FMC Corporation (FMC) Earnings Call Transcript & Summary

Hopefully, you had a good lunch break. My name is Arun Viswanathan and I'm the chemicals and packaging analyst here at RBC. So thanks for joining us for our annual global industrials conference. Definitely very pleased to have Andrew Sandifer, CFO at FMC with us today, along with Zach Zaki, who is now in the Investor Relations role. We will have a number of questions I can ask myself about topics. I'm sure a lot of you will have on top of mind, but if you do have other questions, feel free to type them into the Q&A area below, and we'll ask those as well. So why don't we go ahead and get started.

Andrew, thanks for joining us and Zach as well. I guess maybe you can just give us an update. We can just go around the globe a little bit. So maybe we can start with North America. North America, one of the topics has come up. Obviously, it's just some dry weather out in California. Overall, it appears that maybe it's not -- it could be overblown at times. But what would you comment, I guess, as far as weather in North America and just your overall business there?

Sure. Look, I think North America for us is a number of different crops and geographies within that region. And I think it speaks to, at a smaller level, one of the big themes I'd say about FMC, which is the diversity of crops and geographic exposures we have. We often talk regionally, but even within regions, within North America, it's a big factor for being able to sustain performance in the face of challenges. So certainly, there's been some pronounced drought in the West in California, in particular, which is a big market for us. As many of you know, we have a very strong presence in specialty crops, fruits and vegetables, tree nuts, et cetera. that are particularly strong in California. It was -- the second quarter was not an exceptional quarter, strong quarter for us and products for particularly the California markets. But that was balanced by while we're not traditionally corn, soybean focused company, we're not, that's not the primary driver for us. But we do have some very good products in soybeans and in corn, and particularly a couple of new products that have been introduced this year, a corn fungicide called Xyway that's had very strong traction, growing very, very rapidly this year as well as broad participation in herbicides, particularly pre-emergent herbicides for soybean. So the strength in the heartland, if you will, the corn and soy growing areas of North America, really offset any weakness that we had and what we affectionally call the horseshoe, but particularly the California coastal areas, California fruit vegetable tree nuts areas. The drought is continuing to persist in California. I think we're getting later in the growing season, we'll be starting to look to next year. I think overall health of North America market is a very strong, good fundamental pharma economics beyond those specifically impacted by drought that will support another strong year of growth in 2022 in the U.S.

Okay. Andrew. Maybe we can move on to Latin America then. I know it's early, but you usually assume a normal weather for Q4. Last year, unfortunately, there was some wetness that impacted your results. So any early read on Brazil and whether in Latin America and Q4 at this point?

Sure. Look, Latin America, I think all the stars are aligning for a very strong season, new growing season started coming at the end of this quarter going into the fourth quarter. It's a bit drier than we might like in Brazil at the moment, but the long-range forecast are mixed. But I think there's a great deal of optimism and enthusiasm among growers. We're seeing significant increase in acreage which is crops like cotton, which have strong importance to FMC. Crop prices are good. Farmer balance sheets are good. So there's a strong appetite for farmers to have the crop protection products they need to be able to drive yields and protect their crops. So still a bit early to -- as we start getting ready for planting and at the early part of the growing season to know if the weather is going to be a swing factor yet or not. Again, we are exiting the winter in Brazil a bit drier than we might like, but it does vary a bit across the country. But overall, I'd say sentiment is very, very positive in Brazil for a strong beginning of the new growing season.

And also in Latin America, earlier in the year, there was a real push to bring down channel inventories in order to maybe get some price recovery to deal with the FX issues. Could you just update us on price versus cost in Latin America or at least price versus FX? What you're seeing there, if there's any early read there?

Well, we can say this is certainly we put our foot on the brakes in Latin America in the first half of 2021. We had -- there was a drought in Q4 early in season that impacted a number of important crops for us, particularly cotton and where there are some basically some lost applications for our products during the season last year. We intentionally -- as folks may remember, we took -- we guided a shrink in Q1 on purpose and continue to keep discipline in Latin America in the second quarter to really draw down those channel inventories to make sure we're in a better place. So we feel pretty good, and we feel like channel inventories are in a healthy place beginning in this growing season, again, with the strong sentiment that we've talked about, looking very optimistically to this growing season. We are -- we have orders in hand for Q3 and Q4 at higher pricing than prices that were in place last year. We have raised price multiple times in Latin America. We raised price mid-season in the U.S. We'll continue to raise prices. Our pricing is generally more seasonal in nature, particularly when it's price increases to offset raw material increases. In Brazil, there's -- there are adjustments made more frequently just related to FX, but in light of cost increases that we're dealing with right now, that has traditionally in our industry have been more of a once-a-season adjustment. We are making more aggressive moves in that, but we will continue to move price as we get into the new growing season, not just in Latin America, but as we look going into the beginning of Q1 in Europe, going into India and in Q2, we'll continue to be raising price to help offset some of those headwinds.

And just on that note of pricing, we did get some questions over the last quarter about whether there was a change in strategy at FMC to -- pushing volume over price or prioritizing volume that is and share recovery. Is that the right read? Has there been any change in your strategy? I mean, how would you kind of characterize the price versus the volume trade-off at this point?

Yes. Look, I'd say I think there was a tremendous misunderstanding of some comments made in our second quarter call particularly around this issue of price and volume. Look, we're the only company in our sector that gives forward-looking guidance on drivers of earnings change. We do it because we want to give people a viewpoint to how we're thinking about the various levers that contribute to the performance of the business going forward. But that quantitative guidance can be falsely precise. And while only once the last 15 quarters have we missed our bottom line number, we have every quarter in the 9 quarters, we've given quantitative guidance on drivers of earnings change. We've gotten it wrong every single quarter. Now the reason we've done it is to be able to give people a better view on how we're thinking about some of the trade-offs, some of the challenges and some of the nuances, how we're making decisions in the business. But the idea that there were some change in strategy when looking at a minor adjustment between forward-looking guidance on drivers of earning change, I think it was a complete misunderstanding and overreaction. If you look at drivers of earnings change for FMC over the past 3 years, 2019, 2020 to 2021, and our current incarnation as an ag sciences company, ag-focused company. The predominant driver of earnings growth has been volume. And it's volume and $0.02 is volume -- for us, the way we characterize volume, the way we capture it in earnings bridges, it's not just units growth. It's mix. It's the faster growth of higher-margin, higher-value products like our diamides. So if you look at the incremental margins from volume revenue growth, it's really high. And depending -- very -- moves around a lot by quarter, but it is very high. Why is that? It's because we're growing products that are higher margin, higher value, faster than the rest of our portfolio. So volume has been a key part of driving the EBITDA growth and EPS growth of the company for this entire 5-year plan. So in the August call, we gave an updated view of full year guidance. The real news there was we have a surge of raw material cost inflation, some of which is transitory, that we can't move price fast enough to recoup. And that caused us to have to lower guidance for EBITDA for the year by $50 million. Trust me, Mark and I were very disappointed by having to make that adjustment. But we can see that cost coming and the way that costs flow through inventory and into our P&L over the 6 month period, we know what's coming at us in the second half of the P&L. We had to adjust the guidance. The minor -- the fine-tuning, I would describe between volume and price contribution to EBITDA growth in 2021 was really that as we're looking at making decisions, commercial decisions on a crop country product level, some of those individual decisions is saying, all right, there's more opportunity right now to gain additional volume relative to past guidance at current price of very high-margin products like the diamides. In a time period where we are moving price, but we're not moving as fast as we might have liked, right? But we're continuing to move price. But we can gain volume, add volume high-margin products at a time where there is also a transitory cost inflation, at least in part. We secure that volume, displace older harsher chemistry at farmers used to using a better solution as raw material costs ease, particularly going into the second half of next year, there's a natural margin expansion, and we would hit that margin expansion on a larger base. So I think the nuances of that interplay factors may not have come through clearly in the earnings call. But I would certainly caution people that what we're looking at was an adjustment between forward-looking guidance of earnings drivers, we are still forecasting and still driving to price increase. We just see it as a part of the balance, some more opportunities, again, with higher-value products, high-margin products at current pricing to go out there and secure a long-term share gain. So I would certainly characterize it not as any type of strategy change. It's actually just sort of natural continuation of the dynamics that have been going on in our business for quite some time. The volume has been the biggest contributor to EBITDA growth over the last 3 years. The biggest chunk of that driven by the fact that the volume is really -- a big chunk of that is mix, it's not just units. It's the value of the products that are growing in volume that have allowed us to continue to drive and continue only even with the headwinds we're seeing this year. At the midpoint of our guidance, we're still expecting EBITDA margins to be 50 basis points higher than what they were at the end of 2018. That's in the face of almost $600 million in FX and raw material headwinds cumulatively over the past 3 years. So how have we done that? Well, we've grown higher-margin products faster, volume benefit, mix that flows through volume. And we've leveraged our SG&A through investments in SAP and other investments and other efficiency activities we've had. So we've been able to, even with these kind of large disturbances, some of which COVID-related, some other structural of increased costs. We've been able to continue to expand and expand what were already industry-leading margins in the face of that while growing. So we would like to see that margin and expect to see that margin to continue to expand, particularly as we get into 2022. But for this year, being able to work through, particularly this bump up and somewhat transitory costs, to be able to work through and still have margins at the end of this year, higher on a percent basis by 50 basis points where we were in 2018. We think it's a very strong testament to the sustained power of the portfolio, the differentiated technologies that we have in the marketplace. And as we look forward to the strong continued organic growth and some of the new products that we'll be introducing over the next 3 to 5 years, it's a recipe for continued strong growth, high margins and high value creation.

Great. And just to be clear, what was the drivers of those increased volume opportunities? Is it new customers? You noted share gains? Or is it more on increase in acreage? Or how would you kind of characterize the share gain opportunities?

Yes. It's -- there's certainly some acreage dynamics depending on the particular country, but a lot of it really is we had -- in the Q2 call with some of what may not have been as fully appreciated. There's a lot of information there around our diamide franchise. We talked a lot about some of the older chemistries the diamides are displacing, organophosphate, carbamates, neonicotides. There are a lot of places in the world where farmers are using older, more harsh tools that we are showing them the value of using even though they're more expensive, more effective products like the diamides. And a lot of that share gain is really coming from, it's a continuation of the trend of diamides displacing older, harsher chemistries. So again, this is a great opportunity to really continue that shift to diamides, taking overall share with an insecticides class at very, very high margins and then continue to expand off of those margins as raw material costs ease in the second half next year.

Great. Maybe we could also just touch on Europe and Asia as well. How do you characterize those markets. I know Asia has been a nice area of growth for you in rice in Pakistan and some other areas in India as well. So what would you say on -- let me start with Asia, what would you say on the Asian markets at this point?

Look, Asia has been a great growth story for FMC for the past several years and continues to be this year, very, very strong growth throughout the year. Pakistan is a unique market for us. We're the market leader there by far. But the biggest weight for us in Asia is India. In India, we're depending on the day and which market research you want to look at, we're either #1 or #2 relative to UPL as our largest competitor in the Indian market. Tremendous opportunity for growth in India. The crops that we're well suited to, rice, fruits and vegetables, sugarcane. Those kinds of specialty crops are a huge part of the agricultural industry in India. Our recent partnership announcement with UPL and diamides both gives us access to low-cost manufacturing at a third production point for diamides, but importantly, gives us a commercial footprint that doubles our exposure to Indian market and into crops and parts of India. Look, we have a big business in India, but we don't cover, by any means, the entirety of India geographically or by crop. So having essentially doubling our commercial footprint through this partnership with UPLs will allow us to drive even further growth. So India has been a great market for us. I think we've had a pretty healthy monsoon in India this year. There are obviously some variation in different parts of the country. But overall, it's been a pretty healthy monsoon season, so supportive of a good end market there. And it's a place where we expect to continue to go on for quite a long time.

And in Europe, your presence also as larger post-Cheminova. You've made a lot of changes on your route to market and so on. How would you characterize your position in Europe at this point? And what are you seeing in the markets there?

Sure. Look, I think Europe is the most challenged region for the industry. And it's really been several years, successive years of tough weather. And for us, particularly, a lot of products that we sell are used early in the growing season in Europe, particularly herbicide materials that there were -- weather conditions in the early part of the year that just prevented their use. And once you miss that certain timing window, you just don't get that business back. So we're expecting a nice -- an improved second half, although it's not a big second half in Europe, we're expecting some improvement there. But net-net for the year, Europe is flattish to down for us. It's not a strong market for us this year. Now that said, we have a good product position there. Again, with specialty crops with the diamides, but also in cereals, herbicides, in particular. We're seeing very good growth in Eastern Europe, Ukraine, Russia, so some good opportunities there. It's the toughest market to work in, in terms of regulation and just the slow pace of being able to introduce new products, but it continues to be a very profitable market. So we're hopeful that a more normal weather next year could be a very strong base for growth after what's essentially been a couple of flattish years in a row for 1 weather-related reason or another over the past 3 years. So fundamentally, still a very attractive region, but not one that's been a strong contributor to 2021 results, unfortunately.

Okay. Understood. And so we've all mentioned cost a lot and inflation this year. It's obviously been a pressure point for most companies that we cover. Has there been any change in your outlook in the last -- following the last month or 2? I know chlorine is still very tight, but you've had some other sourcing opportunities as well. So could you provide an update on how you're thinking about inflation for the rest of the year?

Sure. So look, in our last call, we guided to a headwind of about $150 million of EBITDA from costs. Of that, about $110 million of that is in cost of goods. The other $40 million is evenly split between SG&A and R&D. R&D, continue to invest in growth in new products and SG&A a little bit of growth of SG&A, and quite honestly, some snapback from strong spending controls we had in the prior year. The COGS piece, biggest chunk is raw material cost inflation. And for us, that's active ingredients that's intermediates, we use to make active ingredients as well as other formulating components like solvent surfactants on the materials like that. We have seen a pronounced inflation in those products. The biggest driver, though, has been -- or a big driver, if not the biggest driver, has been really disruptions from COVID. There's certainly base level inflation in the materials, but the big driver for us is having to use alternate suppliers who we don't have the same cost position with to make up for gaps in supply where our prime suppliers have been disrupted either by weather, by COVID-related staffing shortages or logistics disruptions. So we have a significant supplier mix impact on our cost in 2021 and particularly for raw material costs that's flowing into COGS, we have a pretty good line of sight on that impact on a 1- or 2-quarter basis because, look, fundamentally, we turn inventory about twice a year. So products -- when we're buying raw materials right now, that's going to get manufacturing product put into inventory. It probably doesn't flow through our P&L until the first half of next year. So the cost increases that we're seeing now happen in Q1 and Q2 in terms of the invoice prices we were paying on raw materials. And we've seen that step-up. We expect that step-up to sustain through the first half of next year. And then we're expecting at that point as we see some more normalizing in supply chains that particularly, we're not looking for global relief on inflation. That's not the point. But as our preferred suppliers get back to more normalized operations become less disrupted. We would expect to see some easing, if not an outright tailwind on costs as we get into the second half next year, particularly raw material costs. The 2 other cost buckets that really -- that also matter there, not as large as raw materials, but they do matter, and that's packaging and logistics. Packaging has been -- again, it's an availability as much as a base cost issue where we're having to go buy from suppliers that we don't have the same kind of pricing relationships with because of disruptions in the market. There certainly has been inflation in resin costs flowing into plastic packaging or steel costs flowing into steel drums. But availability, quite honestly, has been the bigger challenge in packaging. Packaging flows through our financials on a bit shorter of a time frame, 1 to 2 quarters rather than a full 6 months. And then the final piece is logistics. And again, this ties to whether it's weather related or political or ships getting cost in the Suez Canal or COVID, logistics chains have been very disrupted. We're having to use a lot more air freight, high-cost mode of transit. So again, we have a mix issue in terms of cost that, again, none of us are assuming that this goes to 0 or back to 2018 pre-COVID normal, but we're at an elevated level that should not sustain indefinitely in our expectation and what we're already seeing, despite some recent complications from IDA and U.S. ports is some improvement in availability of ocean freight relative to airfreight coming from Asia. We'll see how the next several weeks and months play out post IDA disruptions. But at a minimum, we don't see it getting worse. It just may slow the pace of how quickly does the mix of mode get better in logistics. Logistics, a bit more immediate of an impact on our P&L, but it is also the smallest of the 3 cost factors. So net-net, I think for the rest of this year, we have pretty good visibility into the costs we're facing. We do anticipate that a sustained cost headwind into the first half of next year, but we see markers that suggest just with some normalization of disrupted supply chains, not even full normalization, but just some improvement there that we should see an inflection in the second half next year, which would be supportive of expanding margins while as we're increasing price along the way.

So when you put all that together, it sounds like many of the cost factors had been somewhat factored into your guidance. Looks like North America, Europe and Asia are also relatively known quantities at this point for the rest of this year. So would you -- Would you say that it's really Latin America and weather at this point that is the main dependent factor for your 2021 guidance?

I would say, certainly, Latin America is a big part of '21 guidance, but don't underestimate the impact of North America in the fourth quarter, in part because it's a painful memory, but we did have some operational disruptions in the fourth quarter last year in our North American business where we missed a fair amount of business. We're anticipating very significant year-on-year growth and particularly our U.S. business. In part just by recouping business that we missed last year due to those disruptions as well as the fact that we have a very strong fundamental farm economy in the U.S. right now. Even though we had less sort of headwinds in the tree nuts and fruits and vegetable parts of our business in California in the second quarter, we still grew our North America business 20% year-on-year. So the fourth quarter, second in particular, but second half, North America is a strong contributor to growth in part recouping against lost business in the prior year period. And then, yes, certainly, Brazil is a big part of Q4, but it is not -- our Q4 is not only Brazil. There's a good chunk of North America that going to be a big part of that delivery of Q4.

Okay. That's helpful. And then as you look into '22, you noted a lot of potential price actions. You have some cost inflation, but I imagine there's productivity benefits as well. What are some of the drivers that you could point to if we start thinking about an early read on '22, any framework items you could provide us with?

Sure. Look, we're at that time of the year, where we're starting to do budgets. And so this is all just going to be directional at this point. But I think when we look at the kinds of drivers out there. One, overall, the agriculture economy is strong. So demand for our products, demand for soft commodities is very high. And there are lots of reasons to believe they say sustained in 2022. So we're quite optimistic about the underlying outlook for the ag economy, broadly speaking, in 2022 with strong farmer balance sheets, strong pricing, strong demand. Second, as we talked about the cost dynamics, we do think that there is a path to getting to a more normal situation or at least a less disrupted situation that will lead to some tailwinds on the cost side. We will get the benefit from the pricing actions we're taking right now and that we'll continue taking, again, more seasonal in nature given the type of business that we're in. But as we go into the new growing season in Brazil and the U.S., we are selling at higher prices. We have invoices and orders in hand right now at higher prices than we had -- than prices last year. We will raise prices in Europe in the beginning of the new year as that season begins, we will raise prices in India as we start that in Q2. So we'll start seeing that benefit of pricing buildup as well as we get into the new year. That combination of very strong end market demand, strong volume growth and that price cost balance shifting a bit. We think is very supportive of continuing the kind of growth that we've been targeting for every year, which is we think our business on any given year ought to be able to grow 5% to 7% top line and grow EBITDA 7% to 9%. And then with the way we're deploying cash to buy back shares, growing EPS at a premium to that EBITDA growth. So I certainly I would just point to, we think it's setting up well for a strong 2022. And not only do we think that we're putting our money where our mouth is, people should have seen there have been a number of form 4s from insiders over the past several weeks, myself included, who believe that the company stock does not reflect its full value at current trading levels. The company has an active share repurchase program. We are continuing to purchase shares as we speak. And we're very conscious and very confident in the long-term prospects of a high margin, highest in the industry margins, strong organic growth with a horizon to continue sustaining that well into the end of this decade, if not beyond.

Okay. And on a similar note, you mentioned buybacks. The leverage is low. You've completed a couple of recent acquisitions, i.e. appear and you've started to expand your fungicide franchise as well. So how would you prioritize cash use at this point? I think you've guided to buybacks at the midpoint, around $400 million. Is that kind of the cadence we should expect for the next couple of years?

That's a cadence you should expect for this year. I think we've done -- through Q2, we've done about $100 million in buybacks. So there's capacity to do about $300 million this year. And look, when we look at buybacks. Our cash deployment strategy is quite simple. We fully fund organic growth. Anything -- it's small technology-driven inorganic opportunities. Everything else that's left goes back to shareholders as dividends or largely share repurchase. And that's exactly what we've been doing for the past 3 years and we'll continue to do. We are limited to how fast and how quickly we can do that by leverage. We have -- we do value an investment-grade balance sheet. We think access to commercial paper is important for -- it's the most cost-efficient and most flexible way to finance working capital and as a structural advantage against some of our non-U.S. listed competitors. So it's been a very good tool that we want to protect. Only 2 out of the last 15 quarters -- or last 12 quarters, excuse me, have been in line with the metrics that a specific quarter that we really want to be at for our balance sheet. So we have to be mindful of keeping the leverage in a reasonable place, while at the same time, keeping that discipline on both the balance sheet and our cash flow to keep directing cash towards repurchasing. So this year, I think the $400 million midpoint is a good number to be thinking about. As we go into next year into 2030 and beyond, certainly, we're going to continue growing our dividend, but the dividend is a reasonable use of cash but won't grow that year-on-year. It's not a substantial growth in cash use because we're buying back shares against any increase of dividend. So any increase in cash flow in the absence of organic or inorganic growth opportunities is going to be an increase that goes to share repurchase. So I think that $400 million is a low level if you start looking ahead to 2022 and '23.

Great. That's really good detail, Andrew. Appreciate that. I think we're slightly over time. So why don't we leave it at that for this presentation. I hope you have a good rest of your day, everyone. And thanks, Andrew, and thanks Zach as well from FMC. Good luck with the rest of the year, and we'll speak to you again very soon.

Sounds great. Thanks, Eric.

Thank you.