Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Brennen Arndt - IR

William G. Walter - Chairman, President, and CEO

Michael D. Wilson - VP and General Manager, Industrial Chemicals

Kim Foster - Sr. VP and CFO

Analysts

Kevin McCarthy - Banc of America

Richard O'Reilly - Standard & Poor's

Michael Judd - Greenwich Consultants

Dmitry Silversteyn - Longbow Research

Dennis Delafield - Delafield Asset Management

Jay Harris - Goldsmith & Harris

FMC Corp. (FMC) Q4 FY07 Earnings Call February 7, 2008 11:00 AM ET

Operator

Good morning and welcome to the Fourth Quarter 2007 Earnings Release Conference Call for FMC Corporation. Phone lines will be placed on listen-only mode through the conference. After speakers' presentation, there will be a question-and-answer period. [Operator Instructions]. Thank you. I would now like to turn the conference over to Mr. Brennen Arndt. Mr. Arndt, you may begin your conference.

Brennen Arndt - Investor Relations

Thank you very much. Thank you and welcome everyone to FMC's fourth quarter 2007 conference call and webcast. Bill Walter, Chairman, President and Chief Executive Officer with begin the call with a review of our fourth quarter performance. Bill will then turn the call over to Michael Wilson, Vice President and General Manager, Industrial Chemicals, who will review the segments recent performance, provide our 2008 outlook for the industrial chemical segment. Following Michael, Kim Foster, our Senior Vice President and Chief Financial Officer will report on our financial position. Bill will then complete the call with a discussion of our overall company's outlook for 2008, and we will then take your questions.

A reminder today that our discussions will included certain statements that are forward-looking and subject to various risks and uncertainties concerning specific factors that are summarized in FMC's 2006 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 a definition of these terms under the heading entitled Glossary of Financial Terms. We've also provided a reconciliation to GAAP of the non-GAAP figures what we will use on today's call and we have also provided our 2008 rather outlook statement.

So, its now my pleasure to turn the call over to Bill Walter.

William G. Walter - Chairman, President, and Chief Executive Officer

Thanks Brennen, and good morning everyone. As you saw in our earnings release we had an outstanding quarter, with exceptionally strong operating results across all three of our business segments. Our fourth quarter performance completed another record year for the company.

Summarizing our fourth quarter results sales were $674 million increased 15% versus the fourth quarter of 2006. Segment earnings of $95 million increased 40% versus the same quarter a year ago. Two non cash items, a higher book tax rate and lower LIFO income negatively impacted the quarter's results by $0.28 per share, when compared to the fourth quarter of 2006, and Kim is going to review these with you in detail later in the call.

Finally, earnings before restructuring and other income and charges was $0.59 per diluted share versus $0.61 per diluted share in last years fourth quarter. As I said strong performance was realized in all three operating segments specifically, Ag products earnings of almost $32 million increased 44% versus a year ago, driven by higher sales in Asia and Latin America, and strong global supply chain performance.

Especially chemical earnings of $34 million increased 39% versus the year ago quarter as a result of strong commercial performance in BioPolymer, higher volumes and selling prices for primary lithium compounds, and continued manufacturing productivity improvements, offset in part by higher raw material cost.

Industrial chemicals earnings of $29 million, were 36% higher than year ago, driven by higher selling prices in soda ash, volume growth across the segment and improved power market conditions in Spain.

Energy raw materials were higher than year ago across the company, versus the prior year energy and raw's unfavorably impacted earnings by $0.06 per share in the quarter. Currency translation on the other hand had no material effect on our earnings during the quarter.

On a GAAP basis we reported net income of $40.9 million or $0.53 per diluted share. GAAP earnings for the quarter included a $0.06 per share net charge related to discontinued operations, restructuring, and other charges including tax effects and adjustments. With that reconciliation our non-GAAP earnings were $0.59 per diluted share versus $0.61 a year ago.

Let me now take a more detail look at the performance of each of our businesses in the quarter. Moving on, first Ag products, sales of $229 million increased 18% as gains were realized in Asia and Latin America. In Asia the sales increase was broad based driven robust cotton season in Pakistan and more favorable growing conditions in Indonesia, India, and Australia.

In Latin America sales growth in Brazil was particularly strong, as we benefited from the buoyant agricultural economy, higher crop prices, and increased planted acres in key crops. And in Ag products earnings of $31.9 million as I said were 44% higher than the year ago quarter, reflecting the broad base sales gain and continued supply chain improvements.

Moving on to specialty chemicals, revenue of $161 million increased 10% over the prior year's quarter and earnings increased 39%. Both lithium and BioPolymer delivered strong results. In BioPolymers strong commercial performance in the pharmaceutical and food ingredients markets and continued productivity improvements were only partially offset by higher specialty pulp prices.

In pharmaceuticals we benefited from the continued strong global demand for oral tablet drugs. Sales in India, China, and two generic drug manufacturers across all regions were particularly strong in the quarter. Our food ingredient segment also performed well driven by volume growth in Asia and Latin America primarily in the dairy segment as well as a favorable product mix.

In lithium earnings growth was a result of higher prices for primary lithium compounds and higher volumes in pricing and downstream specialty products. As we commented upon in last quarters call although pricing in most markets continues to be driven by tight global supply demand balance, new capacity and excess inventory has led to some softening of prices in China late in the quarter.

Moving to the corporate items, corporate expense was $12.8 million as compared to $12.4 million a year ago. Interest expense net was $7.9 million versus $7.8 million in the prior year period. On December 31, 2007 gross consolidated debt was $545 million and debt net of cash was $470 million.

For the quarter depreciation, amortization was $33 million and capital expenditures were $38.9 million. That's Ag products specialty chemicals incorporate. Now for a discussion on industrial chemicals, I will turn the call over to Michael Wilson, Michael?

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

Thank you Bill and good morning everyone. It's a pleasure to be with you today to highlight our industrial chemical segment. We view our fourth quarter and full year 2007 performance and provide you with our 2008 outlook. Our Industrial Chemicals segment is comprised of three businesses, our alkali chemicals division or soda ash business, North American peroxygens which is comprised predominantly of hydrogen peroxide that also includes several specialty peroxygens. And Foret, our wholly owned Spanish subsidiary which manufactures peroxygens and phosphates.

As most of you on the call are already familiar with our businesses, I'm going to go straight to the results of our fourth quarter and full year 2007 performance and then to the 2008 outlook for the segment. Along the way I will touch on the key issues and opportunities that each of the three businesses have before them. For the fourth quarter 2007, revenue in Industrial Chemicals was $285 million an increase of 15% from the prior year quarter driven by higher selling pricing in soda ash, volume growth across the segment, and favorable currency translation primarily the Euro.

Segment earnings of $29 million increased 36% as a result of higher sales and improved power market conditions in Spain partially offset by higher energy and raw material cost across the segment. With this fourth quarter performance the Industrial Chemicals segment has regained strong operating momentum that we will carry through 2008. For the full year 2007, revenue in Industrial Chemicals grew to over a $1 billion to finish at $1.87 billion an increase of 10% versus 2006. The soda ash business accounted for the majority of the increase due to higher selling prices and export volume growth. The segment also benefited from good volume growth in Foret and favorable currency translation primarily on the strength of the Euro.

Segment earnings of $92.5 million declined 4% as expected as higher energy and raw material cost across the segment and the lower electricity selling prices in the first three quarters of the year in Spain more then offset higher selling prices for soda ash and the volume growth achieved across the businesses.

Let me now shift to our 2008 outlook. Similar to 2007, the biggest levers on profitability for Industrial Chemicals segment will be selling prices and input cost. As many of you know, the vast majority of our business tends to be on an annual contract rather than spot basis. At this juncture, contract negotiations for majority of our business, particularly for soda ash and peroxygens have been concluded. As a result, we expect to realize strong price improvement in 2008, in both our domestic and export soda ash businesses while contract prices in our other businesses were also generally favorable.

Overall, we expect aggregate volume and net price benefits to contribute approximately $100 million to improved earnings for the segment in 2008. But not all of it will flow to the bottom-line. Raw material costs, energy, and price driven soda ash royalty payments in total are expected to be approximately $50 million higher with phosphate rock prices at Foret being the primary driver.

Let me review each business in more detail starting with soda ash. As we began 2008, the North American soda ash industry remained in a sold out position with all U.S. producers operating at full capacity. Favorable supply demand conditions continue despite a flat U.S. market due to strong export demand growth in the absence of significant capacity additions. We believe the favorable market dynamics are sustainable for a number of reasons. First, sustained growth in export demand. U.S. producers will continue to benefit from the globally low cost position. Second, the returns have improved for all producers with the price increases in last few years. Cost pressures for energy, raw materials, and transportation, continue to favor a rising price environment. And finally we expect no significant changes in U.S. supply.

Our Granger Wyoming plant represents the lowest cost in most capitalization potential capacity in the industry. The facility is now running at an annual rate of 500,000 tones leaving us still holding approximately 800,000 tons of idle capacity at Granger. Given our current export demand outlook, we have initiated steps to bring on the next increment capacity in 2009, while we have not yet taken a final decision as to the size of the increment to bring on stream, we anticipate it will be in the range of 250,000 to 500,000 tons again depending on the market outlook.

We remain fortunate to have operational flexibility with the Granger capacity. Our current long range plan anticipates full re-commissioning at Granger facility by 2012. In North America soda ash price increases varied by customer depending upon contract provisions, timing, and the amount of increase previously accepted. In some cases our opportunity was limited by competitive caps. Nevertheless we realized an average increase that was inline with our expectations.

In addition, we continue to structure our longer term contracts to preserve the price and volume gains over the last few years, while providing for potential additional upside sight for 2009 and beyond. All of our multiyear contracts now allow for freight and energy surcharge pass through.

In the export markets Wyoming producers serve Asian and Latin American markets through ANSAC. In Asia ANSAC's primary competition is the exporting Chinese producers and to a lesser degree Indian and African producers. In our view the long-term outlook for ANSAC in Asia remains favorable due to a number of factors. First; ANSAC is valued by its customers for its multi supplier network and superb logistics. Second, in mid 2007 Chinese exporters lost a 13% export VAT rebate that had historically received. And third, Chinese soda ash producers faced a variety of issues that could impact our competitiveness going forward, including energy inflation, increasing environmental pressures, tightening credit and lending practices, and the continuing re-evaluation of yuan.

With sustained demand growth in China and an attractive domestic market for the major Chinese producers, we expect 2008 Chinese exports will remain essentially leveled for 2007, down slightly from 2005 and 2006 levels. Against this backdrop ANSAC's pricing actions in Asia during the 2008 contract season were very successful. Their favorable results are attributable to the tightening supply demand conditions in Asia resulting from the China situation I just described, and a limited market effect from 300,000 metric tones of new capacity that came online at Magadi in Kenya.

In Latin America where ANSAC continues to hold the favorite cost position, it achieved similar pricing success. Only partially mitigating ANSAC's favorable pricing trends in Asia and Latin America is the impact of rising ocean freight cost. Even though ANSAC's freight cost have risen with generally escalating ocean freight rates, ANSAC remains competitively advantageous as result of its scale, dedicated vessels, and the portfolio of multi year contracts.

ANSAC's success will significantly narrow the price differential between domestic and ANSAC pricing in 2008. Over both domestic and export volumes, we expect to realize an average net soda ash price increase in the mid teens per ton.

In summary higher selling prices and export volume growth in our soda ash business will the major driver to the businesses fourth consecutive year of substantial earnings growth. As I do each year, I want to remind you that we own 87.5% of the earnings of our soda ash business. The balance is owned by our two Japanese partners.

Moving now to North American peroxygens. During 2007, North American demand for hydrogen peroxide, grew by approximately 2% to 3%. Our expectation for 2008 is for somewhat slower demand growth of 1% to 2%. Growth will continue to be driven by pulp demand and the trend toward higher brightness papers supplemented by growth from new applications and antimicrobial and environmental markets.

Supply conditions are expected to remain at 2007 levels with effective capacity utilization around 90% with some seasonal fluctuations. Energy and energy related cost for the typically North American producer of hydrogen peroxide were slightly in excess of 50% of the cost of sales. These inputs will be marginally higher in 2008, while hydrogen peroxide pricing is expected to be level too or slightly up from 2007.

On a relative basis we expect to realize more significant price and volume growth in our specialty peroxygens lines which constitute 25% of North American peroxygens revenues. Though small today, we are excited about the potential of emerging opportunities for our specialty peroxygens in environmental and sterile applications. Overall, North American peroxygens earnings are forecasted to be modestly higher versus 2007 with price and volume gains more then offsetting higher input cost.

Turning to our European hydrogen peroxide business at Foret, in Western Europe hydrogen peroxide demand grew approximately 1% in 2007, down from the 4% average growth experienced in the prior three years. The slower pace in demand growth was largely attributable to weaker European pulp production, due to fiber shortages early in 2007 and the impact of the stronger euro on pulp exports.

With slower than expected market growth, a number of minor hydrogen peroxide capacity additions has resulted in the industry operating rates dropping to the 88% to 89% level. Resultant competitive rivalry among the market leaders has marginally pressured pricing.

As a result, European hydrogen peroxide profitability in 2008 will likely be level to 2007 with volume growth offsetting price impacts. For Foret's phosphorous chemical products, its other major business are used in a wide range of applications including detergent, feed, and industrial uses. Demand growth for phosphorus chemicals in these application tends to mirror GDP. The major product in phosphorus chemicals is sodium tripolyphosphate or STPP.

Historically Chinese producers have been key competitors and the industries price setters. China increased its export of STPP in 2007 by approximately 5% though export growth dropped markedly in the second half of the year. As for Chinese soda ash, Chinese exporters of STPP lost their export rebase status mid last year. Similar to soda ash, Chinese exporters raised STPP prices in the second half of 2007 to recoup the lost margin.

There is now speculation that China plans to take a further step by instituting an export tax on STPP and other phosphorus chemicals as part of its effort to regulate exports of natural resource based high energy content product. The exact timing and magnitude of this potential tax is not known. A major factor effecting phosphorus products in 2008 will be raw material cost particularly for phosphate rock where prices have increased dramatically versus 2007. The escalation in phosphate rock prices has been driven by tight supply conditions due to strong global demand for fertilizer and rock and governments resolve to get higher value for a key natural resource for which they control 50% of global exports.

In the current environment phosphate rock suppliers are refusing to commit to pricing beyond the quarterly basis. Appropriately Foret has moved to largely quarterly price commitments with its customers for 2008. A departure from its historical annual contracting approach. Foret intends to recover raw material cost increases in the form of higher pricing. These higher prices are included in my earlier statement of the segment in total achieving aggregate price and volume benefits of approximately $100 million.

The key factor to Foret's success in phosphates as the year progress will be the behaviors of the Chinese exporters due to rising costs, depreciation of the Yuan against the U.S. dollar, and the loss of export incentives we expect to see more significant price increases from Chinese exporters going forward. If not however supply conditions remains sufficiently tight that the impact of potentially higher Chinese exports will be mitigated.

Finally a comment on the improved power market conditions in Spain. As Bill communicated in our last quarterly call we saw a recovery in electricity selling prices beginning in September of last year when our co-generation plants began to benefit from the new regulations enacted by the Spanish government. Foret will realize a favorable impact from these changes during the first 8 months of the year.

In summary Foret earnings will improve significantly in 2008 as the combination of higher selling prices, volume growth, and improved cogen activities more than offset higher raw materials and energy cost.

With that outlook for the primary levers of Group profitability let me summarize our overall view for the industrial chemical segment for 2008. We expect full year 2008 earnings to be up 55% to 60% versus 2007 driven by higher sales across the segment and more favorable power market conditions in Spain partially offset by higher raw materials and other costs. First quarter 2008 segment earnings are expected to essentially double versus the prior year quarter driven by the same factors I have just mentioned. The segment has indeed regained its operating momentum.

With that I look forward to taking your questions during the Q&A period and would like to turn the call over to Kim Foster. Kim.

Kim Foster - Senior Vice President and Chief Financial Officer

Thanks Michael and good morning everyone. Let me open my comments by addressing two non-cash corporate items which unfavorably impacted reporting earnings in the quarter. Both tax rate and LIFO charges. In recent years our domestic sourced profits have been growing faster than our foreign sourced profits. The result is a higher booked tax rate. At the beginning of 2007 we projected a full year tax rate of 28.5% compared to a 25.4% rate in 2006. Each quarter we re-estimate the full year tax rate, as long as the full year estimate is unchanged we book the full year rate in the quarter. We booked 28.5% tax rate in the first three quarters of 2007. However, when the Europe included in the final tax calculations were completed the full year tax rate was 30.1%, consequently we booked a 36.3% tax rate in the fourth quarter in order which to achieve the 30.1% full year rate.

Last year a similar situation happened except with the opposite effect. For the first three quarters in 2006, we were projecting a full year tax rate of 27% but the full year rate ended up at 25.4% causing us to record a 19.5% tax rate in the fourth quarter. When you calculate earnings per share impact of the tax rate change on a year-over-year basis, the result is an unfavorable comparison of $0.16 per share. During 2008, we see the trend to more domestic sourced income continuing, consequently we are projecting our tax rate to increase to 32% for 2008. Let me remind you however, that we pay minimal U.S. taxes due to our net operating loss carry forwards and consequently the higher tax rate have essentially no impact on free cash flow. In fact we do not expect to be a U.S. Federal tax payer for several more years.

Let me now shift my comment to LIFO. Over the past few years we have realized LIFO income in the fourth quarter of each year. LIFO income or expense is reported in other income or expense in our segment reporting format. This LIFO benefit was a result of our successful efforts to optimize our global supply chain.

In the beginning of 2007, we indicated that our optimization efforts were reaching their full potential and as our businesses continued to grow, the LIFO income should disappear. I also discussed this outlook in our third quarter conference call.

In the fourth quarter of 2007, we in fact had no LIFO charge either income or expense. In the fourth quarter of 2006 however, we reported a 15... reported $15 million in LIFO income. Therefore on a period-over-period basis, the lower LIFO income resulted in an unfavorable comparison of $0.12 per share.

For 2008 we anticipate a modest LIFO expense. Combining the effect of the higher book tax rate and the lower LIFO income, unfavorably impacted earnings before restructuring another income and charges at $0.28 per share on a quarter-over-quarter basis.

Moving to free cash flow, our free cash flow guidance in last quarter's conference call was $140 million for the full year 2007. The actual free cash flow for the year, was $150 million. For 2008 we are projecting free cash flow of $250 million. The cash flow is improving over 2007, primarily due to higher profits, the reversal of one time inventory build in Ag to support Baltimore phase out, and the absence of SOLUTIA payment.

Not included in our 2008 free cash flow forecast is the previously disclosed Princeton land sale. We continue to believe that the sale should occur late in the first quarter or early in the second quarter. Proceeds from the sale are estimated at approximately $60 million.

Regarding our share repurchase program, we repurchased approximately 560,000 shares in the quarter at a cost of $30 million. For the year we repurchased approximately 2.5 million shares at a cost of $110 million. Cash dividends for the year totaled approximately $30 million. In total then we returned approximately $140 million in cash to shareholders during 2007. As a reminder our stock buyback program does not include a specific timetable and maybe suspended or terminated at any time. However, we expect that the current program authorized in April 2007 will be accomplished over a two year period.

Also let me remind that our earnings guidance does not assume that we repurchase any shares under the share repurchase program in future quarters. We remain very confident of FMC's free cash flow generating capabilities and as we have said over the past year, we continue to balance the cash requirements of our growth initiatives with the alternative of returning cash to shareholders.

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

William G. Walter - Chairman, President, and Chief Executive Officer

Thanks Kim. Looking ahead we are confident of delivering another year of record performance. Regarding our outlook for the full year 2008 we expect earnings before restructuring and other income and charges of $3.80 to $4 per diluted share, which at the mid point of this range represents a 26% increase above 2007. In Ag products full year revenue is expected to be up 5% to 10% as a result of the healthy global economy, new product introductions, and continued increased demand for biofuels. Full year segments in Ag are expected to increase 10% to 15% driven by the sales growth and further supply chain productivity improvements, partially offset by higher raw material cost.

In specialty chemicals, we expect full year revenue growth in the mid single-digits as a result of continued volume growth across the segment and higher selling prices in BioPolymer. Full year segment earnings growth in the low single-digits is expected as strong commercial performance in BioPolymer and the benefit of continued productivity improvements are mitigated by lower selling prices for primary lithium compounds and higher export taxes in Argentina.

And as Michael has reviewed... just reviewed for you in Industrial Chemicals we expect revenue growth of 5% to 10% driven by higher volumes and selling prices across businesses but particularly in soda ash. And full year segment earnings up 55% to 60% as the aggregate price and volume benefits and improved power market conditions in Spain more than offset the higher raw material cost Michael described.

Moving to our outlook for the first quarter, for the first quarter we expect earnings before restructuring and other income and charges of a $1.15 to $1.20 per diluted share driven by double-digit earnings growth in all of our operating segments, but partially offset by higher raw material cost.

In Ag products, first quarter segment earnings are expected to increase 10% to 15% due to the continued growth in Brazil and Asia and the benefit of further supply chain improvements. In Specialty Chemicals, first quarter segment earnings are also expected to be up 10% to 15% driven by strong commercial performance in both BioPolymer and lithium and the benefit of continued productivity improvements.

And finally in Industrial Chemicals we expect first quarter segment earnings to double the level of last years first quarter as aggregate price and volume benefits and higher electricity selling prices in Spain more than offset higher raw material cost.

Our strong fourth quarter results I think reflect the fundamental strengths of the company. Our global footprint, the non-cyclical nature of our end user markets in the absence of any significantly petrochemical exposure. These have permitted us to grow a strong double-digit rates over the last the four years and as reflected on our outlook for 2008, bode well for the future as well. With that let me thank you for your time and attention and I will be now be happy to take your questions. Operator?

Question And Answer

Operator

Thank you Mr. Walter. [Operator Instructions].

William G. Walter - Chairman, President, and Chief Executive Officer

What, are we that good.

Operator

And at this time there are no questions.

William G. Walter - Chairman, President, and Chief Executive Officer

Operator, are you confident that the system is working? It is shocking that we would have no questions. Could anybody...

Operator

Okay and we do have a question from Kevin McCarthy with Banc of America.

Kevin McCarthy - Banc of America

Good morning Bill, couple of question I guess maybe on soda ash and maybe Michael can help with this as well. It sounds like you have very strong realizations for '08, can you talk a little bit about domestic realizations versus international and then what were gross prices up internationally and where do you see net backs given ocean freight costs and so forth?

William G. Walter - Chairman, President, and Chief Executive Officer

Kevin I am going to ask Michael to answer your question.

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

Hi Kevin, this is Michael. As I have indicated in my prepared comments, the overall price increase that we saw in soda ash was in the mid teens across domestic and ANSAC. Domestic and exports as a whole pricing and I really don't want to get much more specific in that in terms of the breakdown between domestic and export just for market sensitivities and competitive reasons. But what I did indicate is that there is a substantial narrowing of the price differential between domestic and export pricing so that implies to you that we did realize significantly higher increases in the export market than we did in the domestic market.

Kevin McCarthy - Banc of America

And as a follow up we have seen two of your competitors acquired at least just announcements of deals over the last 6 to 8 weeks. Can you comment on any changes you expect as a consequence of those transactions in terms of industry structure participation in ANSAC and those sorts of things?

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

Yes Kevin at this point I don't have any direct knowledge that would indicate me to believe there is going to be any structural changes. Clearly with the most recent announcement of Tata buying in General we are moving from a private equity owner to a strategic owner. We think as and this is a speculation that is Tata has valued that business that one of the things they are valuing is the ANSAC participation for all the reasons that we think ANSAC benefits our customers. Superb logistics, a multi supplier networks so I don't have any direct knowledge but I believe Tata is probably excited to be acquiring a company that is part of ANSAC.

As you know source Searles Valley was bought by Nirma, another Indian company but in this case Searles Valley has not been has not been a member ANSAC for the past few years. Perhaps with Tata perhaps being a member of ANSAC going forward to maybe greater likelihood that Nirma would rejoin ANSAC as well.

Kevin McCarthy - Banc of America

That's helpful and then finally on Foret, Michael you alluded to some higher cost for phosphate rock, how much of an increase do you anticipate there and perhaps you could also comment on where you see prices trending in STPP.

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

Yes, without getting too specific in terms of actual cost for rock and pricing for STPP, the words that I use is that there was a dramatic increase but if you went out and looked at market prices for phosphates, whether its in the form of rock, whether its in the form of P205 or MAP and DAP the precursors for some of the fertilizers, you would find its essentially a tripping of cost over the last year. So it's a big portion of the overall cost increases we are seeing across the segment.

Kevin McCarthy - Banc of America

Okay. Thank you very much.

Operator

And our next question comes from Bob Goldberg [ph]. And your line is open.

Unidentified Analyst

Yes hi. Good morning.

William G. Walter - Chairman, President, and Chief Executive Officer

You are on Bob.

Unidentified Analyst

Great, thanks. I had a question for Kim on the balance sheet and net debt to capital at year end is roughly 30%, what is... where is the company feel comfortable in terms of its net debt to cap and given that your, sounds like you are going to be generating over $300 million in access cash flow with the Princeton proceeds. How do you see interplay their between acquisition opportunities growth opportunities and returning more cash to shareholders.

Kim Foster - Senior Vice President and Chief Financial Officer

Hi Bob. This is a question of course that we've been addressing for the last few years. In fact in the fourth quarter conference call last year I got asked the same question. And I'll answer it the same way today as I did then. At that point in time when we looked at what our debt levels were we said that we were comfortable with those debt levels. And while we recognized the ratios that you just have articulated our strategy is to grow the business as opportunities avail themselves to us and to the extent that they don't... acquisition opportunities to the extent that we don't, we would return excess cash to shareholders and in fact as I mentioned in my remarks that of our free cash flow of $150 million, we essentially returned all of it shareholders this year because we did not have any of those acquisition opportunities.

And consequently we ended the year with essentially the same net debt that we began in the year. On the same... the same operating principles are in place going forward. We hope very much to find those financial and strategic growth opportunities that we have been that will add value to our shareholders and to the extent that we can't, we'll continue to return cash to shareholders in a similar manner.

Unidentified Analyst

Can you remind me how much is left under the current authorization for share buyback?

Kim Foster - Senior Vice President and Chief Financial Officer

The authorization was $250 million and we have brought back this year about $110 million.

Unidentified Analyst

Okay, great. And I also had a question on agriculture, just curious what is incorporated in the guidance for growth in terms of the different regions. Is most of the growth coming from South America or are you still seeing growth else where in the world?

Kim Foster - Senior Vice President and Chief Financial Officer

Bob, as you know the Ag industry has had some pretty favorable tail wins for the last 18 months. We expect those tail wins to continue in 2008, but probably not as strong as what we have experienced. Specifically by region, the greatest tail wins are going to be in Latin America, more specifically, Brazil, followed by Asia, followed by North America, followed by Europe all of which then results in the guidance we gave of top-line growth somewhere in the range of 5% to 10% year-over-year.

Unidentified Analyst

And then how much... how much you have in the guidance or what can you say about the new in license products maybe not new anymore but in license products that you brought in or how much of a contribution do you expect to see from new products?

William G. Walter - Chairman, President, and Chief Executive Officer

Yes, I think as Milton has being saying Bob for couple of years we expected those to contribute to $50 million to $60 million in incremental sales, and I think we have fully by the time 2008 completes itself we should have fully realized the full value of those.

Unidentified Analyst

Anything else in the pipeline or new technologies or... to add value.

William G. Walter - Chairman, President, and Chief Executive Officer

Milton and his team have got a number of technologies and product developments that are underway. They include largely in 2008 label expansion and pre-mixes. But as we look beyond 2008 there is several very, very interesting technologies. It's probably little pre-mature to talk about the potential of those, but as we work further through them we get fairly excited.

Unidentified Analyst

I'm just wondering if you look out in the medium term over next three to five years could we see much a more substantial operating performance from the agriculture, to bigger top-line and I'm just wondering... the questions is will it continue to grow with these type of rates for the foreseeable future. There are so many Ag economy remains healthy.

William G. Walter - Chairman, President, and Chief Executive Officer

Yes, probably difficult Bob for me to believe that Ag can continue to grow at the rates that it has over the last two years. Again my comment about tail-wins, our view of the global Ag economy for the next three to five years remain strong. But the velocity of those tail-wins is going to decrease. How that translates specifically into top-line growth, I am just not prepared to go there. But I would expect that because of a combination of the Ag economy and the technology and product development work we are doing, that we'll continue to see good top-line growth, and should be able to leverage that on the bottom-line.

That leverage is manifested in the guidance that we gave for 2008. I mean if you work through the numbers Ag should see another 100 basis points expansion in their EBIT margin in 08 over '07 which was up 300 basis points 07 to 06.

Unidentified Analyst

And with this full benefit of Baltimore being until next year, I had imagined you might see further improvement in 2009?

William G. Walter - Chairman, President, and Chief Executive Officer

I would expect so

Unidentified Analyst

Okay, great. I appreciate it. Thanks Bill.

Operator

And our next question comes from Richard O'Reilly with Standard & Poor's.

Richard O'Reilly - Standard & Poor's

Bill, could you elaborate on the comments for Specialty Chemicals for 08 especially the comments about lower lithium prices and the export taxes at some place, I am sorry, Argentina?

William G. Walter - Chairman, President, and Chief Executive Officer

Sure, I'll be happy to Rich. We foreshowed in the third quarter conference call some uncertainty and risk with respect to primary lithium compound pricing in China as a result of some new Chinese capacity coming online as well as excess inventories [indiscernible] based lithium carbonate. We began to see the effects of that late in the fourth quarter in China not just in carbonate but in lithium hydroxide and chloride as well. The guidance we have provided for 2008, assumes that the pressure on pricing as a result of those two phenomenon will continue. But believe it will be confined to those three molecules and confined to a pretty narrow geographic area.

In terms of the export tax that Argentine government midway through the fourth quarter unexpectedly announced a 5% tax on all mineral exports from the country. We believe it was intended to address metal exports particularly copper but the way the legislation was written it applied to all mineral exports including lithium. That's going to have a... if sustained its going to have a $3 million to $5 million negative or unfavorable impact on our lithium operations year-over-year.

Unidentified Analyst

Sizeable. Okay that's it. Thank you, gentlemen.

Operator

Our next question comes from Mike Judd with Greenwich Consultants.

Michael Judd - Greenwich Consultants

Yes. Thanks for taking my question. Bill you guys have been very, very patient on the acquisition side. And I think over the last few years in your specialty chemical business you only made a pretty small acquisition in Europe and that was quite sometime ago. I was wondering if you could talk a little bit about how... what kind of opportunities you see out there now with the private equity guys kind of out of the way, realizing of course its so much challenging these days to get financing but, how do you look at the opportunities are they better than they had been in a while or is there an area of opportunity or are you guys in a more likely to be sort of conservative here and kind of wait and see how things shake out.

William G. Walter - Chairman, President, and Chief Executive Officer

Mike first of all the universe of opportunities in the specialty space is pretty limited, particularly given the number of properties there that did change hands here over the last two to three years. So you start... to answer your questions I start from that standpoint, there is not a lot there. Private equity, fortunately at least for now seems to have disappeared from the scene, whether they will come back and when they come back and what they are going to able to pay for properties going forward is yet to be seen.

I happen to believe that there may be however one or more BioPolymer related properties that were acquired in the last two to three years, quick come back on the mark to market this year. To the extent they do we will be there, we will be bidding on them but we will continue to be conservative and ensure that we can get a reasonable return on any acquisition price we would pay. So, Mike I guess when you distill all of that be as down I would not assign a particularly high probability to our being able to complete transaction in specialty chemicals in 2008, although we are going to continue to try.

Michael Judd - Greenwich Consultants

Okay great. And then separately if you exclude the energy situation in Spain and I know you guys have a rolling hedge in terms of your use of your energy exposure. How should we think about '08 versus 07?

William G. Walter - Chairman, President, and Chief Executive Officer

Mike energy cost across the corporation are going to be slightly higher than they were in '07, slightly less then $5 million.

Michael Judd - Greenwich Consultants

Great, thanks a lot for the help.

Operator

And our next question comes from Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research

Good morning gentlemen. Couple of questions mainly having to do with industrial business. You talked about making the decision on Granger as far as re-commissioning your 250,000 to 500,000 metric ton portion to plant, one, should we expect that decision, that you expect it to as you have done that fast and basically have it ready up and running by mid summer or may you be doing this earlier this summer on given the strong export demand and lack of export growth out of China.

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

Dmitry, this is Michael. And you are right. As I said we have initiated steps to bring back an extra increment of capacity but I don't anticipate additional tons being available to 2009, and again we haven't decided on what the ultimate increment would be there. We will bring back, we will continue to monitor conditions. But if you pick one of those numbers either the 250 or 500 I suspect even in 2009 the actual capacity that we bring back would be something less then that as we would be bringing it on during the course of the year and ramping it up.

Dmitry Silversteyn - Longbow Research

Thank you Michael, but I guess the follow-up question is why do you expect to take that long to bring the capacity on given the strong export demand. I mean I know that North American market may be a little bit weaker but from everything I have been reading and learning, the export market should be strong enough to realize some volume growth, where is the volume going to come from, if its not going to come from the Green River Valley Players.

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

I think you are right, I think we are supply constrained at the moment, there are volume opportunities but as we look at opportunity we think there is a lot more earnings leverage in a dollar of price than there is in a ton of capacity. So, as we go into 2009 we are going to want to evaluate that dynamic, about the next round of contracts and we also have considerable work to get done in order to bring that capacity back up. We have a number of options as I said. We are blessed with having the flexibility that we can do this on an incremental basis and really dial it in to where we think the need is. But, because of that we've been evaluating a number of options and will continue to do so.

Dmitry Silversteyn - Longbow Research

Okay, alright Michael thank you. Second question on natural gas I just wanted to make sure I understood what Bill was saying, now you hedge natural gas and in 2007 your delta natural gas was higher versus 2006 even though the price of gas was lower. My expectations would have been that as you layered in this lower priced gas in 2000... during 2007 that your delta will be positive in 2008 but did hear Bill right in saying that it will be modestly negative still?

William G. Walter - Chairman, President, and Chief Executive Officer

It did Dmitry and it is largely in Europe. Our U.S. operations gas cost are probably flat and down slightly year-over-year.

Dmitry Silversteyn - Longbow Research

Okay And Europe being I guess it's a phosphorus business as well as the how does your phosphorus business that's being impacted by high energy cost?

William G. Walter - Chairman, President, and Chief Executive Officer

Correct.

Dmitry Silversteyn - Longbow Research

Okay. Alright thank you. And then on the lithium comment that you made, we did expect to see some down pricing as you pointed out because of the Chinese capacity, I guess your two bigger competitors are bringing on capacity 2008 as well. To the extent that you are a purchaser of some more commodity lithium as well as a seller of downstream product, can you give us maybe a little bit more flavor, little bit more detail on how the relative price expectations are going to impact your business level. So, are you are going to see any relief on the raw materials front, but you expect your pricing... your downstream pricing to come down even further or how does that work?

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

Dmitry, we do buy.... I don't know exactly a million to two million pounds of lithium carbonate, miniscule amount. So that whatever pricing pressure that there is on carbonate has essentially no benefit to us a purchaser. So it's all on the downside to us.

Dmitry Silversteyn - Longbow Research

Okay, I got you. Do you... is there any concern that as the integrated players bring on their capacity this year that pricing of some downstream products which have been holding up so far may start trending down as well, is that a risk that we should be looking for?

William G. Walter - Chairman, President, and Chief Executive Officer

I don't think so Dmitry. I mean the value added at these downstream products, well I can put it differently, the commodity value that is in these downstream products is very, very small in relationship to the total cost and the value of the downstream products.

Dmitry Silversteyn - Longbow Research

Okay and then you don't see anything as far as end market growth is concerned to make you kind of raise any kind of red flags for 2008.

William G. Walter - Chairman, President, and Chief Executive Officer

No, we continue to see strong 6% to 8% growth despite the uncertain global economy that may actually be a little upside to that.

Dmitry Silversteyn - Longbow Research

Okay, alright, Okay, thank you very much.

Operator

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

Dennis Delafield - Delafield Asset Management

Bill I just punched in so you know somebody was listening. I thought I would say it was very good.

William G. Walter - Chairman, President, and Chief Executive Officer

Thanks Dennis.

Operator

And our next question comes from Jay Harris with Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

Good morning Bill, my questions have been answered and I sort of also punched in for the same reason Dennis did.

William G. Walter - Chairman, President, and Chief Executive Officer

I appreciate it Jay, thanks. Is there anymore question out there operator?

Operator

You do have a question from the line of Gary Dallas [ph] with Dallas [ph] Investments.

Unidentified Analyst

Good morning Bill, I have a lithium related question again and that is with the all interest, the trade order show and the announcement last week that JCI staff is opening their first lithium battery production facility I know you don't comment on individual customers but can you comment on the various grades of lithium that FMC is producing and how that fits in with the grades of lithium that are being required for these new EV [ph] vehicles?

William G. Walter - Chairman, President, and Chief Executive Officer

Yes, Gary we sell lithium carbonate, lithium hydroxide, and lithium metal foil directly into the battery industry. Our carbonate is probably indistinguishable from anybody else's carbonated terms of the battery manufactures. That is not true of the lithium hydroxide given a much higher purity level to ours that accrues to us through the process that we employed to make lithium hydroxide, which is unique to the industry and gives us a preferential position, a preferential pricing, and that follows through into battery metal as well with our low sodium chloride that we are able to produce down in our Argentinean operations. So all in all I suspect we are advantaged vis-à-vis any other lithium producer and that advantage will largely prove back to us in the form of higher pricing and probably share at the high end of battery market.

Unidentified Analyst

I don't remember... last call or prior call but you were thinking that it was still, I think I had it correct, quite a few years off before there was any kind of significant sales or earnings potential from the EV [ph] business. Have you changed your thoughts on that all, are things are picking up in terms of technologically where the industry is able... is able to be closer to producing these things in mass.

William G. Walter - Chairman, President, and Chief Executive Officer

Probably not, Gary I don't think there is any change in our view. What we have said is its two to five years out, before lithium manufacturers are going to see any significant impact of electric vehicles or hybrid electric vehicles. I think its still out there, I think what you are seeing is a lot of spin and well I just leave it at that. Its still several years out there.

Unidentified Analyst

I read you. Thank you.

Operator

And our next question comes from the line of Caroline Chiyodo [ph] with Wells Capital Management.

Unidentified Analyst

Hey, this is John Evans for Caroline. Can you talk just a little bit on pricing from the standpoint of what you saw coming out of Brazil from the standpoint on the Ag side, and were you guys able to push price or was the industry able to push price?

William G. Walter - Chairman, President, and Chief Executive Officer

John, if the industry got the price increase in Brazil in '07 it's difficult for us to see or to measure. Having said that, there are increasing reports from our Brazilian team, that everybody is trying to move prices forward here in '08 season. Whether or not they and whether or not, we are going to be successful in that effort is yet to be seen but it does seem to be a different environment today than what we have seen for last few years down there.

Unidentified Analyst

Got you, so basically, you're saying, you didn't see really any pricing in Q4 but if the industry is successful you may see pricing next fiscal year, is that fair?

William G. Walter - Chairman, President, and Chief Executive Officer

That's correct.

Unidentified Analyst

Okay. And then, the other thing I was curious to talk to you about or understand better soda ash I guess you've talked about your contracts, do you have more contracts that come up throughout the year, if you do, can you give us a sense of what you have maybe left to contract? And then how much business you plan on being in the spot market, because it sounds like the spot market is increasingly tight?

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

John, this is Michael Wilson, and pretty much all of our business is on an annual contract basis and that's true both for FMC and it also true for our exports through ANSAC. And I think it's particularly true this year because of the tight market conditions. There is going to be even less product available for anybody to purchase on a spot basis.

Unidentified Analyst

Okay. And, can you just, and may be this isn't the right form, you don't want to take it, but can you just help me understand better what you were talking about relative to your phosphoric rock and I guess is there a potential that you guys get squeezed or is phosphoric rock prices going up actually good for you because other competitors don't have it?

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

Well, I think in part phosphate rock supply conditions are very tight and in some cases buyers are being limited in terms of their quantity. So I think to some degree the fact that we've been in the industry a long time or a long term buyer, we actually buy a specific grade of rock. We do have an advantage there from the supply standpoint and that we secured our supply for the year. I think that there could have been a situation where we could have gotten squeezed had supply not been so tight, but the phosphorus demand is very high and what's driving it is the demand for agriculture for fertilizers and we look at all of the phosphate rock that's produced on a global basis. I mean 92% of that's going into fertilizers that's what's driving the demand and driving the price. And because of that what we have found thus far is that we are having a great deal of success in passing through the higher cost that we are seeing on a raw material basis.

So I guess in short I don't expect, I don't anticipate the squeeze that you referenced which could have been a possibility.

Unidentified Analyst

Okay because basically you have contracted your supply at a certain price for the year.

Michael D. Wilson - Vice President and General Manager, Industrial Chemicals

We have gotten commitments for our supply for the year. As I indicated phosphate rock suppliers are generally only giving pricing on a quarterly basis and that applies to us as well and as a result of that we have moved away from annual contracting with our customer to also pricing on a quarterly basis.

Unidentified Analyst

Okay, got you. And then the last question I guess, can you just talk a little bit about what you are seeing in soda ash coming out of China from the stand point because of the 50 year storm they had a lot of problems with their infrastructure, etc. Has that brought down exports and has that tightened up the soda ash market at all.

William G. Walter - Chairman, President, and Chief Executive Officer

Well it's a relatively near term and short-term effect including there has been logistical issues over the past couple of weeks but looking at it from a broader standpoint we don't see exports of soda ash from China increasing in 2008. We believe they are going to be flat with 2007 and that in part due to the supply demand balance that exists in China and the attractiveness of the Chinese domestic market for those Chinese producers.

Unidentified Analyst

And if you are wrong in the... its not even flat, its less than flat that just is positive for you because it will exacerbate the market and make it tighter right.

William G. Walter - Chairman, President, and Chief Executive Officer

It will certainly make it tighter, it will certainly drive up prices, and we will wish we had even more products to supply.

Unidentified Analyst

Okay, thank you.

William G. Walter - Chairman, President, and Chief Executive Officer

One last question operator.

Operator

And our last question is a follow up question from Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research

Hi, I am glad I was able to get on there, thanks for taking my call. I just wanted to get a little bit more detail perhaps on the ANSAC business, you talked about freight going up but you also made a reference to I guess you owned some ships or barges. Can you talk about what your fleet is and what the dynamic is, how does the higher cost filter in through your business and whether it's a positive or negative net, net?

William G. Walter - Chairman, President, and Chief Executive Officer

Dmitry, first of all the pricing information that I gave out is on a net basis. So that's after any freight impacts but there is no question that ANSAC like all other shippers sold higher export or higher freight cost, as we went from 2007 and 2008. But that factored out of the numbers that I'm giving in terms of what they really are.

Dmitry Silversteyn - Longbow Research

Okay, but I guess my question is do you... is there an opportunity for you if you do own your or part of your fleet that does the hauling for you to take advantage of higher prices in shipping or is it strictly dedicated fleet for holding soda ash?

William G. Walter - Chairman, President, and Chief Executive Officer

I think ANSAC situation certainly benefited them in terms of their net realization of price and reality is that ANSAC approaches multiyear contracts on the freight side and locks in freight. So for example if you looked at their portfolio business in shipments for 2008, 95% of that is already secured. If you went out to next year they have got something like two thirds to 70%, that's locked in, 50% two years out. So it's a laddered portfolio of freight agreements. In some cases they are dedicated vessels that they have contracted, in other cases its simply freight contracts.

Unidentified Analyst

Okay, I understand, thank you.

William G. Walter - Chairman, President, and Chief Executive Officer

Well thank you operator and thank all of you for your continued interest in FMC.

Operator

This does conclude today's fourth quarter 2007 earnings release conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: FMC Corp. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts