FMC Corporation (FMC) Earnings Call Transcript & Summary

Yes. I'm sure Bethwyn Todd, who is our President of Asia, is going to love me for this comment. But I do see Asia as a real focus for us. As I commented earlier, that whole fruit and vegetable market in Asia, if you think about it, it's an $11 billion market all on its own. Now it's extremely fragmented, which suits us well. I think you have to have that local market access to grow into. We're not finished in India by a long way. There are parts of India where we don't yet have market access as we build out our new model. So I still see India as a very strong growth engine going forward. Also, Indonesia, a very large market where there are parts, very much like India, where we've grown into yet we don't have full market access. Cereals market in Australia, we're launching Isoflex next year. This is our new herbicide for cereals. I'm pleased to say we actually got our first order this month, and it's a very large one, heading into the next season. So we're up and running. Those are growth engines that we don't have today. So they're totally incremental to how we think of the business, the portfolio today. So Asia is a big focus for us. And then I would say the parts of Europe, some eastern, some southern, and then moving into Turkey, where we think about the, again, the fruit and vegetable market, the high-value market for us with the portfolio that we have. So that's kind of how I think about the real growth engines in the near term, so the rest of this 5-year plan. We're not finished on soybeans in Brazil. We have a pretty low market share there. So it's a long-term gain for us, as I said, with fungicides and then more application of our insecticides. But more importantly, a very interesting market. There has never really been a pre-emergent soy market in Brazil. Now we're starting to see that resistance come from a number of herbicides, and we are now selling into Brazil in a pre-emergent herbicide, which were very strong in Argentina and, as you know, very strong in the U.S. So we like the look of that business, but the fact is there is a new market growing for us in soy in Brazil.

Is it safe to say that product would be a cousin of Authority?

Maybe a distant cousin.

Distant cousin. Fair enough. So just to wrap up the -- let's say, the intermediate to long-term growth strategies, just have you seen any changes in the COVID environment? And just, obviously, all the puts and takes, logistical issues, presumably, in certain countries, have you seen any changes to -- in competitive behaviors? Do you see anything, either positively or negatively, that could affect your momentum into 2021?

No. From a COVID perspective, Chris, I think the first 6 months of the year were by far the most difficult, starting off, obviously, in Q1 in Asia and Q2 in Europe. We haven't really seen any issues in the U.S. We certainly haven't had any logistics issues like we had in Europe or China and Asia. On our watch screen, 2 countries, obviously, India and Brazil. We are entering the planting season. A lot of labor is already in the farms, ready to go in Brazil, especially where they grow crops. We're watching very carefully. India. We are operating remotely in India. Our plants are very safe. We've had no transmission inside our plants, so we have a very sophisticated systems for checking. But the question is, as the season goes on, what's going to happen to labor in India? It's not an issue for us. We've certainly seen no slowdown, but it's something we're watching. In the more medium term, I don't think the competition has changed much. It's always been a competitive market. Technology wins, unless you're a pure generic player. And then price wins, but we're not in that game. So for us, we're competing with the people we normally compete with. We're very excited about the technologies we're bringing to market, starting next year. So no, I don't see any major headwind to slowing down that growth at this point.

That's growing the top line. If we can shift over a little bit just to how investors should be thinking about margins, you've had a lot of moving factors, positively, over the last 3, 4 years. You've had a benefit from some higher-margin products. You've been able to reduce costs. You've recaptured a lot of inflation via price. How should investors be thinking about margins on a go-forward basis? And if you -- feel free to obviously bring in, obviously, the -- your previous TSA roll-off, SAP implementation. What are the moving factors? How should we be thinking about them?

Yes. I'll give you a break from me. I'll let Andrew talk about that. I know we both talked about it many times, but Andrew, why don't you tell us?

Fair enough.

All right. Thanks, Mark. Look, we set out an objective when we launched the current 5-year plan at the end of 2018 to expand our EBITDA margins by about 300 basis points. Since that time, in the first 2 years of the plan, and we went from about 25.9% EBITDA margin in 2018, hit 26.5% last year, and at the midpoint of our guidance range for 2020, about 27.3%. So we're not quite half there, but almost halfway there in terms of margins prior to that margin expansion goal in the first 2 years of the 5-year plan. A couple of key drivers there. And certainly, the preponderance of that is the benefit of a faster growth of higher-margin products. And certainly, the outside -- outsized growth of the diamides in the first couple of years of the plan have been a big contributor to that. And we'll continue to contribute strongly to -- as we introduce more products like the new formulated product, first formulation using Rynaxypyr with -- paired with another FMC active ingredient, the -- a product called Elevest that we've introduced in the United States this year. As we continue to introduce new diamide products, as we continue to penetrate further markets, and as we start bringing some of our fundamentally new products to market, expect each of those things to be additive to the product mix and improve the margins. Yes, the 2 other big drivers for driving margin improvement and, certainly, one of them is finishing the implementation of our SAP system. The -- we have been operating with a hodgepodge of different legacy systems from various acquisitions we've made over the past 5 years. We are stitching everything together into a single state-of-the-art SAP S/4HANA system. We got about 60% of the company up and running on the new system already. The remainder of the company will go live in early November, with an extended support period through the first quarter. But we're kind of in the end of that implementation program. We've already achieved about $40 million in benefits to the P&L this year, about half and half benefit from exiting of TSAs, transition service agreements, where DuPont was providing us certain services to support the acquired business that we've been able to pick up for very little incremental cost. So that happened earlier in the year. We've been able to pull forward some of the synergies expected from the broader SAP implementation. So overall, we're expecting a benefit of $60 million to $80 million at the EBITDA line from the SAP implementation, $40 million of which we've already captured as of the end of this year. So it's been a -- moving to that single system, and particularly a single system that's designed for an agricultural sciences company, not for a diversified chemical company or one of our other legacy businesses. It is an ag-specific system that's been designed to allow us to run very standard processes across all of our 100-plus countries around the world and then allowing us to leverage shared service centers to really take some back-office costs out. So that's the big -- second big contributor to the margin expansion. And the third is the scalability that, that platform provides. There's this direct reduction in costs that we'll see -- these synergies we're seeing this year and next and continuing on -- a few of the following years as well that this -- from implementing SAP. But we shall also have an architecture that allows our back-office costs to stay relatively stable, if not improve, while continuing to grow the overall revenue of the company so that we get some real leverage at the SG&A line on a percentage of sales basis from those investments. So we're really excited about the mix trajectory. That 300 basis points, we're very confident in that expansion. And again, that progress against that trajectory, 2 years in, we'll have 140 basis points at least of that 300 basis points expansion already in place. So it puts us solidly in the highest EBITDA margin stand-alone. And including -- not to be overly upbeat the point we're a stand-alone chemical company, that's a full and all in, including all corporate costs number. That's not a segment number. So that includes all of the costs that it requires to operate a stand-alone, independent public company. So pretty exciting trajectory there, Chris.

That's helpful color. Just the last question I'd have on margins is something that's been, let's say, I won't say completely in the back burner, but in terms of investor thought processes. But I think it's most likely been on the forefront of your own thought process is just your manufacturing base over the last couple of years, where you were, where the industry was, where you are now, where you could be. A lot of that came in regard -- came to light in regards to active ingredient inflation in China. How should we be thinking about your own thought process as it pertains to your manufacturing base in terms of diversification over time? I believe you already have steel in the ground in some other countries. What's the best way for investors to think about that? And any potential effects on margins?

Yes. Listen, it was a good point, and it's something that we've been working hard on for probably 5 years now. If you think prior to the Cheminova acquisition in 2015, FMC had this real strong strategy of asset light. And probably 90% to 95% of our active ingredients and intermediates came from China at that point. Obviously, with Cheminova, we gained major assets in Europe and in India. And then when we acquired DuPont, we acquired further active ingredient assets in the U.S. and in China as well. So if you look today, we're probably at about 60% of our total active ingredient and intermediate needs flow out of China. And we have a plan over the next 3 to 4 years to bring that down to about 40%. Any chemical industry is not going to be totally independent of China. There's just too much infrastructure there. However, I think what you can do is balance out that portfolio and, frankly, that risk. I mean -- and that's what we're talking about. We're not necessarily doing this from a cost perspective. Although the good news is, as we put steel in the ground in our own structures in Panoli, in Rønland, in Mobile in Alabama, or Puerto Rico, then obviously our cost structure lowers. So we do get a margin improvement in that respect. But that's not the primary driver. The primary driver is surety of supply and quality. And that's why we've made this move to really put steel on ground around the world. And we'll continue to do that. But we'll never be free of China, nor do we want to be. I mean there's some very, very good assets in China that we operate or our partners operate. And so it's really that balance across the world that we've been looking for. We're not quite there, but we're well underway.

So turning to the last, I'd say, key topics, which is especially pertinent for some long-only investors. And to be frank, one of the larger criticisms of the FMC story has always been cash flow. You have made a very conscientious effort to further improve this. You're absolutely moving in the right direction. But it still seems like you have a lot of opportunity over the next 2, 3 seasons to further improve that, correct me if I'm wrong, but over the next few seasons, pulling your targets eventually 80%, 85%. Can you speak to your progress in 2020, the moving factors? What still needs to be done? And what gives you the confidence in your ability to reach that longer-term guidance?

Yes. I'm going to make some high-level comments, and I'll ask Andrew to talk about some of the details of how we feel about getting into the higher levels of free cash flow conversion. Chris, you're right. I think we -- I think our shareholders have been very patient with us over many years as we transformed the company under Pierre's leadership. It was the right thing to do for the company at that time. Now we're in very much a different mode. I think one of the things I would say upfront that is making a significant difference to how we think about cash flow is the rewards of senior executives and managers now being tied not only to EBITDA or EPS performance but also to cash flow. And that makes a big difference inside our company. When people understand how much they're going to get rewarded from moving cash through the organization and improving free cash flow conversion, that's something that's very important. So overarching what Andrew is about to say about the mechanics of what we're doing, there is a philosophy change and a cultural change inside the company to focus just as much on free cash flow as we always have done on EBITDA without losing that focus on EBITDA. Andrew, do you want to share some details?

Sure. Thanks, Mark. I think it is important. It's a bit -- it's a journey on multiple dimensions in terms of the managerial process, incentives and systems and discipline, all those things. I think the historical criticism is fair. FMC, prior to the transformation, we've never talked about cash because we didn't generate a lot of cash flow. As we started life as a true stand-alone ag sciences-focused company in 2018, we were digging -- we had a bit of a hole to fill with -- the DuPont acquisition didn't come with the working capital fully. So we had to build working capital to support that business. So we've seen a big step-up in free cash flow conversion from very low levels in 2018 to the mid-30s in 2019. And at the midpoint of our guidance this year, I would expect free cash flow conversion from net income to be around 56-ish percent, right, at about the midpoint of our guidance. And just for clarification, just I want to make sure everybody is clear on definitions. When FMC talks about free cash flow, we talk about the cash flow after everything, except for acquisitions or other small inorganic investments we might make, some of the technology kind of things that Mark was talking about earlier, dividends and share repurchases. This is not operating cash flow minus CapEx. This is everything, legacy liabilities, environmental, to everything, with the exception of those 3 choices, which tie very closely to the way we think about capital allocation. So we've made very good progress. We think we're having a good solid year in the mid- to high 50s this year in percentage conversion. Coming out of this year into next year, we have a tailwind on cash flow as we're finally -- we're finishing this period of transformation, particularly finishing the SAP program. That will be about a $100 million tailwind to cash flow going into 2020. And of course, there'll also be organic growth, and there's always puts and takes in cash flow as you go from year-to-year. But that big step, just on its own, with -- if you look at where our net income is based for this year, that will step you from the mid-50s into the low to mid-60s on its own. The next big push is working capital. We have been somewhat constrained in our ability to manage working capital more aggressively by the net -- web of systems and legacy systems we have. So there's systems alone are not the panacea, but they certainly are a big enabler, and we're looking forward to being able to be much more aggressive. We're driving improving working capital as we get much more real-time visibility and control over all the different pieces. And the last piece that will contribute to continuing that upward trend through the next several years is, look, we do have some legacy liabilities. They're pretty stable. They vary a little bit year-to-year, but they're not fundamentally growing. So as a drain on earnings, they become a smaller and smaller percentage as we grow. And those could -- that could easily contribute 3 to 5 percentage points of cash conversion over the plan horizon. So I think that trajectory of up through the upper 60s, 70s, up and beyond that over the next several years is very much intact. I think it's important to put in context that it's not just the percentage that matters, that absolute dollars and what we do with that, we think, is pretty important as well. And that's where that capital allocation policy of fully funding organic growth, opportunistically funding small inorganic growth where we see it, and then returning the rest of that money through dividends and share repurchases back to shareholders, that's the discipline we've had and that discipline will continue.

So absolutely last simple question for me is how would you gauge your confidence level in your ability to reach those targets on the cash flow front versus January 1? Same, better or worse?

At this point, I'd say, relative to our cash flow guidance, better. Look, we are -- as Mark described, we're building a culture and doing that evolution in culture to put much more emphasis on cash flow, both through performance metrics. Also, we've changed substantially our managerial processes where we spend much, much more time in our quarterly and monthly financial reviews on working capital. We've got increased visibility. We've got a long way to go. We've got room for growing our capability here. We certainly have a much improved line of sight on our cash flow forecasting today than where we were at January 1. So I feel much more confident now than where we were at the beginning of the year.

Andrew, Mark, Mike in the background, thank you so much for joining our conference today. It's always greatly appreciated. And I will certainly look forward to hopefully hosting you in person next year, but thank you very much.

Thanks, Chris. Thank you, everybody.

Thanks, Chris. Thanks for your support.

Cheers.