, we will not rely on these exclusively to continue to drive profitable future growth.

Importantly, we are actively pursuing three strategic growth initiatives which we expect to help us drive future profit growth. The first initiative is developing and expanding vital alliances. We already have a proven track record of increasing values through alliances and have identified a number of alliances aimed at expanding our profit line or at enhancing market access in focus markets. Our alliances also include the areas of manufacturing and technology access and development.

The second initiative is expanding into adjacent spaces with crop protection market. This entails identifying, developing and potentially acquiring physicians and technologies that are adjacent to traditional chemical crop protection products and that would allow us to leverage our skills, innovation, market access and consummate images. An example would be development of a line of biological products which we could enhance with our novel technology platform. We currently have more than 20 different biological products in various test programs across the world.

However, biologicals are example of an adjacent phase. We are exploring our neighboring opportunities with future EBIT growth potential. Our third initiative is size transformation. This entails acquiring products, technologies and/or businesses.

While this is not necessarily a new initiative, it is a key element of our ongoing strategy to strengthen market position and to drive sales and profit growth. In particular, we are currently considering several bolt-on acquisitions that are complementary to our crop protection business. We believe that there will be more opportunities to consider than have been available over the past several years and we also believe that FMC is well positioned to take advantage of these opportunities as we arise.

So in summary, FMC has spent years developing a culture focused on bottom line profitability and return. The interrelationships between our strategy of aggregating technologies, our sourcing model and our agile marketing approach to develop customer intimacy create a sustainable long term competitive advantage for FMC.

Unquestionably our competitive edge relies on our resourceful team of people, their commitment to productivity and our empowering organization structure. While we will aggressively pursue alliances, expand into adjacent spaces where feasible and make size transforming acquisitions in order to complement our paradigm breaking strategy of growing innovation, these strategies and initiatives are all geared towards continued profitable growth for the foreseeable future.

Finally, let me reaffirm our outlook for the remainder of 2010. Third quarter earnings are expected to be up approximately 25% compared with the prior year driven by growth in Brazil and Asia. Based on current commodity prices and planting intention, the outlook for the 2010, 2011 the whole market season is quite positive and we expect this to benefit our second half performance.

For the full year 2010, we project revenue to be up approximately 10% reflecting increased volumes in most regions, particularly Brazil. Due to the projected improving market condition in growth and new and recently introduced products. And finally, I wish to reaffirm full year earnings growth in the mid single-digits reflecting higher sales in most regions partially offset by the higher first half inventory costs, less favorable product and geographic mix and increased spending on growth initiatives.

Thanks for your time. I look forward to taking your questions during the Q&A session. And I’d now like to turn the call over to Kim Foster.

Kim Foster

Thanks, Milton, and good morning, everyone. Moving to our financial position, first free cash flow. As a reminder, free cash flow is defined as after acquisitions but before cash returned to shareholders. Our year-to-date free cash flow is in line with our expectations and we are maintaining our free cash flow projection for 2010 at approximately $200 million.

I'd now like to make a comment curtaining FMC's consolidated SG&A or selling, general and administrative spending for the quarter. For the second quarter, our SG&A spending was $96 million, up $21 million or 28% from the second quarter of 2009. The increase was driven by six factors. First and by far the largest is an increase in pension expense which stems from the dramatic market declines in 2008.

Second, changes in exchange rate have resulted in spending in our foreign businesses being translated into higher US dollar amounts. This impact is most pronounced in EBGs, operations in Brazil where the Brazilian real has strengthened 20% versus the US dollar in the period to being compared.

Third, performance-based incentives are higher than a year ago. In the second quarter of last year, we revised our full year guidance downward and consequently reduced our projected incentive-based compensation for that period.

Fourth is disclosed many times in the past six months we will have higher consulting expenses associated with several of our vision 2015 initiatives. The initial focus for spending will be on our global procurement initiative, which we now expect to deliver $50 million in annual savings from the procurement initiative should begin in 2011 and reach maturity in two to three years.

Fifth, as we've discussed for the past year, we have increased spending on growth initiatives and agricultural products. And finally, we’re experiencing higher costs during the transition of Chief Executive Officers. These costs have been fully disclosed.

In summary, our spending on recurring SG&A remains tightly under control and we are selectively investing in several focused initiatives that will deliver improved profitability in the near future. Regarding share repurchase, during the quarter we repurchased 410,000 shares for a total value of $25 million.

The share repurchase has essentially offset the year-to-date dilution from the issuance of restricted stock and stock option exercises. Our stock repurchase program will continue with the goal of offsetting future dilution. The existing board authorization has $165 million remaining.

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

Pierre Brondeau

Thank you, Kim. Regarding our outlook for the full year 2010 we have raised our guidance for earnings before restructuring and other income and charges to $4.55 to $4.80 per diluted share. The 13% increase above last year at the midpoint of range. We expect agricultural products to deliver seventh straight trade year for record earnings while increasing investment innovation and continuing to deliver higher profit margin.

Full year segment earnings growth in the mid single digits expected reflecting higher sales in most regions partially offset by less favorable products geographic mix. Higher house inventory cost and increased spending in growth initiatives. In specialty chemicals earnings are projected to increase by approximately 20%. We expect biopolymer to achieve its sixth year for recall earnings and lithium to realize significant earnings improvement through a robust demand recovery in lithium primary.

In industrial chemicals we project earnings to be up 25% to 30% on the strength of a significant volume rebound and favorable raw materials costs partially offset by reduced selling prices and higher plant outage costs. Moving now to our outlook for the third quarter, we expect earnings before restructuring and other income and charges of $1.00 to $1.15 per diluted share. A 21% increase above last year at the midpoint of this range.

Double-digit earning increases are expected in all three business segments. In agricultural products we look for third quarter earnings to be up approximately 25% driven by growth in Brazil and Asia.

In specialty chemicals earnings are expected to be up approximately 15% driven by continued strong commercial performance in biopolymer and higher volume in lithium primaries. In industrial chemicals we expect earnings to be up in the low teens as higher volumes and lower raw material costs are partially offset by reduced selling prices and higher plant outage costs which we previously mentioned.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Frank Mitsch from BB&T Capital Markets.

Sabina Chatterjee - BB&T Capital Markets

Good morning. This is Sabina in for Frank Mitsch. Just had a question on specialty chem., you gave guidance for Q3 in the full year and it sort of implies a sequential decline from Q2 and then roughly a $5 million up tick in Q4, but historically Q3 and Q4 seem to been similar. So what owes to the variance this time?

Ted Butz

There's a number of issues occurring here, nothing that is significant. We do see a stronger fourth quarter coming than we had in prior years as our outlook in customer demand is strong. We have some planned outages that are hitting us in third quarter in a couple of the businesses that affect just the square on that. So nothing else other than that is significant for the timing between third and fourth quarter.

Sabina Chatterjee - BB&T Capital Markets

On industrial, results were nicely above what we had expected. It sounds like strong volumes were the driver there. Can you just determine how much of that volume recovery is actually fundamental demand versus restocking? And I know Ansac’s share recapture probably accounted for a portion of that as well. Could you break that down for us?

Michael Wilson

True, a significant portion of the profitability gain was driven by volume and we are seeing fundamental demand growth across all three of the businesses in ICG, but you have to recall that from a comparison standpoint we had a particularly weak first half to 2009 with economic conditions. It was particularly true in soda ash as it related to export demand and share within Ansac. So if you look, for example at the demand for soda ash and year-to-date, total sales were probably around 8%, but Ansac, for example, demand is up some 52%. So that sort of gives you an idea where the split. Similarly in peroxygens and phosphates we've seen a big rebound in demand just based on year-over-year recovery.

Sabina Chatterjee - BB&T Capital Markets

Can you just tell us what you're seeing on the M&A landscape in terms of actual number of properties up for sale and maybe some discussion valuation multiples?

Pierre Brondeau

We do believe that without getting too precise on number we do have multiple opportunities to name for merger and acquisition, and those most likely in the bottom range, which I would classify as the $100 million to $500 million, maybe a couple at a higher level of size.

The question in this space where we are looking for acquisition is always the one of multiples, because when you look for properties in AG or pharma or food, you tend to have pretty healthy multiple, and I would say today the kind of multiples, which are at the beginning of negotiation would be somewhere around between nine times and 12 times EBITDA. Certainly at 12 times EBITDA it becomes a diligent acquisition for us, so not the kind of premium we are willing to pay, but in the lower range we are talking to quite a few firms today.

Operator

Your next question comes from the line of Douglas Chudy from KeyBanc.

Douglas Chudy - KeyBanc

First question, we've seen a nice rebound here in soda ash, and it sounds like utilization rates have picked up quite a bit. Can you give us your thoughts on Granger, I mean, because there’d be some consideration to bring this back on in 2011, and then maybe little bit of idea how long it takes to get that back up and running?

Pierre Brondeau

We're still at the same point as we were at the last quarter earnings call. We haven't changed from the mental position which is to make a decision around Granger most likely around Q3 next year.

This is when we will make decision. Most likely it will lead to a partial reopening of Granger sometime next year. Now as I'm sure you understand we do have the flexibility with the type of facility we have in Granger solution mining to have partial opening. We don't need to have a full opening of the entire facility bringing very large volumes. So we will most likely go through a partial reopening if demand keeps on justifying that sometime next year with addition to second quarter.

Douglas Chudy - KeyBanc

You've quantified, I guess, this procurement savings plan, so you would expect to start seeing about $50 million in annual savings? Would that full $50 million hit in 2011? Did I understand correctly?

Kim Foster

I think I would characterize that that way. We will be at $25 million run rate by the end of 2011. It doesn't mean we have $25 million saving in 2011. That is the run rate we would reach by the end of the year and then we would ramp up to the $15 million run rate before the end or by the end of the following year. So to reach to the full $15 million, it will be a two to three years period.

Douglas Chudy - KeyBanc

Okay. That's helpful and then just finally switching gears to the AG business, any issues with pricing pressure across your products or any concerns on the horizon for that?

Kim Foster

There's no doubt that the market conditions in several of the key markets are tough and that there are pricing pressures. Nothing that we can't handle. We built that into our full cost. But it's certainly a lot of the key market conditions are really tough out there.

Operator

Your next question comes from Dmitry Silversteyn of Longbow Research.

Dmitry Silversteyn - Longbow Research

Question on the crop protection to stay with that. When you talked about kind of the pillars of the business, one of the things that you kept coming back to repeatedly was customer relationships and getting closer and working closer. Can you provide some examples for us on exactly what you mean by that and how is that different from what your competitors are doing?

Pierre Brondeau

Dmitry, I don't want to get into a lot of details on this. Obviously this is a competitive advantage of us. I'll give you an example, one example anyway. In Brazil, we have fairly strong in sugarcane and we created university for 300 students where we trained them in a number of skills that the sugar mills who want to hire new people coming into their businesses would like to have and so that's an example.

It was a first move and nobody else had done this and it’s sort of highly or not sort of it is very highly appreciated by our customers. That could be an example. We have many of these in other areas, but that's it.

Dmitry Silversteyn - Longbow Research

So you're really talking about thinking kind of outside the box. I mean we're not talking about, you know, improving distribution networks or, you know, servicing the customers out of your centers better. You really are looking at becoming, more involved in almost day to day lives of your customers?

Pierre Brondeau

You put it better than I do, Dmitry, absolutely.

Dmitry Silversteyn - Longbow Research

To follow up on the M&A question, we talked about the multiples, obviously, but when you said things are getting better do you mean in terms of number of deals, number of deals that are appealing to you or the multiples that people are willing to accept or I mean what is it about the M&A market that's getting better? Is it just credit is more available and getting easier to borrow?

Kim Foster

I think a little bit of both. First of all, types of deals we are looking at, we do not have a financial problem per se or boring problem. We do generate cash and we do have a moving capability with a very clean balance sheet which is good within the range of kind of deals we are looking at. I believe it's more the other statement that you made around the fact that there are more deals available and maybe in some cases specialty in the Ag space, the kind of deals we are looking at. Maybe there is a little bit less of a competition than we might have seen in the past. So we do hope that multiples aren't going to get or are getting a bit more reasonable.

Dmitry Silversteyn - Longbow Research

On Foret it sound like this quarter there was nothing extraordinary going on in that business outside of the Codem profit losses which we knew about. Anything to be aware of in the second half of the year either with phosphate rock movements out there, announced price increases or decreases or any inventory issues, anything that would make that part of the industrial chemicals let's say behave unexpectedly?

Kim Foster

No. I think we're all looking in the second half of the year for Foret which is value stable along the same line as first half which makes the business a bit less damaging to the overall industrial chemical business than it did in the past, not a great business to be in. That being said, we are in a much more stable situation than we were in the last couple of years with the situation around phosphate rock. So it's a bit calmer than it's been and nothing of a surprise to be expected in the second half of the year.

Operator

Your next question comes from Kevin McCarthy of Bank of America.

Kevin McCarthy - Bank of America

I think you mentioned that you're witnessing a V-shaped recovery in lithium. Would you comment on the expected volume growth in that business on a sequential basis as we move into the back half of the year?

Kim Foster

Sure. I think the [V] shape is mostly something we have been experiencing on a year-to-year basis at this level because a year ago we did have a fairly slow year. That being said we are looking for a next couple of quarters in terms of sales, much more in the range of what we have been experiencing around the second quarter and third quarter. So we had a very steep recovery in the first half of the year which we do not expect to see. For some reason because of capacity variable and that would change the plans we have in the third quarter, we might have a slightly lower sale to come.

Kevin McCarthy - Bank of America

For Milton, I appreciate the strategic overview there; I did want to ask you about the quarter, though. You cited four factors that were weighing on profitability there, inventory costs, import duties, geographic mix and higher spending. Can you help us understand the relative importance of those and also which of them are transitory in nature versus persistent in the back half?

Kim Foster

The inventory costs were certainly a first half event and will not have any impact on the third and fourth quarters, Kevin. The duties I think will sort itself out in the third quarter. Those definitely will not impact us going forward.

Kevin McCarthy - Bank of America

Pierre, can you update us on the phosphates business and your strategic evaluation there, what timelines might look like?

Pierre Brondeau

We are still evaluating options with the same range of possibilities. So at this stage today we are still shooting for an end of the third quarter. We are not in the position today. We do have multiple options we are looking at and weighing which one are the most beneficial for us in the short-term and the long-term as well as being in discussion with potential partners.

We’re not yet close to make a decision. We'll see where we are, still shooting for the same date of the end of the third quarter that nothing more certain at this stage than we had the quarter before.

Operator

Your next question comes from Peter Butler from Glen Hill Investment.

Peter Butler - Glen Hill Investment

Sounds like FMC had a better second quarter than Le Bleu in the Monday alley?

Pierre Brondeau

It wasn't very hard.

Peter Butler - Glen Hill Investment

In regard to your Spanish problem, the natives ought to be pretty happy there. Will that put you in a better position for the great FMC CEO to come up with a satisfying solution? How does the outlook look there?

Pierre Brondeau

First it doesn't help me because those guys have been celebrating for the last two months and they aren't working. So we don't get work to help me, but it's a complex situation. We do have issues with gypsum storage. We do have to weigh the balance of getting out versus partnering with somebody and staying in. We will come to a decision. And I have no doubt that we'll come to decision and we are shooting for the same timing, but there is not a very clear option today, which is showing better than another.

Peter Butler - Glen Hill Investment

And the other thing I wanted to ask about, you've had discussions today about the reduction of your supply chain costs, but I didn't hear very much on the situation with your total fixed cost apart from the supply chain. What's going on with your fixed cost position?

Pierre Brondeau

If you look at where we are, where we are in the key cost initiatives we are returning. One is as you said supply chain with a focus on stronger delivery performance to our customers and strengthening our balance sheet with the lower working capital. And the highest focus right now is the place where we have the most complicated supply chain which is Ag. The other business will come in time, but most likely will stop after Ag is well into the process.

And the number two priority today is implementing the procurement structure change to deliver on the $50 million our annual saving. We can expect that those are the two major products we are currently pushing forward in terms of cost savings.

Operator

Your last question comes from the line of John McNulty from Credit Suisse.

John McNulty - Credit Suisse

On the lithium side, can you give us some color as to the types of increases you saw in the downstream pricing versus what you saw on kind of the more commodity grade lithium?

Ted Butz

On the downstream we've seen pricing mix probably up 5% on the downstream side versus the primary side being probably down a little over 10% year-over-year in a mix of products.

John McNulty - Credit Suisse

On the AG front I think, Milton, in your comments you'd talked about new products that you had kind of in the pipeline that you thought over the next, call it four to five years would bring in $300 million to $400 million of incremental revenue. Can you give us some color as to how much of that business would cannibalize some of your current business and how much of it really would just be new incremental business on either different crops or different applications?

Ted Butz

That's the incremental sales over the next five years, $300 million to $400 million, and it's from new products and product concept.

John McNulty - Credit Suisse

So it's all incremental, okay. And then just the last question, housekeeping question. The interest expense guidance for the full year is $42 million. I believe you did $19 million in the first half, so you're kind of calling for a relatively decent up tick despite the fact that you're generating cash, so I'm wondering what's driving that.

Kim Foster

In the second quarter, John, the interest expense was down a little bit, slightly down from where we thought it would be. And the notion is influenced by something called capitalized interest we capitalized construction in progress that is in place at the end of each quarter and during each quarter.

So the issue isn't so much a cash flow issue and, you know, most of our cash flow really comes in the second quarter of the year. The second half of the year cash flow is not as pronounced as the second quarter, but it's really a timing issue on capital spending.

Operator

I will now turn the conference over to Mr. Brondeau for closing remarks.

Pierre Brondeau

So I will be closing our call by providing an update on the five strategic trusts we’re pursuing to increase a profile and ensure a continued level of premium profitability. First we'll maintain our financial strength and strategy flexibility. We have a solid balance sheet and investment grade rating.

We have the capacity to take on more debt, but will only do that for the right opportunities, highly strategic accretive acquisitions. High liquidity profile is conservative with debt maturing in the next five years less than $200 million and our cash flow is strong, $200 million pre-cash flow is projected this year and is likely to increase next year.

Next we are working to lower our cost by leveraging our company size such as procurement, logistic and supply chain. Though we are early in this process we have identified annual procurement savings of up to $50 million at maturity. Saving in procurement could he should begin in 2011 and reach maturity in the next two to three years.

Third, we are focusing on growth in agricultural products and biopolymers. By increasing our emphasis on internal technology development, complementing this already growth by financially attractive bolt-on acquisitions and technology end licensing and balancing our growth toward capturing share in a rapidly evolving economy.

For example, we have announced the consolidation of the five offices and labs in and around Shanghai in one innovation center that we will house our R&D commercial tech service and administrative team. The cost of consolidation into one site from multiple sites is low.

Fourth with, we intend to enhance our additional chemicals portfolio by leveraging our strength in sodaash and peroxygen, while reducing the earnings volatility as was associated with the first stated business. We continue to reevaluate and remain optimistic about the potential to develop a new environmental solution platform. We are pursuing a number of promising opportunities spanning air, soil and water treatment which liberates existing property and green chemistry.

And finally our fifth strategy first is to position our lithium business for the middle of this decade as the next growth platform. The capacity increase of 30% we recently announced is progressing well with a scheduled on-stream in the fourth quarter 2011. In addition, we have begun to look for our next source of lithium in order to be ready by mid decade for the next leg of the lithium growth curve.

Our companywide strategy with you is progressing well. This will enable us to refine a business to develop a roadmap for greater top line growth without compromising our commitment to shareholders to deliver sustained earnings growth. The outcome of this effort will be in a development of a five-year vision, Vision 2015 that we will present to our board in October. In December we plan to hold an Investor Day to share our strategic direction and introduce our Vision 2015 for FMC.

Thank you very much. This concludes our call.

Operator

Thank you. This concludes the FMC Corporation second quarter 2010 earnings release conference call. You may now disconnect.

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