FMC Corporation (FMC) Earnings Call Transcript & Summary

All right. Good morning, everyone, and welcome. My name is Adam Samuelson. I'm the equity research analyst here at Goldman Sachs. I'd love to continue our Industrials and Materials conference this morning with FMC Corporation. From FMC, we're -- I think we lost FMC. We had -- hold on 1 second, everyone. [Technical Difficulty] There we go. Andrew, can you hear me? I just want to make sure we got that connection right. Andrew is on mute again.

Adam, can you hear us now?

Now we hear you. Okay. All right. Sorry about that, everybody. So let's try that again. Good morning, everybody. My name is Adam Samuelson. I'm the equity research analyst here at Goldman Sachs. I would love to welcome everybody and continue our Industrials and Materials conference this morning. We're very pleased to have FMC Corporation here to present. We're Going to do a fireside chat with their Chief Financial Officer, Andrew Sandifer; Mike Wherley, who heads up their Investor Relations effort is also here, and we're going to jump right into Q&A, but before we do for anybody on the webcast, we are soliciting questions via the box in your webcast window. They come to me, love to get to them as we go through the conversation. So please do send them in.

With that, Andrew, you guys reported earnings last week. Maybe you talked about an 8% organic revenue growth target for the year, reaffirm the outlook for the year on EBITDA, but maybe talk about some of the key drivers you're seeing in the business as you come out of the first quarter.

Sure. Thanks, Adam. Good morning, everybody. Sorry about the technological challenges. It's great after a year of doing these virtual things that we're still -- we're getting better, but we're still figuring it out, getting all the systems to talk to each other. We talked a little bit about this last week on our earnings call, but just to recap for everybody, we're looking for a very strong year in 2021. We're guiding for full year revenue growth of 8%. That's 8% organic growth as well. It's 6% volume, 2% price and essentially no head or tailwind from FX. We're also anticipating 10% year-on-year EBITDA growth and 14% EPS growth. Just from the benefit of share repurchases completed to date, not any potential benefit from any additional share repurchase during the year. Again, the growth is really -- the story, this is really a volume growth driven most significantly by our business in Asia. In Asia, we've got a tremendous platform in India. We're anticipating a very favorable monsoon season in India, which is most of you know, will drive -- it drives the conditions -- the economic backdrop for the Ag business pretty substantially. We're also seeing some really impressive growth across the ASEAN regions and new products. So l just click down a little bit there since Asia is such a big part of the story. India is a key contributor to growth during the year. It's our largest country in Asia and will continue to be. Again, we're looking for a very good monsoon season this year. That will help reinforce what's been a very strong growth story for the diamides business in India, particularly fruits and vegetables, but also as we're expanding the diamide franchise in India to other crops like corn and pulses. Across the ASEAN region, we've got some expansion of our fungicide and herbicide portfolio, where we've gotten some new registrations and some additional licensed end products that allow us to grow more rapidly along with growing the diamide platform there as well with some crop label expansions, particularly for Cyazypyr, the younger of the 2 diamides. We're also done -- made some moves in Indonesia, specifically to expand our sales coverage over different parts of that very geographically diverse country. Australia is a big story for us this year. We've had a return to better weather there over the past year, after a couple of years of drought. But more importantly, we've had the introduction of our new Overwatch Herbicide powered by the Isoflex active, one of the first new active ingredients to come out of our R&D pipeline, but a very, very strong and positive response to that introduction above our expectations as we've launched this year. Finally, just rounding out Asia. Looking at China, we're continuing to grow very substantially our network of local partners for the diamides business and -- along with our own direct sales, principally in the fruit and vegetable markets. And expect continued strong growth there from the diamides. So certainly, Asia is a key factor for us in that 8% organic growth in the year. Continuing around the world, just to give a full view of all the geographies. Europe, we expect some pretty healthy growth in diamides and herbicides, in particular, with particularly some new product launches in the herbicides category. We do continue to face some registration losses. I think the industry as a whole is always fighting a headwind, particularly in Europe on that. So we'll see some growth in Europe, but not nearly on the scale that we have expecting in Asia. The other key engine of growth for the year is Latin America, and particularly second half weighted given the timing of growing seasons in Latin America. Obviously, a lot of the world is focused on soybean dynamics and certainly favorable market conditions for soybeans will be a positive for FMC in Brazil. But even more importantly, for FMC is cotton. You might remember, in Q1 of '20, we had an oversized quarter because of very strong performance on cotton. We've seen -- this past growing season saw a significant reduction in acreage. Going into the new growing season, we're anticipating very strong improvement in cotton acreage. And cotton in particular is a very chemically intensive crop as grown in Brazil. So those acres bring a lot of sales with it. So we're very confident on the growth outlook there for cotton in Brazil. We had extensive conversations with large farmers in terms of what they'll be planting in the second season coming up here this fall. And we expect some very, very strong growth year-on-year from the cotton business. We also expect some continuing strength in sugarcane, which is another position of strength for FMC in Brazil. So it's not -- Brazil is a big part of the growth story in the second half, but is not, by any means, a soybean story only for us. Cotton and sugarcane critically important to that growth in Latin America. Finally, rounding out the tour of geographies, North America, we're expecting that very healthy growth. In part recouping some of the volume we lost in Q4 of 2020 due to some of the COVID-related disruptions we talked about at the end of the year, but also from some very positive response to some new product introductions like our new Xyway corn fungicide as well as the new diamide products, Elevest and Vantacor. So it's going to be a very, very strong year for organic growth. It is somewhat second half loaded, given the seasonality and given some of the other dynamics in our business this year. But again, 8% organic growth, 6% volume, 2% price, is very much what we think is deliverable. Against a market backdrop that only is low single digits at best.

That's a really helpful tour, Andrew. And so maybe just against that, how do we think about the underlying commodity price environment being a tailwind to volumes this year. I think the 6% volume growth has kind of been maybe slightly -- there's some comparison issues, but pretty in line with what you have been targeting and achieving for the last couple of years. And just trying to think about how do we think about better grower economics, particularly in the Americas, maybe being a potential added tailwind to your business as we look forward?

Yes. Look, the 6% organic growth is pretty much in line, maybe actually attack our 6% volume growth, just a hair slower in the last 2 years, but you're right, in line with the kind of organic growth numbers we've been putting out for the last couple of years. Much less favorable crop price conditions. Crop price conditions are helpful to crop protection chemistry broadly. We are less responsive to changes in crop price than many of our peers because we are significantly less exposed to the large grower raw crops in the U.S. particularly corn in the U.S., which is a relatively modest crop for us. And while soybean is an important crop for us, it's not nearly the same size or in the relative portfolio for us. We're much more overrepresented in specialty crops, like fruits and vegetables, sugarcane, cotton, et cetera, around the world. So the -- we would certainly -- we certainly find business conditions more supportive when crop prices are higher. But the difference between $5 corn and $7 corn for us is not substantial. Because it really is not triggering -- at that point, you have all the acreage in play. It might trigger some additional incremental sprays from a downside protection kind of mindset. The bigger driver for year-on-year growth and where we have higher leverage is changes in acreage. So again, if you look at a crop like cotton in Brazil, where we're anticipating 15% year-on-year growth in acreage in production, that's something where our results will be much, much more responsive to. That's -- again, the general operating environment of operating with stronger commodity prices and healthier overall farmer economics, it's a better environment to be doing business in. But we've been able to put up outsized results regardless of crop commodity prices. So I don't think it'd be -- given that we have not negatively correlated, we shouldn't -- I don't think people should overly expect positive correlation either than an increment, no matter how positive of corn price is going to shift FMC's results.

Okay. That's helpful. And maybe just closing the loop on the kind of volume outlook as you think about the year. And this actually came from an investor. You alluded to, and we saw in the first quarter, there's a large second half ramp implied in your guidance from a volume perspective. And just help us think about the confidence in achieving that and the risks both up and down as we think about that second half acceleration?

Yes. Look, I think we're -- the first -- the story of us this year is really 2 halves. The first half is a relatively flat section as we would basically normalize following the impacts of the drought in Brazil in Q4 of last year and some proactive actions we've taken to bring channel inventories down in Brazil in the first half. The second half really driven by the tour of the world we've given in terms of where the volume growth is. We're very confident in that outlook. I think it comes from an understanding of acreage and where the farmers are going to be meeting our products. So I do think we have a good line of sight to the demand. I think there's always ups and downs and there's always the potential of some upside and downside for our business. The wildcard always in the Ag business is weather. We're anticipating a good monsoon, but not an exceptional monsoon in India, for example, or expecting more normal weather and moisture conditions in Australia. But we're not banking on any kind of abnormal weather benefit. But I think when we look at that second half, but -- strong growth in the U.S. and Brazil, we had weak Q4 2020 in both of those markets. But that also -- weather and crop conditions will help there. The new products we've been introducing Overwatch in Asia as well as a new Authority NXT herbicide, which is a herbicide for sugarcane in India are big drivers of growth; Xyway fungicide, 2 new diamide formulations in North America are big drivers for growth. So we've seen very positive response there. Those will continue to be a big part of delivering the second half. We talked a lot about crop fundamentals. I think all of the major crops that we're dealing with are dealing with much better macro backdrop. Certainly, everybody focuses on soy and corn. But again, cotton acreage being up, sugarcane is in a good place in the world right now. And fruit and vegetables as long -- as well as rice, which are both very important crops for us in Asia, have really seen a resurgence falling, a little bit of dampening, particularly in the fruits and vegetables space last year with COVID. We've also continued to increase our market access, our ability to reach all of the country through either more feet on the ground, through additional distribution partnerships. And particularly in places like in India and Indonesia and the Philippines, Vietnam as well, where it's really helping us build some share gain. So it's not just any one factor that we're counting on and driving a strong second half. It is a strong second half. It's 15% revenue growth, 30% EBITDA growth on a half-to-half basis. But it is absolutely achievable and something we think we can see pretty clearly the drivers for.

Okay. So one final question on the 2021, and then I want to have some kind of medium-term discussion. So as we think about this year, the other kind of big facet that came up on your earnings call, as you talked about getting a little bit more price in the market and that helping to offset some of the raw material pressures that you're facing. Can you just talk about how confident you are? You've ring-fenced that raw material risk and the confidence in achieving the pricing that you're going after.

Sure. Look, moving price is never as easy as we might like. But I think we feel very confident about our ability to deliver on that pricing outlook for the year. We are seeing meaningful inflation in raw materials and logistics, in particular as well as scarcity and availability issues with certain active ingredients that are driving inflation across the crop chemistry space. We've seen some very public price announced from a number of our competitors. We've made some very public price announcements in different markets. So we are moving price. We're expecting to see the most substantial movement of that price in the Americas. Less pronounced in Europe and much more selective in Asia, where we're looking at some opportunities to grow volume much more than we are looking at price improvement. But particularly in the Americas, we would expect to have pretty substantial price increases during the year. Looks like we've lost Adam. I don't know if our producers, we still have live feed here, if he can verify. Adam, you're back?

I'm back. Sorry about that.

No worries. So I think you've asked about the linkage between pricing and cost, I think we have walkthrough the pricing elements there. I think from a cost perspective, again, the big drivers and cost for us in the year are a mix of cost inflation, raw materials and logistics, as well as a return to more normal R&D spending after some substantial reductions last year, slowed down last year due to COVID restrictions as well as some return of SG&A spending that we've reduced significantly last year around COVID. So that cost headwind, it's -- the actual raw material inflation piece of it is probably $40 million to $50 million of the $100 million in total cost headwinds we're guiding to for full year EBITDA. We're guiding price increase well in excess of that. So we expect to more than offset the raw material and logistics cost inflation as well as catch up a bit on some of the FX gap we've been carrying since the previous year. While at the same time, having that more -- the return to more normal levels of R&D spending flow back into the P&L.

Okay. It's really helpful. So maybe let's take some of the performance this year and extrapolate that a bit longer term. So in your review of the different regions, you talked about some of the new products like Overwatch in Asia that you're introducing on your earnings call. You introduced kind of a new metric, you talked about revenues generated from products introduced since 2018. We've spent a lot of time in the last couple of years, talking about diamides, but I think there's other new products in the portfolio. How do we think about those other new products and new active ingredients being revenue contributors going forward? And what do we -- especially, Overwatch, which is the newest one, how do we think about that and what you've learned as that's come to market?

Yes. Certainly, look, diamides are a big part of our business and a big part of our growth. But as we talked about in our November investor event focused on our technology pipeline. We do have 11 new active ingredients coming to market over the next decade. That should bring somewhere between $1.8 billion and $2.1 billion of incremental revenue by 2030. We're in the very early stages of that. We're expecting somewhere between $200 million and $250 million from brand-new active ingredients in sales by 2023. We did introduce a couple of new metrics in this call, trying to get people a little more line of sight into the impact of our new product introductions. And that new products are new formulations. So for example, Vantacor, which is a high dosage form of Rynaxypyr, provides us a number of efficiencies and benefits for farmers that we've introduced in North America first this year, and we'll be rolling out to the rest of the world over the next 2 years. As -- LVS, which is a blend of Rynaxypyr with bifenthrin. Again, introduced here in the U.S. first, we'll be growing out to a number of countries over the next year. So formulations -- new formulations are also a key part of it, not just active ingredients. So when we think about that 5% to 7% top line growth compounded that we've been targeting from 2018 to 2023, those new products are all part of making that 5% to 7% happen. So we're very pleased with a couple of these very large new product introductions. Overwatch, in particular, we're running well ahead of our initial forecast. We think that given how the field -- the product is performing in the fields and the response we're getting from farmers, that product should edge to the higher end of the peak sales potential we'd sketched out in November. So it's increasing our confidence in that molecule. We're very excited to see the response to a number of our other smaller products that are being introduced. But I think it's one of these places where we're going to continue to give a bit more visibility as we go through the next several years, so people can really see the impact of new active ingredients as well as new formulations hitting our business. Now the metrics we introduced. It's often common in our industry for people to use a product introduced in the last 5 years kind of metric as a way of looking at growth and vitality of the portfolio. Given that we acquired the diamides business at the end of 2017, we don't have 5 years of history that we can actually do that math with. This year, it'll be our fourth year. So we've used in a bit of a slightly different metric and looking at sales of products that have been introduced, essentially since we've had the portfolio and the company and its current configuration at the end of '17. So products that have been introduced in 2018 are contributing about $400 million in sales of our overall $5 billion guided in sales for 2021. In this -- products that have been introduced just in this year alone, we're expecting to contribute about $100 million in sales. And that year-on-year growth of all of these new products is about $180 million from 2020 to 2021. So very solid contribution to our overall growth algorithm. But again, an important part and a foundation of how we built up to that target of 5% to 7% top line growth overall. So, yes. I think very much in line with our expectations when we laid out as planned at the end of 2018 that we can -- with these new products coming to market and with the strength of the product portfolio we have, that we can sustain that kind of growth rate with the assumption of very little fundamental market growth underneath it. That would allow us to deliver that. And I think we're very, very pleased to see the positive response of the new products that we've launched today.

Okay. And then just on the Overwatch point, which I believe in November, you talked $400 million to $600 million peak sales potential. You talked about that maybe edging towards the higher end. Do we think we get there sooner? Or what's the learning from the commercial team? You've gotten a big pipeline of new active ingredients kind of progressively launching in coming years. And so this is something that's going to be increasingly important to not just the formulations, but the new active ingredients themselves. So what's that learning? What does that tell you as you've thought about the implications for the rest of the R&D pipeline?

Sure. Look, I think some things specific to Overwatch. I think the results in the field have been very strongly confirming of what we had seen in trials and an expectation. I think that's made a number of our other country teams that had been a little more hesitant to be aggressive with thinking about what they could do with Overwatch, with the Isoflex active to be a bit -- to rethink their position, rethink what they can do. So I think there is -- absolutely, there's an opportunity for the product to edge to the higher end of that peak sales range. I think the ramp profile looks pretty much the same because it's really driven by the timing of receiving registrations. So we think we will be able to get some stronger results in a couple of countries later in the introduction time line and the sequence of when we get registrations. That all edges up to closer to that $600 million peak sales. And there may be a few additional countries that weren't a part of that initial thinking that we're able to take advantage of. It is not something that will suddenly accelerate in the next 2 years just because of the timing of registrations. But broadly speaking, in terms of what it suggests about what the other products we're going to start introducing. It really does give us confidence that we do have a good ability to assess what's going to work, that there might be a little bit of inherent conservatism in the way our marketing groups have thought about the launch of these products and how they might be received. Particularly when there are things that are truly new modes of action. Different ways fundamentally of attacking a pest or weed than other alternatives on the market. And if you look at the 11 active ingredients we plan to introduce over the next decade, the vast majority of those active ingredients are fundamentally new modes of action, bringing different tools into the farmer's hands to help them improve yield and control pests.

Okay. Great. So maybe switching gears a little bit as we think about the capital allocation piece. And so there's -- the 2 elements here, one, you've had a multiyear target to get up to a 70% free cash conversion. Maybe discuss the confidence of achieving that as we go through the next 2 years? And then as that cash flow profile improves, help us think about the priorities for the cash deployment, share repurchase picked up pretty notably in the first quarter. How we think about the phasing of that going forward?

Sure. Look, we've been very, very focused on cash flow, cash generation and the effectiveness -- the ability of us to convert earnings to free cash flow. And when we launched our current 5-year plan back in 2018, we initially set a goal to get cash conversion into 65% to 75% free cash flow to net income range. We've raised that goal up into the 70% to 80% now by 2023. On a normalized basis because we had a little bit of timing shifts. We talked about this in our Q4 call, or acute timing shifts right around year-end basis -- at year-end. But on a normalized basis, our cash conversion for 2020 was about 62% and our guidance for this year is about 65%. So obviously, over '22 and '23, we still have a couple more steps to go to get into that mid-70 range. There's really just a couple of drivers that will allow us to get that next level on cash conversion. One of which is we did finish the SAP implementation. And the series of big portfolio changes that have been, the big part of reshaping the company over the past several years. So what we colocally refer to as our transformation expenses dropping off pretty substantially this year versus prior year. So those -- that drag on cash conversion should be pretty much gone and will help further step-up this year and next year cash conversion. And the second piece is, we're continuing to drive working capital improvement. We have a lot of opportunity. We just went live in November and just the first time closed our books in February -- in January and in April using our new SAP S/4HANA system. Previously, we had over 5 different ERP systems that didn't talk to each other very well. So we have a very different line of sight into our working capital now that we've ever had in our history of the company. That doesn't by itself change the situation, but it gives us the opportunity and a tool set we've never had before to keep driving that. So we have very strong aspirations to keep driving working capital efficiency. And then the last piece is, look, we are a focused Ag chemical company now. We have a long history of being in a number of other diverse businesses. And as a result of that, we do have some legacy liabilities. They're pretty well understood. They're pretty stable. There's some lumpiness from year-to-year occasionally, but fundamentally, they're not growing. So as we continue to grow the earnings of the business and the cash flows required to sport those legacy liabilities becomes a smaller and smaller drag. So that's really the algorithm, those couple of pieces there, with growing -- continuing to grow the operating earnings of the business, moving past this period of transformation, driving increased working capital efficiency and just getting scale leverage normally on relatively stable legacy expenses, legacy spending. That gets us to a higher level of cash. So one -- I think the second part of your question is, all right, now that you're generating more cash, you're converting more of the earnings to cash. What are you going to do with it. But I think that's equally as important part of the story. We have a very simple capital allocation philosophy. We run an investment-grade balance sheet with a target BBB rating. We keep the leverage pretty aggressive against that -- as much aggressive as we can against that rating. And with that, with the free cash flow we generate and the incremental borrowing capacity that we have from growth to earnings, we look to either amplify our organic growth by making some small, focused technology-based investments. We bought out our partner in development of -- joint development of the fungicide last year, for example. We've made a number of early-stage technology investments. But some relatively modest inorganic investments. Beyond that, the free cash flow goes back to shareholders. And it's a combination of dividends and share repurchases. Dividends -- we reset our dividend policy in 2018 to a market median payout ratio of around 25%. Our goal is to keep it in that 25% to 30% payout ratio kind of range. Growing the dividend at or slightly above the rate of earnings growth year-to-year. We grew the dividend 10% in 2019. We raised it another 8% at the end of 2020. So continuing that trajectory. And then the flywheel here is share repurchase. So as you notice -- as you noted, we did buy $75 million in shares in the first quarter. It is a seasonally weak quarter for us for cash flow. We're negative free cash flow in the first quarter, but we feel it's important to be a regular repurchaser of the shares. Our goal this year is to buy back between $400 million and $500 million of FMC shares. It will be more heavily weighted to the second half just because of the timing and seasonality of our cash flow. But we would expect to make share repurchases throughout the year just more heavily weighted in the second half. And again, that's tied to that seasonal nature of our working capital. And it's also tied to -- we are trying to balance maintaining that investment-grade balance sheet throughout the year and making sure, for a full year basis, we have the right overall metrics to keep the rating in the right place operationally.

All right. Great. Well, I think we're just about up at -- out of time, so maybe we'll stop it there. Andrew, Mike, thank you so much for joining, everyone. Thanks for joining. I hope everybody has a great day.

Thanks, everyone.