FMC Corporation (FMC) Earnings Call Transcript & Summary

Okay. Sorry, a couple of minutes late just to catch up on technology here. Next up is a fireside chat with FMC, of course, a large producer and distributor of crop protection chemicals. Happy to be joined again at this conference by the CEO, Mark Douglas, welcome, Mark.

Thank you.

So we're going to do all Q&A for this. [Operator Instructions]. I'm going to kick it off, Mark. FMC has been known by investors for delivering very consistent above-market EBITDA growth for many years. Recently, some investors have started to question this "algorithm" is broken. Can you elaborate on some of this?

Yes, well first of all, I'd say I don't agree with that sentiment given where we see the company and how we've been performing. But I do understand why you would ask the question or investors would ask the question, given our performance in Q4 and then what we forecasted and delivered on in Q1 this year. I mean if you take a step back, if you think about the fundamentals of the company, we put a long-range plan together at the end of 2018, which had a 5% to 7% top line growth and a 7% to 9% EBITDA growth. And all the way through, currently, we're about halfway through the plan, and we are right in the ranges of that 5% to 7% and 7% to 9%. There were some specific events that happened in Q4 that we've talked about ad nauseam since then. Some of them related to the marketplace and one in particular related to our own supply chain. Those are well past us. If you think about what we delivered in Q1, we said we would derisk what we saw as inventory levels in Brazil that we didn't like, and we did that for 2 reasons. Number one, we've lived in this industry for a long time. We know the impacts on your balance sheet of having significant inventory levels or higher inventory levels. Number two, we believe that having the right inventory levels going into the '21-'22 season in Brazil is very important because of pricing leverage. And that's going to be a key message this year in the second half is the volume-price balance that we have in place to really drive that growth of about 8% on the top line this year. But we fully expect to deliver that. But the actions in Brazil, which slowed us down in Q1, that was the reason why we did it was to get the pricing leverage as we go into second half of the year. Don't forget, Asia grew 18% in Q1. So it's a very strong growth rate in Asia, which is one of our major areas for growth going forward. So we feel very good about the algorithm that we have, that 5% to 7%, 7% to 9%.

Talk about Brazil in the second half of the year. I mean it's obviously come up a lot this year. It's obviously very back-end loaded to meet your numbers. What really has to go right to meet these goals? What are the key risks?

Yes. And listen, the second half of the year is not predicated just on Brazil. Yes, Brazil is an important part of that. I mean, first of all, you generally have a good backdrop right now with soft commodity prices where they are. I know a lot of people focus on soybeans and corn, but we also focus on cotton, sugarcane, a lot of the fruit and vegetables. A lot of them are niche crops for us are very important. And the general sentiment is the same there. I think pricing is going to be important as we look to recover and what we're seeing as continued cost inflation and availability. Those are important elements. But for me, the real driver is going to be how you take advantage of the investments we've made over the last couple of years in 2 areas: number one, market access; and number two, new product introductions. So market access, we've invested in India and Southeast Asia, in particular, and parts of Brazil with the co-ops in terms of how we reach those end markets the types of products we're selling. And we've seen that growth in India and Indonesia over the last 6 to 9 months as we put more boots on the ground, more salespeople calling, more agronomists working with distribution and retail. So that's an important part. Indonesia, India, in Asia. The co-ops in Brazil, we are signing new deals that are more expansive than we ever had before, given the size of the portfolio and our desire to grow more strategically in Brazil. Those are 2 pretty big pieces. Then the new products. I said on the last earnings call, and I think I caught quite a few investors by surprise that $400 million of our revenue this year has been generated by products we introduced since 2018. $180 million of that is real growth year-on-year and $100 million comes from products we've launched this year. So it's a very healthy pipeline. This year, we launched Xyway fungicide in the U.S. and a big one for us is our new Isoflex herbicide that we launched in Australia. That is the first product that is coming out of the joint pipeline we put together when we acquired the DuPont assets in 2017. So we know that pipeline is strong. We have lots of expectations for it, and it starts to really speed in this year. So you put all those pieces together. And you can see that there's no one silver bullet that gets us to our total growth in the second half of the year to deliver that 8% year-on-year growth. But more importantly, it's spread across a number of activities. To your other part of your question, Joel, what could go wrong? Well, obviously, weather is something that we all know who disrupts any of us in this industry, whether it's in Latin America or Europe. Something we watch for closely. The intent is to be able to offset weather patterns with other parts of the world. But if you get more than one region impacted at one time, it becomes more difficult. So for me, that would be, I would say, the #1 risk. The second risk is raw material availability, packaging availability, all those types of elements that not only the crop protection industry but many industries are seeing today, which is cost inflation as well as availability of key raw materials or packaging and logistics. They're affecting everybody.

If we go back a bit, in fact we are coming out of second half of this year. But if we go back to what happened in Brazil in the second half of last year, maybe talk about the challenge that you saw in Brazil and what you might have done differently and how the dynamic has improved into this year?

Yes. It's difficult to say that in Brazil alone, we would have done anything differently. In fact, if we have realized that the time the dry drought weather that we experienced that delayed the season was going to have so much of an impact, in Q1 as we look to bring down inventories, we may well have actually slowed down revenue growth in Q4. We might have actually taken that pain a little earlier to give us a better run as we went through 2021. But I'm not so sure that would have been the right thing to do either. So when you get hit by weather impact, are there other things you can do in the rest of the world? Perhaps, we could have done some other things to help offset what happened in Brazil. But fundamentally, when it's from [indiscernible] size right at the peak of the season, there's not a lot you're going to do differently to change that outcome, to be honest.

So obviously, what's very topical these days are cost inflation, raw materials, logistics. Talk about the pressure you've been seeing in these areas and how you've been able to mitigate this -- the price coverage?

Yes. I mean, listen, I'm not going to tell anybody on this call anything that they already know by looking at the news. Raw materials, not only in this space, but in others, are in some cases, short, i.e., can you get it, and in other cases, going up in price. And we face exactly the same thing. Whether it is input raw materials that we use to make our product or whether it's a final product that we're buying or whether it's a packaging material, so whether it's steel drums, plastic packaging, pallets, whatever it is. And then the third element that doesn't get so much attention but is still impactful is the availability of logistics, whether it is maritime logistics or road freight in certain parts of the world. Again, availability issues and more importantly, cost issues as well. So it's kind of spread across the whole input as we see it. Inflation itself, i.e. people cost inflation, et cetera, we haven't really seen that yet. If that comes, it will hit us next year, not this year because we're already through the cycle of compensation, et cetera, but that's something we're also keeping an eye on as we think forward. The obvious means to change all of that is pricing. I think we did a pretty good job last year of offsetting FX price. We didn't -- FX impacts, we didn't get it on, and we will be looking to close that gap this year. But this year is more really driven by the cost side, moving our pricing to really offset that cost. We announced a March increase in North America, which is highly unusual. That's a mid-season increase, but it shows that ourselves and others in the industry are serious about moving price, and we've already announced a price increase for Brazil going into the next season, which we'll start negotiating as we go through Q3. We are looking at what we're going to do in Europe as we head out of this season into the next one in the second half of the year, and our folks in Asia are looking at various countries of where we're moving price. So it's already underway.

And I mean are there any -- some of your competitors talked about switching out some of their different raw materials, whether going from rhodium to palladium or things like that. Have you looked at some of that? Or is there no shelter anywhere for different minerals?

Yes. That's a good way to describe it. I think we all have different views of our portfolio from a procurement perspective. The reality is, this is so broad-based. It doesn't matter whether you have a catalyst problem somewhere or surfactant problem somewhere else or a solvent problem. You've got a problem. And your ability of your procurement and supply chain organizations to work with your supply base is very important. And I think that's something that I know my company is highly focused on. But -- I know everybody else's as well. So I don't think there's a hide in place. I don't think anybody has an advantage. Seriously, I don't think anybody is disadvantaged. I think we're all facing the same pressures.

Okay. Maybe we could switch a bit more to some of the mid-term and longer-term thoughts here. What sort of a reasonable expectation to the trajectory of top and bottom line growth for the diamide portfolio for the next couple of years and after that as different patents start to come off, and do you have different arrangements, different players, How does it all -- what does growth look like for you?

Yes. Listen, it's a complicated subject, given all the elements you just indicated, and we've not really put a pin in it and nailed a number down for the really long-term growth of the diamides. I would say between now and 2023, which, let's be honest, is real short term, our top line growth of 5% to 7% is predicated upon the diamides growing in that upper single digits lower double digits depending on the year. We don't see any reason why that would change and certainly in the short term. In the long term, it's interesting. You have to look -- take a broader look at the insecticide market itself. And there's some interesting dynamics going on that I think not only help the diamide growth, but help the partners that we're putting in place for the diamide growth. If you think about the overall growth of the insecticide market from sort of 2027 all the way through to 2019, you have a growth rate of about 3.5% to 4%. Today, we're at a $16 billion market. If you look going forward, the expectations are that the market for insecticides grows at about 3.5%, again, taking you to something like $20 billion in size. Well, the diamides are not going to grow lower than the marketplace, two reasons: Number one, they've taken more share than any other technology since 2007. Going forward, there's 2 big classes of insecticides that are facing regulatory pressure. Those are the neonics, which everybody has talked about and knows about and the organophosphates -- the organic carbonates. They are products that are declining in value. You can use the diamides in mixtures in many parts of the world to start to replace some of those technologies. So we not only see it as a continued growth of the diamide but there are many older chemistries that are going to face regulatory pressure that we see working with the third parties and the agreements that we put in place, where they're going to formulate the diamides for different uses that we don't have today. That's going to help that growth. So for me, I kind of see the base at a 3.5% number, which I don't consider as the number we would grow. And then we're looking at how we add on the various elements to get a growth rate, which is much more substantial than that 3.5% in the real long term, and we're talking through the next decade.

The honeybee lobby really hates the neonics. So you got to be -- so I was going to ask then, you described a scenario where the pie for the diamide needs is going to grow, right, fair, as it can be more broadly used, fair? And then maybe you can hold or even grow kind of your exposure to it -- at least hold because the pie is going to get bigger. Does that make sense so far?

Yes.

And I guess to grow -- hopefully that the pie grows, your volume grows, maybe some margins come off, don't know. And is that how you kind of look at it to kind of balance it off?

Yes. Listen, I think volume growth is an important piece. We've signed these agreements with 50 other companies, 5 global and 45 local agreements. They're not entering into these agreements to sit still. They're going to be looking at their own markets to take share with these technologies. Now that's a difficult volume model to predict because it is so dispersed, and everybody has their own views of where they're going to grow. But suffice to say, you have to believe that, that is going to be faster than the market growth or else why would people be investing in these technologies. Why would we do that with them? So I do see that as a very positive momentum. What happens with the volume as we go through will depend on how those people perform and how we also take our technology and change it. We are formulating the diamides in a very different way. We have brand-new formulations that are coming to market as we speak, and we've launched a couple of other in the U.S. this year, and they're doing very well. They're differentiated. And I think that's the key. How do you capture the value on crops and geographies that you're not currently in, yet you know you could have very good products for if you formulate them in the right way. That's a continued eminent of the growth.

So we got a question from the app and it's asking about some dry weather in Brazil. Any challenges you might have to meet some of your numbers, second half of the year, particularly in fungicides?

Yes. I mean, I think most people who follow the ag will have seen that there is dry weather in the central south region that seems to be impacting the citrus fruit and the coffee markets. They're not enormous markets for us. We're watching it carefully, but they're not the drivers of our second half growth. For fungicides, listen, it's dry now as we entered the next season. We're at the end of the season in Brazil, let's be honest, is Q2 is a very slow quarter. Next big season starts in September, October. It's all going to depend on what the weather patterns look like and what inventory levels are for the big fungicide producers. We're not one of them in Brazil. But it's going to depend on what that weather pattern looks like going into the next season.

You talked about the diamide and the complex situation there. Let's talk about what gets you really excited for 2022 and for 5 years from now in the portfolio that you have?

Yes. It's interesting journey to start off with the diamide conversation. And listen, it is a very, very important part of FMC. But the other side of the coin is where does the lot more growth come from? Actually more than the diamide is the new pipeline. We have something like $2 billion or north of $2 billion of new revenue by 2030. And then peak sales far in excess of that as you go well into the next decade. So for us, yes, we're very focused on making sure that diamides get all these love, care and attention they need to grow and continue to grow. But we're also, at the same time, investing heavily in our marketing plans for the new pipeline that's coming that really delivers a significant amount of brand-new growth in fundamentally new markets that FMC doesn't compete in. So that level of cannibalization is low for us, which is very good. So think of the products that are coming. The new one Isoflex that's just been launched. It's a grass herbicide for cereals, being launched in Australia, first season, doing much better than we thought. We're going to take that to Europe very soon in the next year or so. Argentina also picks it up and other parts of North America. That's a big molecule. That's something in the $400 million to $600 million range as we think of it today, I'm sure that number will change once we see how good it is in the marketplace. Fluindapyr, the new fungicide that we have coming, we launched it this year. It's being launched in what we call non-crop applications. So turf and all the medical applications. So it's a small volume this year, but it gets the product moving. Argentina is the next one, which is next year and then the other big countries following 2023. Again, another big molecule, $400-plus million of peak sales. And I think there's 2 molecules that come after that. One of them, we just had our iso name for, which is a rice herbicide. It's called tetflupyrolimet. Do not ask me to say that one again because it's almost impossible.

Got that.

It is a new mode of action for rice as a herbicide. So we know there is a lot of resistance in rice applications. This is a brand-new product, and we have great expectations. That one hits 2024 through 2025 and mainly in Asia. So you can imagine most of the world's rice is produced in Asia. So we know this is going to be a big product for Asia. And then we have another insecticide coming an aphid product that is very targeted just for aphids that comes in 2025. So those products alone generate a significant amount of brand-new revenue at a higher margin than we have today. So that's where we get excited. Yes, the diamide is important as of the rest of the portfolio, but that pipeline really drives a lot of the growth going forward.

There's -- just always seems to be scrutiny on crop protection from a lot of places. And you wonder if the concerns about increased regulatory scrutiny, increased traditional scrutiny in the states, particularly, would -- when you start counting out numbers and spreadsheets and risk analysis would make it difficult to justify R&D spending in new molecules. What's your thoughts on that?

Yes. You can view this 2 ways, I think. You could look at the regulatory environment in the world and say, my goodness, it's getting tighter, it's getting more stringent. But from an ESG perspective, that's not necessarily a bad thing. Yes, I mean, you know our view of the ESG and how much we're spending in this area and focused on it. They go hand in hand in terms of, yes, the regulatory environment is changing. But if you're investing in more sustainable solutions and bringing on targeted softer chemistries to market, why is that a bad thing if you truly are an R&D player? It's actually a good thing because despite the EU say Farm to Fork or Green Deal, we're going to reduce pesticide usage by 50% by 2030. By the way, they've come out recently and set that's an aspiration now. I think the reality is the market is still going to be there. It's not as if people are going to stop using pesticides. We have to feed the world, and we need that productivity and yield improvement without encroaching on new land spaces. So for me, I see it as a distinct advantage. There are only 5 companies practice real discovery in this space. And those 5 companies are the ones that will drive this industry forward. That's the advantage. I think it has. So yes, it's here. It's not going to change, in fact. It probably will accelerate in many parts of the world. That's the reality that you have to deal with. That's why we invest so much in R&D to bring those new products to life.

And you have been very clear in your ESG strategy over the last 9, 10, 12 months, at least more publicly or more transparently, but more out there talking about it. Talk about -- you talk about really trying to put out new products, when you put out a new product, it has to always do better, at least, in one of your major ESG categories [indiscernible] categories and not do worse than the other ones, at least. Talk about what you've learned from that and how it's really driven -- how you view your portfolio going forward?

Yes. So we have our sustainability matrix that we use, our sustainability assessment tool that we use in R&D. That really, as you just described, looks at various elements of the product's makeup and its impact on the environment or biodiversity, et cetera. And we got to a process where we met out what is out there in the industry today, what is also coming in the near term. And how do those products perform. If they don't perform, we cancel them, and we have canceled products not because they didn't work in the applications that we thought they would, but their sustainable profile would not get us to the marketplace in 10 or 12 years' time because that's the time line we talk about from discovery to commercialization. It's about a 10- to 12-year time line. So I think it adds a lot of focus to the organization because you can talk about sustainability. But when you're influencing what you're actually investing in at the very early stage, it really does focus the organization to say, what will that regulatory environment be in 10 years' time? What will the growers be facing from an environmental perspective? How are we going to deal with that? It's changing the way we think about R&D. First of all, we set up our biologicals business, and it's growing nicely. That has a major part of how we think about the synthetics versus biologicals or a combination of the 2. So all those pieces are playing out into how our R&D organization is going forward and thinking about the technologies we're going to invest in.

And Mark is going to join us tomorrow Midday in our Crop Input Producer ESG panel along with Tony Will of CF and the woman that runs sustainability at OCP [indiscernible]. And one way you can really look at environmental scrutiny and sustainability is to look at new biological products, which you're doing. Your key sales target for biological seems not overly material. I think you're expecting a few hundred million dollars in 2030? What needs to happen for biologics to become a bigger part of your sales mix?

So I know we've talked about biologicals and the industry has talked about biologicals for a long time, but I still think we're in the very early stages of development of these technologies, whether they be microbial or enzyme or using pheromones. The real push will come when we have products that can perform at the same level or close to the same level as some of the synthetic standards that are out there. This industry is notorious for how slow it will change. And if you're trying to change your synthetic with a biological that has different characteristics, not necessarily worse characteristics but different, that's a hard sell. So I do believe that having an aspiration to have a multi-hundred million dollar business in the next few years, and we have $100 million of biological sales today. I do think that is achievable. But I also expect there has to be a step change in performance. I think the other thing, Joel, that people have to recognize, you're not going to see our Rynaxypyr diamide type products here, not yet. First of all, a lot of these products are based upon microbial pesticides. There are many rules around the world where you can -- cannot import microbes that are not native to that country. So it's not as if you can take a microbe from the U.S. getting to express what you wanted to express and then import it into India. You're going to have to discover something in India that is native to India that allows you to grow that market. So it's much more fragmented in nature, and I don't think that message has quite got across yet that the way that industry is going to grow is many more products, smaller in size, but highly valuable in the marketplace.

So when we look at FMC, I mean you're a crop protection producer, you're branching to some projects around digital ag and biologicals. You're -- is there other things that FMC can be, do you want to branch into other crop nutrients? Do you want to get bigger in crop protection? Do you want to buy a little more of fungicides, a little more [indiscernible]. What do you think are the gaps what do you think you want to be in 5 and 10 years?

Yes. Listen, you're right, we've been investing in precision applications, which are very targeted for specific end-use needs that the growers have. We're investing in FMC Ventures in terms of the periphery of technology that we have today, both from a, what I would call a biological perspective as well as precision ag or AI learning for our research groups. All those will help the core of the business. I don't -- I've said many times and get asked many times. Are you going into the seed business? No we're not. We have a micronutrients business. We bought it when we bought Cheminova. It's about an $80 million to $100 million scale. It's not a bad business. That will continue to grow organically. I don't think we'll do any M&A in that area, but it's growing nicely. I think for us, we want to be bigger in this space. Bigger is -- means a couple of different things to us. Market access is very important. We don't have the size of market access that some of our other larger competitors have. So that's something we want to get hold of in the future as we go forward. And then I think the scale is very important because it will allow us to spend more on R&D. And we are fundamental believers that those 2 planks of technology and sustainability are what will drive the company forward. So yes, we do want to get bigger in this space.

I mean we obviously saw a trend 4 or 5 years ago, we got Bayer-Monsanto, we got DowDuPont from Corteva, we got ChemChina's Syngenta. FMC wasn't part of that marriage cycle -- consolidation cycle. What have you seen competitively happen since a lot of seeds and chems mergers have happened together, bundled whatever? What does it look like from FMC perspective?

Well, to be honest, it doesn't look that different today than it did 5 years ago. The names on the dollars are different in some places and the scale of the company is different. But when you think about seeds and chemicals together, they're very, very different businesses. And I think companies have always had issues of how you drive leverage out of sales and -- seeds and chemicals together. We and others have been pure-play actives in the market. And we've never slowed our growth down, we've never seen lack of opportunity. As I've said before, we're agnostic on who seeds we use, but we will bring you the latest technology to protect those seeds. And I think that's very important, and it's valued not only by distribution, but by growers as well around the world, and we continue to outpace the market in terms of growth rates. That tells you that there is definitely a need for a company like FMC that is purely based on research. And that the market rewards us for that when you look at our EBITDA margins versus the rest of the industry. We are right there at the top of the tree. That's because it's the technology that we're bringing. All I need is more market access and scale to drive that even faster.

There has been a lot of talk about generic pressure on crop protection states, things like that. With crop prices now so much higher than they've been for years, what are you seeing as changes in the business? Are you seeing now less generic pressure? Are you seeing [ conflict of ] volumes in farmers going to trade up on products? How does -- what does it look like?

Yes. Fundamentally, we're not seeing a difference in terms of generic pressure. Listen, there is a large generic market out there, and it's a viable market. It has a business model that is clearly different to ours and others. But it works for those companies. They have products that they produce very efficiently, they market very efficiently, and there is a market for them. That's always going to be there. And it will change over time as products move from being on patent to proprietary to more generic in nature. But there's nothing wrong with that business. It's a very solid business that works well. And I don't think that pressure is going to go up or down in any real way. You will, certainly in these environments, want to protect your crops as much as possible to get the highest yield and productivity because of the value. I think we have a slight edge in that space where the newer products and the products that want to be used, but it doesn't mean to say that the generic model is not viable. It has been before and it is today.

So in the minute or 2, we have last, Mark, what do you think is the most underappreciated about FMC say?

Well, certainly, obviously, you can look at the financials and you can see how we perform, the margins that we have, the growth rates that we have. I think it's the pipeline piece. We did a big technology investor day in November last year, where we gave a lot of information out. I think people are now starting to realize with the numbers we just talked about in terms of how much revenue we're getting from new products and how it's growing. I think that light bulb is starting to go up with investors to say, this is not a short-term play. There is a lot of value in the FMC pipeline. I fully recognize it as a show-me story. We can tell you whatever you want about our technology. At the end of the day, we have to implement, execute and deliver that revenue and profitability. But we're very confident in that. So I would say that's the one piece, Joel, that when I listen to how investors talk to me and what they're focused on. I think it's the pipeline piece that's starting to get more attention and is very, very important.

Okay. Thanks, Mark, a lot. We'll see you on our ESG panel tomorrow. Thank you very much. Have your conference.

Thank you. Take care.