FMC Corporation (FMC) Earnings Call Transcript & Summary

Well, good afternoon. I am joined now by Mark Douglas, Chief Executive Officer of FMC, leading global crop protection company that has been punching well above its weight relative to the competition. Mark, before we dive into the company, I was hoping you could spend a couple of minutes and talk about your own path to CEO, which is a position you've picked up relatively recently.

Yes. Thank you, Mark. Pleasure to be here. It is a very varied path, how you get into these offices and these roles. I am a chemist by trade, started off in England, in research, then moved into a company called Rohm and Haas, some of you will remember that name from the chemical industry. I was there 21 years. I started off in sales, moved into marketing in London, then moved into operations through our manufacturing outfit. Then moved to Singapore, ran a couple of businesses out of Singapore for 5 years, then moved to Philadelphia for the first time, where I ran a North American business. Then was given the onerous task of running procurement for Rohm and Haas. And then went back to Asia to run Asia for the company, which is one of the fastest-growing regions of the world. And then Rohm and Haas was bought by Dow Chemical, and I decided that it would be time to go explore a new part of life. And Pierre Brondeau, who was to be the new CEO of Rohm and Haas became the new CEO of FMC. And 1 month later, I joined him at FMC, really started off again in procurement, running -- building a procurement organization and really looking after what we called in those days, rapidly developing economies, so thinking about how the company would grow. We've gone through 10 years of really significant change around the industrial chemicals business, which was the old alkali business, soda ash. And then in 2012, I was asked to run the Ag business and have been running the Ag business for 8 years now, was made CEO of 6 months ago. And I have to say Pierre's timing to leave the CEO role was probably just about perfect. And here we are.

As you say, FMC's portfolio has changed so dramatically that asking you to run through it in the normal way, it just doesn't seem right. I was hoping we could do is, could we go back and think about the FMC that we know today, but the core FMC, legacy FMC and talk about its core strengths and how they've changed when you picked up Cheminova and how they changed again with the next transaction? Just to sort of get an evolution of competency.

Yes. So listen, I think one facet of the FMC that I joined way back in 2010 was a very entrepreneurial organization. It didn't matter which of the businesses you're in. They were agile businesses, close to customers, whether that be through supply chain optimization in a business like the Alkali Chemicals business or real tech service in the Health and Nutrition business or real customer intimacy in the Ag business. So I think that notion of customer first and then agility around the business model was something that we carried through. In the Ag space, prior to 2015, we would definitely very much focus on delivering products through formulation techniques. We didn't have basic research. We had abandoned that many years before, mainly because of the scale of the company. You need to be big to invest in basic research and we weren't. But we adopted a acquire molecules that are close to being launched or have been launched and then formulate them into different types of applications. We also had what we called in those days an asset-light model, so we had large toll manufacturing facilities mainly in China. I think prior to 2015, we were probably 95% dependent on China for all raw materials and intermediates. In 2015, we purchased Cheminova, which was very interesting purchase in the sense of it gave us much more exposure to Europe. We had a direct market access in Europe that we really didn't have before and that allowed us to grow our business in Europe. We acquired 2 large manufacturing sites for active ingredients, 1 in Ronland in Denmark and then 1 in Panoli in India. And we acquired some very interesting fungicide active ingredients that are now bearing fruit for the new organization. We then saw the world changing and we saw the consolidation that was occurring as we got into 2016. So the Monsanto, Syngenta, Dow, DuPont, we could see all that are carrying and we knew we would have to get some way back into basic research because we felt the avenues for acquiring molecules would slow out. Sure enough, the deal came along where we acquired the assets from DuPont, which was a significant set of assets, both in terms of products, manufacturing and very, very large basic discovery research engine, which proved to be one of the best in the world. We swapped that for our Health and Nutrition business and cash and then eventually divested the Lithium business and to become a pure-play Ag player. Today, the business is very different to what it was pre-2015. First of all, our dependence on China is probably about 60% today, going down to about 40% in the next 3 to 4 years as we're investing in our own assets and other toll manufacturing around the world. We are basic in research and development. We have some 35 molecules in our pipeline today, an award-winning pipeline for the second time in 3 years. We've invested heavily in biologicals, which are augmenting the synthetics. We've set up FMC Ventures, where we have our own venture fund now, but we're investing in start-up companies in a number of different technologies around our core. And then we have our precision Ag footprint that we're building out. So we really have become a full-service provider in terms of crop protection. And I think that's key, Mark. When I think of FMC, with the -- we are really the only basic research company that is pure-play chemistry. We're not encumbered by seeds, we really focus on bringing those new technologies to the marketplace. And I'm totally agnostic on what seeds you want to use, we have the best chemistry to go with those seeds. So that's kind of how I think of the company. We've retained that what I call that real entrepreneurial spirit. We are very fast moving. Like many companies, we've had a lot of shocks over the last few years. 2019, we had significant disruptions out of China, supply chain issues. In 2020, obviously, we've seen COVID be a major element in how companies are operating. Yet all through that, we've maintained our growth profile, we've maintained our profitability profile and as you just said earlier, outperformed the market significantly. So I think that closeness to the market and that agility has served us well.

So let's talk about that relative consistency because clearly, there's a lot of execution there. But when we think about the challenges in crop protection specifically, most major producers did not keep up with the kind of performance you did across the regions. When we had early planting and late planting in corn, we saw companies stumble from that. We didn't see FMC have that problem. We have -- we've seen FMC be more consistent in Brazil than others. So is that just a matter of execution? Or how should we think about the portfolio and how the portfolio is driving performance?

Yes. Listen, I think there are a couple of key attributes that the company has. First of all, geographically balanced. I think we might be the most balanced company in this space. We have very close to 25% of our revenue is derived from each of the 4 regions of the world. So to your point earlier, when you think of 2019, very wet, cold start to the season, everything was delayed, well, we only have, I think 2% of our overall revenue is corn in the U.S. So we don't have that concentration of exposure to any one crop in any one region or country that can cause those big swings. It gives you that more of a smoothing effect across the portfolio. Think of this year, Europe was extremely hot and dry, not only in the early part of the summer, but as we went through the fall as well. We rolled that through by having a strong business in Asia and Latin America. So I think having that balance, that really helps from a geographic standpoint. You ally that to the fact that 75% of our portfolio is really targeted towards specialty and niche crops. About 25%, 26% is on the big grow crops. And that's spread between the U.S., Brazil, Argentina in terms of soy and then corn in Asia, corn in Brazil and the U.S. So we have that nice platform to build from. You take those 2 pieces, I think you're in pretty good shape. I would say the one weakness we have, which is one that we're trying to address is, when you look at the intent of what we sell, so herbicide, fungicide insecticide. We are out of balance with the world's #1 on insecticides, and don't get me wrong, I'm not complaining about that. It's a great place to be, but we're underweight fungicides. So I would really like to -- if I could get the perfect balance, I'd like to see our fungicide portfolio accelerate faster than the rest of the portfolio, not slow everything down, but just get a little more balance with fungicides versus the other 2. Then we would have all 3 layers of that, what would almost be the best way to view the company.

As you're saying that, it occurs to me that when we think about the old FMC strength, we almost immediately think about Brazil when it comes to agriculture, sort of the best reach in Brazil. Was that best reach a function of specialty? Or was it a function of how distribution works? And maybe we can take that and talk about how distribution works for FMC and whether you look differently there, too.

Yes. Listen, I think there's a couple of things. I think we had a very good portfolio and still do on sugarcane and cotton and coffee. So less so in the soy complex. Now when you sell to a cotton grower, there are also soybean growers, so you have the opportunity to actually sell-through into that area. But I think that was the basis of the FMC that you described pre-2015. I would say the weakness there, though, was 40% of the company, of the Ag business was Brazil. Now when Brazil took a stumble in 2015, we really felt it. We were way too exposed. Today, Brazil is something like 20% of the overall portfolio, so much more balanced. Now we're growing our soy business on the back of the cotton business. So our insecticide portfolio, we're looking at more herbicides into soy in Brazil, so we have more of a market access. The market access is probably the most diverse of any of the regions of the world. We sell direct to major growers, we sell to distribution and retail, and we sell-through co-ops. So we have all 3 modes of action working on in terms of market access and distribution. We can do more, to be honest, I think we could do more in the south and with the co-ops. I think the pipeline that we have that's coming through will benefit them more. So I don't believe we finished for an instance. But yes, Brazil is obviously very important. But for those people that tend to think back to FMC, it's not the FMC at all. Brazil is not the dominant force in terms of our geographic portfolio.

Now are there opportunities in distribution in other parts of the world, given your experience in Brazil? Obviously distribution works so differently in different markets.

Yes. I think one that I highlighted on the last earnings call was India. We really, with the DuPont acquisition, we very much revamped our whole distribution network to have what is kind of more like the U.S., in a way, 5 major distributions that are exclusive to FMC that we sell-through. Why do I say that is still an opportunity is because we're not in all parts of India yet. We're still growing our geographic market access within India. You've got millions of small growers out there that need to be serviced. These distribution companies are the ones that we go through, but they also have to grow as well. I would say places like Indonesia, where we have the similar activities. Indonesia is an extremely fragmented country, lots of different islands. You need distribution and retail to really penetrate all those different markets. We've been growing that over the last couple of years and we'll continue to accelerate that. And then I think, finally, I would say Europe, surprisingly enough. Europe for us, it also includes the Mid East and Africa. We're growing in Eastern Europe, we're growing in the Balkan states. Turkey is growing for us. Africa is probably underrepresented for FMC. We've had so much going on in the last few years that we haven't particularly focused on Africa. It is something we will do in the future, but that's a little bit way down the road. We know the portfolio will work well because of the amount of specialty crops that we grow.

So let's switch gears a little bit and talk about some of the products. Clearly, the diamides that you picked up with the DuPont deal have been driving a significant piece of growth. And investors still want to know how much of that can continue, how long -- how it changes as the patent expiries come up. And I think you think to remember is most investors don't have a lot of experience with patent expiry process in crop chemicals because as you point out, we haven't had a pure-play crop chemical company to look at very closely. So maybe you could walk us through how you see the diamides evolving over the next couple of years and what that means for growth?

Yes. So listen, the diamides have been an incredibly successful acquisition for us. I think when we acquired the diamides, there were about -- this was at the end of '17, there were about $1.1 billion in size. This year, they're approaching $1.8 billion in size. And that growth has come through geographic expansion, registrations in different parts of the world on different crops. So we see that high single digit, low double-digit growth, certainly occurring for the next few years. Longer-term than that, the patent expiration of these products is rather interesting because we have over 1,000 patents on 2 molecules. So it's not as if you're hanging your hat on one patent. People tend to focus on what is called the composition of matter patents, which are the basic structure of the molecule. Those patents for these 2 diamides come off in 2023 and 2024. But then we have process and manufacturing patents, which are built around -- these are pretty sophisticated molecules, 15, 16 steps that are all individual synthesis. We have the vast majority of those, all patented. Those run through 27, 28. So we have this long period of time. It's not like the pharma industry, where a product comes off and then, boom, you have a significant impact. That is a long burn rate for patent exploration. Allied to that, we've done something rather interesting, which is put deals in place with our competitors, where we are supplying them the diamides, giving them access to the diamides ahead of patent exploration, yet the contracts run past patent expiration. So basically, what we're doing is supplying people so they can get into a market quicker than they would normally be able to. So there's extra economic value for them and then we get the longer-term sales past patent exploration. So you put those 2 together, we have a pretty good view of how we see the diamides continuing to grow all the way through the next decade. And I think, Mark, I know you've been in your conference for the last couple of days, we did do an Investor Day yesterday on technology, which was actually very well received. And some of the feedback we've been getting is, with the 35-molecules that we have in the pipeline and especially the big ones coming in 2021 and 2023, people are starting to say, "Okay, diamide is very important now." Let's turn our attention to what else is coming out of this pipeline because some of these molecules of $500 million, $600 million in size of peak sales, that drives you through the next decade as well. So we feel very good about that.

So let's stick with that. I mean, you're launching a number of new products over the next couple of years, and then there's a big pipeline behind that. How much experience does FMC actually have launching molecules? And how should we be thinking about launch risk? And how from the outside can we tell whether you're being as successful as you need to be with those molecules?

Yes, great question. So you're right. We think about spending $300-plus million a year on R&D, watch your associated marketing spend to make sure that money is well-invested and actually gets where you're going. And you're right, FMC, it's decades since we launched brand-new active ingredients. However, the good news is when we acquired the DuPont assets, we acquired global marketing groups. They were the ones that launched the diamides. So we have that expertise built in to the corporation. And what we've done is our global marketing group has been used as, how should I say, internal consultants to help the regions and the other areas of the company, really build out a process for launching new active ingredients. So although we never had it organically, we achieved it inorganically by buying those assets and getting those skill sets. So you know what, we have a very robust process. Isoflex is our first launch next year. It is a brand-new serial herbicide. And the launch process has gone extremely well, and we're very confident that what we've been in Australia, we'll then be replicating in Europe, parts of Latin America as well. So we do have that capability very well-built inside the company. And to be honest, since the acquisition, we've been hiring a lot of talent. And we've hired marketing talent from, frankly, some of our competitors who are very much used to doing this. So it is a very changed company from what it used to be.

So what kind of milestones will you be presenting to investors to show how the progress is working? Will you be setting targets for individual launches? Or will you be keeping it more broad than that? How do we know how you're progressing?

Yes. So what we've done is -- and when you get to read the slides, you'll see we've laid out some sediment charts for the different molecules, when do they launch, when do they reach peak sales and then sort of the grade of how they grow. I think we'll be very clear when we come to the next review, probably in an 18-month time frame. We'll say, "Look, Isoflex is supposed to be $200 million by this point." It's $180 million, $240 million whatever the number and then sort of give that going forward. I think that's the best way for you to judge, well, how are you doing. Because if we don't say that, you'll never know.

Right, right. And Syngenta, when it was a public company, used to do that pretty consistently. The challenge investors have had is that, as you pointed out earlier, most of the crop protection companies in the U.S. have been seed and chemicals. And for a big part of that period, most of the commentary was on chemical, on seed, so we really weren't getting the level of detail. And also, as you said, I have only been able to scan through your deck because I did miss your presentation yesterday. And I suspect that other people on this call who did, too. I was wondering if you could just give us a little bit of highlights from what's new because you had done a very thorough Investor Day, not too long a year or so ago.

Yes. So you know what we were supposed to do something in June, and we wanted it to be in our Stein Research Campus. Obviously we couldn't do it. So we did a truncated Investor Day yesterday, about 2 hours, really focused on what is the pipeline and then from a marketing perspective, how do we value that pipeline. What's the process that we put in place and then what's the output. The output is pretty simple. We have a pipeline that will deliver $1.8 billion to $2.1 billion of revenue by 2030. And then we have peak sales of that portfolio of about $3 billion. I think the one takeaway that I would say is it's a pipeline loaded with new modes of action and those products are coming at a pretty consistent base as we go through the next decade. We have a plan to launch one brand-new active ingredient every year. So i.e., move from discovery into development, development into commercialization. We're not quite there yet, but we're getting pretty close. I was very pleased with 2020 performance, we actually moved 3 molecules from discovery into development. So we know the pipeline is moving and we do show a slide when we last spoke about the pipeline at the end of 2018 at our Investor Day. We used that as a baseline and we now show where the pipeline is today. So you can see the movement of the molecules as they're progressing through the stage gates. I would also say that we've had feedback to say people are somewhat surprised yet impressed by the amount of biologicals we have in the pipeline, whether they be biofungicides, biostimulants or bionematicides. That's an important piece of this whole balance of how we view sustainability within crop protection. And I did touch on that yesterday to some degree to say, "Listen, everything we're doing with this pipeline, it's all through the lens of sustainability." We're very focused on -- we have a sustainability assessment tool that really starts at the very beginning of discovering, goes all the way through to launch. And basically, what we do is we take 5 different parameters and question the activity of the molecule versus a standard that is in the industry. And we want to improve on the sustainability index of at least one of those areas without attracting from others. And if a molecule can't do that, we stop work on it. So that's an important aspect of how we think about that pipeline moving forward.

Let me interject with the question on that, because Kathy has talked about the innovation and the R&D business as molecule manipulation. But when you move into biologicals, you can't manipulate very much. So it really is sort of a different thing. Do you approach that side of the business differently? And are you having to build a new competency there?

Yes. We're doing a couple of things, Mark. You're absolutely right, listen, from a molecule manipulations synthetic organic chemistry. Yes, that is one way to do things. A lot of the biologicals that we look at are metabolites that are expressed through yeast and fermentation activities, so a completely different ballgame, completely different skill set. However, the framework is the same. You may be doing it in a different way and expressing something, but the skill is to know what are you expressing and how do you then maximize the concentrations of that. So you're right. We've set up a basic discovery research laboratory in Copenhagen. We're also investing through FMC Ventures in companies that are looking at how yeast expresses various biopesticides. So that's an area that is new to us, but it's not so new. We've been in biologicals for I think, 6 or 7 years now. We have about $85 million of revenue, pretty close to $100 million of biological sales today, without the new products that are coming in the pipeline. So we've gained a lot of experience. And I -- I've said this before, I think there's a lot of education that has to occur. The way biologicals work versus the way synthetic works are very different. And guess what, we've been selling synthetics for 50 years. We know how to do that. So we have to train our salespeople and agronomists. We have to train distribution, we have to train the growers. There's a lot of work. And then you need product consistency and quality. And I think that's what held back a lot of biologicals in the early days. They were all over the place in terms of efficacy, in terms of quality. That's changing now as really good, solid manufacturing is getting involved in the quality side of the process.

Interesting. At your last Investor Day, Pierre made it pretty clear that M&A was not going to be a big part of FMC's priorities after -- I think he felt he had done enough. He also laid out a return of capital strategy that was quite a bit more detailed and specific than we typically get. So can you update our thinking on those? There's always room for tuck-in M&A. Is that a priority? Are there places where you're specifically looking? And then maybe talk about the capital side.

Yes. Sure. So I think Pierre and I were lockstep, so I'm not going to tell you that we're going to take a big left turn and go buy something enormous right now. Frankly, I don't think there is anything out there. I don't think you're going to see any consolidation between the R&D players in the space. And I'm certainly not interested in going looking at the generic side of the business. So for me, I think it will be tuck-in, bolt-on technology acquisitions, mainly focused around the biological space. And then anything I can do on fungicides to either gain access to technologies. We just made the acquisition of Fluindapyr from our partner company that we developed the product from. That was a $65 million acquisition. So I think you're going to find things in the 10s and 50s of millions of dollars, not the hundreds and billions of dollars. I think from a capital allocation perspective, listen, first priority, feed R&D. It is the lifeblood of the company. So we're going to make sure that we're investing in R&D at the right level. Today, we're investing in 6.5%, 7% of revenue. I don't think we can handle much more than that one molecule rolling through the system every year. The pipeline is full right now. Kathy has to work it out, managing what we have. Secondary to that, we'll be very clear on our dividend policy. We really changed our dividend policy at the end of 2018. We raised our dividends to have a sort of an average yield for our space. We've committed to increase that dividend, at least, at the rate of our earnings growth, and we did that at the end of 2019. We have a December Board meeting coming, where we will once again review the dividend policy going forward. And then we've been back in the share buyback market. We haven't been there for a long time. We have been buying shares over the last 2 years. We stopped this year, mainly because we were very, very conservative on managing cash as we saw what was happening with the COVID impact. We felt more comfortable as we've gone through the year, and we started our buyback program in the fourth quarter, and we'll finish the quarter probably of invested about $50 million in buybacks. Now going forward, as our free cash flow improves, we're probably targeting that $450 million, $500 million of buybacks on an annual basis. The intent is not to try and time the market. We want to be regular buyers of our stock over every quarter. Maybe slightly different because we have some working capital requirements that are higher in the first quarter going into the second quarter. So you may see a lower level instead of -- I'll just pick a number, instead of $125 million a quarter, makes you $450 million, you might find $50 million in the first quarter and then ramp up as we go through the year. We did that previously. But we do have significant cash flow now as we really changed the model of the company. It's interesting that from a cash flow perspective, executives and senior managers now have a component of their both short-term bonus compensation and 3-year long-term bonus are tied to cash, whereas previously, it was either all EBITDA or total shareholder return, we now have a cash component, and that's made a big difference to how people think about managing working capital to generate the cash at the other end of the company.

Well, and you've made enormous working capital progress over the last couple of years, particularly after Cheminova. So we can see it. And obviously with your cash conversion targets, continued progress there. I've got a question that's come in. It's really about geography. Distribution channels working differently in various markets. In what parts of the world do you think you are most effectively driving growth through distribution? And where is there more room to go? I think it's a question both about distribution and about sort of geographic opportunity.

Yes. I'll tell you the most successful place in the world where we have the highest market share, and I think our market share is pretty close to 30%, is Pakistan. And in Pakistan, we have our own retail stores. So FMC, you can go traveling around Pakistan, and you will find FMC stores selling all our products. It's been the most successful model. Now don't get me wrong, we are not advocating that we go and open all our retail stores all over the world. But in that particular geography and the way that market is structured, that model works. And the reason I'm telling you that is that the models are very, very specific to the countries. You look at the U.S. market, it's incredibly concentrated between a small number of large distributors and one particularly large co-op. For us, that's our route to market. It's the most effective way. We have very strong deep relationships, and they will continue to work. In other parts of the world, that may change. When I look at Brazil, there is consolidation in distribution. Well, how do we play that? How do we play with who? Do we have to make specific choices? The mega growers are getting bigger in Brazil, we go directly to that. So I think Brazil has optionality. India certainly has. And then other parts of Asia, China is changing rapidly, probably the most fragmented market in the world. If you look at the 5 top R&D players, we, generally speaking, have, I would say, roughly 65% to 75% of any market in the world. I think in China, we only have 35%. So I think there will be a lot of change in that marketplace, and we are going to have to think about our model and how we go-to-market in China.