FMC Corporation (FMC) Earnings Call Transcript & Summary

All right. So Megan, can we go ahead and get started then or just give it a few...

Yes. I think go ahead and get started.

All right. I think we have some additional people filtering in. I'll at least get started with the -- so my introductory remarks here, I just wanted to say welcome to the Seaport Research Partners Exchange Call. It's part of our Chemical Cornucopia Event this year. I'm Mike Harrison. I'm the senior chemicals analyst here at Seaport. I want to thank everyone for joining us today to discuss FMC. Very pleased to have CFO, Andrew Sandifer, with us today; as well as Zach -- Zaki, who recently took over Investor Relations. The format that we'll plan to follow today is about 15 -- or sorry, 20 minutes on recent trends, 20 minutes on some longer-term opportunities and more strategic questions, then we'll try to reserve 15 to 20 minutes for questions from the investors and the audience at the end. If you would like to ask a question, you can use the Q&A function at the bottom of your Zoom screen there. The chat function will also work. Megan and I will be monitoring that. And then there's also a raise hand function, and you'll be recognized and you can ask the question live. If all else fails, you can e-mail me a question at [email protected]. This is the first meeting we're doing in this series. So I'm hoping that we get through with all the technology working in our favor. FMC is a company that we see as a long-term core holding, given the secular trends around crop protection chemicals and the strong new product pipeline that we think points to several years of consistent growth to come. The company has recently been leveraging new formulations and accessing new markets, although costs have been a headwind, which we'll get into presently. So with that, thanks again, Andrew and Zach for joining us today.

Our pleasure. Thanks, Mike. Good to be here.

So the first question I wanted to ask is kind of on the cost front. I think of FMC is a company that has pretty good visibility on cost, sometimes as much as 6 or more months out into the future. So you've been seeing this inflationary dynamic coming for some time. Can you walk through how you guys have seen raw material and freight and logistics issues playing out relative to your expectations?

Sure. Look, I think we may have been a little early calling out the issues compared to some of the others in our space. But certainly, if you've looked at any of the results or the conversations from many of our peers, broadly speaking, particularly in the Ag chem space, everybody has been seeing a step up in costs. And when I say cost, it's cost broadly, it's active ingredients. It's the raw materials that go into formula into synthesizing and manufacturing active ingredients, it's formulation ingredients, it's packaging, it's logistics. And Mike, I think to your comments, yes, certainly, given that our inventory turns about twice a year, particularly for active ingredients and intermediates and the things that go into making active ingredients, we tend to have a pretty good 4- to 6-month out view on costs because what we're buying today, by the time it makes it all the way through a multi-stage manufacturing and down to being a formulated product that gets sold and flows into the income statement, as costs that you won't see until Q2 next year, quite honestly, at this point. And now things like packaging move through a little quicker and certainly, logistics are much more real time. So in the August call, we saw this next surge step-up in cost inflation coming, called it out. And certainly, that led to a change in guidance and talk some more about some of the moving parts there later. This is interesting. But on the cost side, look, the cost dynamics are such that, this year, we're facing about a $150 million headwind of EBITDA from costs. Of that, COGS is about $100 million to $110 million. And of COGS, the biggest chunk by far are raw material and active ingredients -- for active ingredients and intermediates. And that's a place where it's not just base level inflation, it is a combination of input costs further back to the chain going up, but it's also -- a big piece of that is supply chain disruptions and availability, right? Where we've done a lot into building alternate suppliers into our supply network over the years. And when you shift volume from your preferred Tier 1 supplier down to your Tier 3 supplier, because your Tier 1 supplier doesn't have capacity available at the moment, whether that's COVID-related, or dual controls in China, or pick your disruption, you end up with a pretty substantial cost headwind from just supplier mix. So there's absolutely a piece of what we're seeing that's underlying inflation, but there's definitely a bigger piece, particularly in the active grid space, that's around supplier mix and supplier availability. I'll give you an even more tangible example, which is in plastic packaging. It's a meaningful cost down before us, but it's not anywhere near on the scale of active ingredients. But the base resins, polyethylene, polypropylene and [indiscernible], seemed to be coming off and easing off a bit. Prices of packaging for us are not going down, and it's, again, a supplier availability piece. While resin costs might be going down, the suppliers that we'd normally do business with and have the most volume leverage on have not been able to meet our needs. So we've had to move to second and third tier suppliers where you're paying a significant premium over what our normal costs are. So I'd be very cautious to use the word transitory, but certainly, there is an element of this cost inflation that I don't believe is permanent. I do believe that there -- as supply chains -- industrial supply chains broadly start normalizing after all the whips that we've been seeing with COVID and other related disruptions, Suez Canal getting blocked, Texas freeze, dual controls, pick your disruption, that there will be some normalizing of supply chains, and we can get back to a little more predictability. May not ever look like 2019 or 2018 did, but it shouldn't be as volatile it is now, and that will allow us to sort of improve the supplier mix portion of the cost equation, certainly.

I did a plant tour recently, and they were saying that they typically ship in white buckets and they've had to switch to black buckets because that's all they could get from their supplier. And they were apologizing to their customers. And the customers said, "We do not care what color the bucket is. As long as you're getting us the stuff in the bucket, we're good." I'm curious just to kind of drill down a little bit more on this cost issue and the visibility that you guys have. Do you still see some risks out there that inflation could worsen? Or are you starting to get some visibility that your costs are peaking? And as you mentioned, in the case of polyethylene, polypropylene, maybe things are showing signs that they could start to come off soon?

Yes. Look, if COVID has taught me anything, is that to approach forecasting with a bit of humility. So I will say, certainly on our longer lead time and longer flow-through items, like active ingredients, intermediates that are used to make active ingredients and other raw materials of that type, we have a longer line of sight. Costs are still going up. We are optimistic that things are at peak or reaching peak. But I think it's too soon to call whether or not there will be an easing in the second half next year or not. Certainly, in the first half of next year, we know in that -- for that biggest cost category, we will have the sustained cost headwind. For things like packaging and other ancillary supplies, logistics, we are seeing some positive signs here and there. I would not call the turn just yet, but I would say there are at least reasons to be optimistic. So I think what we would say at this point, as we're continuing to look ahead to next year, we absolutely expect that there will be sustained cost headwinds in the first half. And the second half right now, it's too soon to tell.

And then in terms of availability, it sounds like you guys took some steps. You guys had some supplier issues going back a few years ago, particularly in China. And I think you took steps at that time to expand your supplier network, qualify some new suppliers. But what other steps have you taken to kind of overcome these availability issues?

Yes. You're right, Mike. This is something that we and our industry have been wrestling with for several years, starting as far back late 2018 going into 2019 with Project Blue Sky in China, where there were pretty indiscriminate shutdowns of entire chemical parks for periods of time. We had started on that journey several years before that, but certainly took on greater urgency after that. And then before we fully recovered from Project Blue Sky, then we had COVID. Then we've had dual controls and other disruptions. For us, what it's meant over a very long period of time is making sure we're not single-sourced on any critical material, having multiple supply points. And this is complicated in our industry because often your registration for your product, your license to sell in a specific country is often tied to the location of manufacture of the active ingredient. So to get a second and alternate site registered can take some time, in some cases, years depending on the country. So this is something we've been working on for a number of years, where we have some resilience built into the network where we can use multiple points of supply. We've also been looking very critically on how we manage inventories, where we keep product, trying to get things closer to end market earlier so that you have less risk of logistics disruptions or delays. I remember we've had, in Q4 of last year, we had some pretty significant logistics disruptions in the United States, for example. So that's been a big piece of it. And then just we have built some confidence -- some significant confidence in our supply chain on managing movement of materials on a very short interval control basis, down to during the peak of the pandemic, managing truck routes around checkpoints and across borders in different countries, both in Europe and in Asia. So it's a skill set we would love not to have to use quite so much. And certainly, things have improved immensely in the past 12, 15 months from the depths of the pandemic. But it is a part of the resilience we've been able to built into the supply chain to where we really haven't had any significant loss of ability to supply customers as needed throughout the whole of the pandemic and before.

You mentioned very briefly the dual control situation in China and kind of the power curtailments. Maybe talk a little bit about how that's impacting your supplier network? I think that, that's still, even after all these actions you've taken, a pretty important region and location country for getting a lot of your raw materials?

Absolutely. Look, we're in -- in the Ag chem business, no matter what you do, you're going to be exposed to China as a supply source. If you go far enough back in your chains, so much of the chemical -- fine chemical and specialty chemical infrastructure that we piggyback on and used -- our downstream taking products off of is based in China. We have done a lot in the past, half decade, to reduce our reliance on China. Look, earlier in the 2010, 2012 range, FMC was probably 90% dependent on Chinese suppliers. We had a very leveraged manufacturing -- outsourced manufacturing model using a network of tolling partners. Through a series of acquisitions, first, Cheminova in 2015 and then the DuPont assets in 2017, we've brought more production into in-house, into directly-owned active ingredient plants. We now have directly-owned active ingredient plants in the U.S., Puerto Rico, Denmark, China and India. So a broad base as well as still a significant network of toll suppliers. We also have broadened our network of toll suppliers to where -- yes, we have significant partnerships in China, but we also have significant tolling partners in Vietnam and Thailand and Mexico, even in Western Europe. So we have really worked hard to diversify that. We brought that dependence to China down below 50%, approaching 45% now. But again, there is no path to 0 dependence on China in the next decade. Decades of chemical infrastructure investment have gone into China. It's a critically important country for the chemical industry in terms of base supply, and will continue to be important to us. What we've wanted to do is, since we discussed a moment, have built some resilience and some backup supply within the network and reduce that dependence, complement it with the ability to produce elsewhere. And I think certainly, as we're introducing some of the new active ingredients, the fundamental new active ingredients we bring to the market, we are generally locating that manufacturing outside of China. So specifically, like Isoflex, our new cereal herbicide, that we launched in Australia this season, We're manufacturing in India. Now if you go -- some of the trace raw materials may be linked to China, but the actual active ingredient manufacturer is in India. So again, just continuing to try to diversify. But again, there's only so far you can diversify away from China in the chemical industry.

And I guess in terms of the trends that you've seen with the dual control issues there, has that worsened? Has it gotten more manageable or maybe easier to plan around? Or is it still pretty uncertain?

Look, I think there's a significant amount of uncertainty right now with dual controls, but also in recognition going into the winter -- to the Olympics and the Chinese New Year holiday, right? So Q1, typically within the Chinese New Year, there's almost always disruptions, both from just the vacation period, but also just from emission control actions that are taken. And with the Olympics, certainly past Olympics in China, they've done some broad shutdowns, some curtailments of activity to control emissions. To date, we've not had any significant disruption in our manufacturing network. And we continue to be able to meet all of our customer needs. But we are very much planning carefully around Q1. And that's a part of the reason we had a bit higher inventory at the end of Q3, and we'll probably carry a bit higher inventory at the end of Q4 just to make sure we have enough flexibility should there be any disruptions through that period. Beyond that, I think the government is becoming a bit more transparent in China on how they're managing those tensions. And over time, I think like many things this program gets more fully implemented in China, it will become more clear. I think it just caught the industry a little bit by surprise how quickly it became a choke point this fall. But hopefully, there have been some encouraging data points coming out of China, particularly on restoring levels of coal inventory at power plants getting back because at its core, yes, there's an emissions control on this, but a lot of this was rationing of energy and a direct policy choice by the Chinese government to prioritize consumer use of energy over industrial use. So as we get a little more buffer back into the particularly electricity generation in China, that will, I think, help normalize things or at least reduce volatility a bit. And again, there have been some encouraging data points in the last week coming out of China in that regard.

I wanted to shift over to pricing. I think there was a little bit of a misconception that FMC was going after volume over pricing as a broad strategy. When I look back at that comment that you made back on your Q2 call, I believe that you guys intended to apply that comment to a specific subset of high-margin products in emerging markets but it was selectively -- it was taken differently. So maybe help set us straight on how you guys are approaching pricing and how you're thinking about pricing and balancing that versus your longer-term geographic expansion goal?

Sure. Yes, I'd be glad to. Look, certainly, we acknowledge -- we were -- obviously, we were not as clear as we could have been in communicating some of the changes in our guidance on the Q2 call, because the message did get garbled in multiple ways. I mean the real change in our guidance in August was a reduction in full year EBITDA guidance by $50 million on -- in the face of a surge of costs. That was the fundamental change in our guidance. Now we're one of the few, if not, the only companies in our sector that gives forward guidance on drivers of earnings change quantitatively, right? So we also adjusted our forward-looking bridge on price volume and cost, for example, at EBITDA. We did make some other changes there, and that's what sparked I think, some of the discussion. I think one of the things that got missed there, we did lower our expectations for price benefit in the full year at the Q2 call to reflect what we saw out in the marketplace and the timing of how pricing works in our industry. But we also raised substantially the EBITDA contribution coming from volume. And it's important. I think what was lost in a part of this discussion is while we raised the contribution to EBITDA growth from volume, we did not change our outlook for revenue growth from volume. What it was is we were seeing a much stronger mix. And to be very clear, mix benefits flow through volume in our bridges. So we were seeing a much stronger mix benefit from the higher growth of new products, particularly a bunch of new products we've introduced this year as well as the faster growth of higher -- more differentiated products like the diamides across the globe. So I think there was a misunderstanding of, hey, we've adjusted our pricing expectations for a number of reasons. At the same time, we are getting more value out of the volume that we're driving in terms of growth. But revenue growth driven by volume didn't change, the EBITDA that was generating did change. So when you think about pricing generally for us, what's different about Ag chem versus other chemical businesses, is that we are tied to the Ag seasons. It makes no difference if we change prices in the winter time and not selling season on products because if you're not selling any units, there's nothing that's hitting your P&L. Your window to set price is at the beginning of the selling season. And it is traditional in our industry that you typically set prices at the beginning of the season and you live with them. Now on a rare occasion, you will see mid-season price increases. We did one in the U.S. this year. You will see there's an exception in Brazil, people will update their BRL price list on a more regular basis for movement in the currency, but not for cost. Our products, our specialty products, they're sold on a value and use basis where you establish -- essentially a value share for the value of your product gives to the farmer, protecting and enhancing yield. There's no discussion of cost. There's no observable index. If a customer wanted to say, "Hey, what's happening? I want to understand what's going on in the cost of making Rynaxypyr?" Not much you can do to do that. Now there are certain classes of Ag chems, particularly the nonselective herbicides, think glyphosate, glufosinate, dicamba, 2,4-D, that have much more observable impacts in case of glyphosate, yellow phosphorous, well-informed customers know the price relationship between a formulated glyphosate product and raw phosphorus. And it's much more of a cost-plus kind of discussion. That's not our business. Our business is highly specialty products that the cost relationship is not clear. So you want to be careful and thoughtful about how you reset pricing. So in addition to having the seasonal element, which is -- the only time you really can get pricing is when they are in the selling season, and that's when you actually have the volume that apply against the new price. You also want to be -- the pricing is never set on a cost basis. So when you have that reset of the price, you got to think about how you have that discussion with the customer and get that price to flow through. So it is -- at this point in time, we're going into new growing season in Brazil. We're in the stocking season in the U.S. We are selling at substantially higher prices than we were earlier in the year, much as we had planned for this year to be and we're going to continue raising prices as we go around to the new season. So in Europe, Q1, Q2, we will have -- we will be selling at substantially higher prices. We are announcing as we speak, price increases in Europe. As we go into India, another key market, that's really a Q2, Q3 time. Q3 is not a peak season for anywhere. It's a really tough time to raise price. And even if you do raise price, there's not as many units to apply it against so you don't see a lot of pricing traction in Q3. And that's pretty much what we had guided for the quarter and pretty much what was delivered. The other thing that I just note about pricing in our industry, I think it's important for everyone to understand, because it's not cost plus, the pricing tends to be pretty sticky. So you mentioned, Mike, we had some disruptions in 2019 that led to some pretty substantial cost headwinds for us in 2019. We raised prices to try to recoup some of that. The following year, in 2020, we had a cost tailwind. We still raised prices in 2020. We didn't give any of it back, right? So while there is a lag, and there's absolutely a lag because of seasonality, we will continue moving prices. We will -- and in a world, if costs flatten off, we will catch up. But even if there is a pronounced downswing in cost, there's nothing that suggests that we're going to give that price back. So it will take a little time to recoup. But that's something we're confident over a long enough period of time, we will restore that hit the margin by bringing price to offset the cost.

The guidance that you guys provided for Q4 was that you expect 4% year-on-year pricing increases. Are there risks to that number? Or are those actions pretty much fully in place at that point? And maybe shifting to 2022, is that 4% number? Is that a good place to start for how we should think about pricing rolling in for '22?

Yes. So we have made -- we have implemented significant price increases in the U.S. and Brazil that are consistent with our guidance. Actual price increase, when we report pricing, that is the way we typically report it. It's a net price. It's pricing -- it's invoice price adjusted for changes in rebates, discounts, allowances. So we have guided to 4%. I think we're on track with that with the pricing that we've put in place, but it will depend on how things go with which products which -- because we didn't raise across the board. We raised product -- as we talked about, we're being trying to be a bit more strategic. So depending on which parts of the mix grow faster, there could be some variation in the exact amount of price that flows through as well as depending on what happens with rebates and discounts and certain other things that have other triggers attached to them. But I would say we feel very good about where we are in terms of moving invoice level price. As we go into next year, look, I would not annualize the 4% Q4. We've not guided next year yet. I think it certainly sets the stage for continuing good price increases. But again, our pricing is seasonal by the growing season in the market we're going into. Brazil and the U.S., they're good drivers for that level of price increase. The specific price increases that we put in place in Europe and in India, will get determined as we move closer and how those flow through. It doesn't mean you can just mathematically annualize where we are in Q4. What I think you should take from that is we are moving in an environment where pricing is very top of mind. We're not the only ones talking about it. It's been a very strong refrain across all of our peer companies. So we're expecting to be able to -- an environment -- that I don't know that customers are ever receptive to price increases, but it may perhaps less resistant in an environment where it is clear that there's cost headwinds for the industry as well as there are a lot of reports of concerns about availability or limitations on supply. So that's an issue that will also, I think, help support moving prices more quickly. So we'll be a little more granular on '22 pricing when we have the February call. I would just say that it is a clear priority for our organization to continue moving prices and continue to try to recoup this COGS headwind as we move into '22.

All right. Maybe moving on to some of the more strategic longer-term questions that I had. The first one is on Latin America. People tend to think about Brazil when they think of Latin America. You mentioned on your last call that Argentina is now your fourth largest market in the world, which is incredible to me. Chile, you mentioned, has doubled in size in the past year. Mexico is becoming a very important fruit and veg market for you. Can you give us a sense of what has driven the success that you've seen in Latin America? And maybe how much additional market expansion could we see over the next few years?

Yes. So look, Latin America has been a great growth story for us for a long, long time. And it's certainly anchored by Brazil. But I think you're right to point to there is substantial growth outside of Brazil as well. Argentina, we made a series of moves several years ago to reconfigure how we go to market in that country. And it allows us now to access a much broader set of growers and geographies within Argentina. And we've grown that business to north of $200 million this year. So it is in that #4, #5. There's a bit of jockeying among countries going on right now. So nice to have a little bit of rivalry there. But Argentina is becoming a very large and important market for us. And it's been driven by a combination of legacy FMC products. Sulfentrazone is an important product line for us in Argentina, but particularly the diamides. So I think not dissimilar from the story with a lot of the growth benefits of having very strong performing products, having the diamides as open doors to bring other parts of our product portfolio to customers. And now as we start introducing new active ingredients, I think specifically Isoflex, our new cereal herbicide, that had -- we have some very good expectations for that product as it gets introduced in Argentina in the next couple of years. So it's been -- Argentina has been a great growth story, and we think that will continue to be a good growth story. Chile, at smaller scale, but significant growth there. And again, it comes from really restructuring the way we go to market. and increasing our ability to reach farmers both geographically and with product breadth. The other geography that often gets overlooked in Latin America is Mexico. And while Mexico has been a more stable market in terms of growth, it's a very high profit market for us and a substantial one because of the high amount of fruits and vegetables and other specialty crops. So it's a particularly valuable market for the diamides and is a place where some of our new products will also be very attractive. But again, Brazil, still the largest market in the world and the most significant driver in Latin America. I think that combination of product line as well as market positions that we have and with our historical strength in sugarcane and cotton and some of the other more niche crops and our growing presence in soybeans really has a lot of opportunity to continue growing. So I continue to expect Lat Am to grow above the overall average. I mean our fastest-growing region has been Asia, but Latin America will be a significant contributor to growth and continues to be a key platform for the company through the rest of the decade and beyond.

You mentioned the diamides here as kind of the key product line, Rynaxypyr and Cyazypyr, which are insecticides that have pretty broad applications. Can you help us understand what it is that makes those products work better than alternatives? And kind of where are we in the process of accessing all the potential geographies and crops and different applications for the diamides?

Yes. So look, the diamides are a better mousetrap. They are fundamentally better performing than other chemistries. They are more targeted. They're particularly great for caterpillars and other chewing pest. They are -- they have a biological activity that has less off-target impact than many of the traditional product used for these uses. They are systemic in nature, meaning they're absorbed in the plant. So they provide very, very long-lasting control. An insect comes up, starts to eat the plant, ingest Rynaxypyr and then dies. So a very, very good length of control and very limited off-target issues. They don't -- it doesn't spread. It doesn't go up. It doesn't kill things that aren't intended. So when you compare to particularly organophosphates or carbonates, there are 2 classes of chemistry that diamides have been taking share from for several years, less harsh, more targeted, more effective. So I think we're still in the early to mid chapters for the diamides. We still have more geographies where we've not fully penetrated. So we referenced in the call some strong growth in South Africa, and that's a place where you got a new registration, which is allowing us to sell into other applications there we haven't been able to before. Even in India, where -- look, we're tied to our #1 position in the Indian market. It's a very fragmented market, but we and UPL are tied for #1 there. We've grown substantially, and it's a big part of our diamides franchise. But we have a new partnership with UPL that instantly doubles our commercial footprint in India, where they have just flat out presence in geographies and crops that we don't have. So rather than duplicating -- trying to duplicate their investment, we will piggyback. And we'll talk a bit more about that if there's interest around the partner strategy. But from a commercial perspective, there's still more to do in terms of getting broader geographic access and working with partners to both accelerate the ability to reach the market, but also to bring different formulations to the market. And that's the other trick here. We're at the -- when we bought the business and we got into it, we were selling basically single products, straight formulations of Rynaxypyr or Cyazypyr. We have started adding now value-added formulations. And certainly, historically, FMC's strength has been around formulation innovation. We've built a nice capability and, in large part, added to it with the acquisition of the DuPont R&D activities. But we have a long legacy of being able to take active ingredients and continue to build differentiation and maintain value of them through formulation. And we've had 2 really great launches in the last 2 years. One is Vantacor, which is a high concentration form of Rynaxypyr that was introduced in the U.S. and Australia this year, a really, really positive response. The other is Elevest, which is a combination of Rynaxypyr with bifenthrin. Bifenthrin has a different profile. It's a much faster acting insecticide. So you see immediate kill from bifenthrin. So if you have an active infestation, there is some satisfaction from spraying and immediately seeing bugs die, and then Rynaxypyr gives you the sustained control. So it's a great value proposition and a great mixture. And it's a great example of what we can do and what some of our partners will be doing with formulating Rynaxypyr with other active ingredients to get a different balance of properties that allows you to fragment the end market where you're taking a targeted product to a specific application and a specific crop that has a value rather than selling thousands and thousands of gallons of the same exact single product. So that formulation, that legacy skill of FMC to do that is a key part of that next phase for the diamides, continuing to create differentiation and converting to bring products that have added value to the market rather than just simply competing on price for volume of a single -- a standard formulation.

Yes, I think you covered a couple of things I wanted to ask about, one of them is the formulation expertise. But the other area I wanted to dig in on a little bit is if I go back a couple of years, you talked about the patent protection around the diamides business. Kind of underscored that there's a whole suite of different patents, a very complex production process that probably means that competitors would be better off working with you and licensing the diamides rather than trying to copy it or trying to get around the patent protection. Can you maybe just give us an update on kind of where we are in terms of those commercial licensing partnerships? And how much bigger of a contributor does that become in '22 versus '21?

Yes. So look, I think the whole management of the diamide portfolio is obviously a critical area for FMC, given it's important to our overall results. We gave an update on the August call. I kind of got lost in some of the noise around pricing. But I think if you look at Slides 11 through 20 in our Q2 earnings presentation, give you a good update on where we are with the patents, the registrations, other data protections and how that time line works. So I won't rehash all of that here, but just to say that we are very clear that it's mid-decade before there could be legal entry into Rynaxypyr market, in particular, from competitors. And we've taken this partnership strategy long in advance of those patent expirations, whether composition of matter of process patents or regulatory data protection to really expand the use of the molecules and to your point to get people into the market with us before the patents expire and lock up a long-term supply agreement with them as we move past that time frame. So we can really manage through the move from patented to non-patented. So to date, we have 5 global partnerships, about 50 local partnerships. We're still in discussion -- continue to discuss another 10 to 15 local partnerships. The partnership business was about 40% of our diamide sales in 2020. It will be a similar level this year. So the partnership overall right now is growing at similar rates to the overall diamides business. It is -- the partnership strategy has some very strong attractiveness from, again, the ability to penetrate more quickly to get people in the market now and particularly focusing on bringing more value-added formulations into the marketplace rather than just competing on straight Rynaxypyr very simple formulations. And again, the partnership also bring some other benefits, particularly the UPL partnership, our latest partnership. It's the first time we're partnering with someone to manufacture the diamides. So not just yet, but starting late next year and into the following year, UPL will start manufacturing the diamides for us and for them in India using our process -- with the oversight of our process engineers to -- which gives us a third manufacturing point for the diamides that helps -- we currently manufacture them in China and the U.S. This will give us a third source, again, building on that resilience and multiple points of supply in the network. It also gives us the ability to partner with look, UPL is a world-class manufacturing organization. They make very high margins, selling off-patent molecules in part because of their manufacturing prowess. And while we're pretty proud of what we do, we recognize good skills when we see them. So both from having a partnership with someone who we think can bring valuable things to the manufacturing process, I think there's also a statement there that UPL, who is a very capable off-patent producer, chose to partner with FMC rather than trying to go around the process patents. And certainly, India is one of the countries where the composition of matter patent expires earlier. The process patents continue well into the second half of the decade, and UPL chose to partner with FMC rather than try to go around, and they are one of the most capable off-patent chemical producers in the world. So we'll leave that for people to draw their own conclusion, but we certainly feel that's a good validation of the strategy, and we're excited to have them as a partner.

Just a quick follow-up on that. When you guys come out with a new formulation like Vantacor, does that have a separate patent around it and therefore, no one else can make a similar formulation?

There can be patents on formulations, yes. Vantacor I do not believe is patented, but there are some know-how pieces to how Vantacor is made that would be difficult to replicate. But yes, there can be patents for formulations, absolutely, which is another way we can extend the life cycle.

Right. The last question that I have before we open it up to questions from the audience. And again, you can use the Q&A function or the chat function, or shoot me an e-mail if you'd like to ask a question. But looking at the new product pipeline, you guys recently did a virtual technology update that kind of gave this $1.8 billion to $2.1 billion in revenue from new actives. It seems to me, at least, like that's a conservative number, not only because you guys probability adjust the number, but also because it really only includes your targeted market and you guys have shown over the course of your history that you're very good at finding new applications, new geographies to expand in over time with new actives, with new formulations. So maybe my way of asking, do you share my view that the technology pipeline is a really underappreciated aspect of FMC's growth story and really of the valuation of stock?

Yes. Look, I do, Mike, think that the new active ingredient pipeline is not fully reflected in our valuation. I think if you look to FMC, through the end of this decade, we certainly expect the diamides to continue to be a major contributor to growth in the value, but they will obviously be a maturing franchise. However, as that franchise matures, we have this building wall of revenue coming from introducing these new active ingredients. And it is a build. So as you referenced, we held an investor event virtually last November that went through in great detail, each of the 11 active ingredients we're introducing over the next decade in terms of technical information around it, but as well as giving essentially a ramp of the revenue. And it's really driven by how the -- not only finishing the development of the molecules, but also how registrations time and your introduction by country. So folks are interested in seeing how that revenue builds over time. And we did break that out for each of the major molecules in that November 2020 presentation. So as we think about that pipeline, look, we valued that pipeline. I do think relatively conservatively. It is, as you mentioned, our methodologies. We only include in that value, that $1.8 billion to $2.1 billion by 2030 and $3 billion in peak revenue of the pipeline by looking at the applications we are considering today, both from a country perspective and a crop and pest perspective. I can tell you, we look at Isoflex, our new cereal herbicide, which we launched under the Overwatch brand name in Australia this year. Our estimate that's included in that $1.8 billion to $2.1 billion is about $400 million to $600 million of sales of Isoflex. The introduction in Australia has gone so well that a couple of other geographies that hadn't initially considered introducing the -- that active ingredient in their regions have changed their viewpoint. So for example, the U.S. is not included in our forecast for Isoflex. And obviously, there's opportunity in cereals markets in the U.S. that might be of interest. And as we get more comfort with the active ingredient and you see more real-world results with it, I do think it opens the door for potential additional geographies or additional applications that aren't considered in our estimates. So obviously, there's lots of uncertainty in an R&D pipeline. But certainly, one thing about Ag chem, because of the long regulatory time frame, a lot of the development time. The last 3 to 5 years is really working through registration data not efficacy data. It's all around toxicology and all the things you need to do to get a label and agreed to instructions on how to use a product. We have pretty high tech confidence in the products working. It's just the time it takes to get them to registered and ramped up in a market and with what restrictions or controls around them. So that risk factor becomes tiny more than efficacy of the molecule, and it's just a matter of building up how those curves build over time. So I think, again, if you think about the longer-term dynamics for FMC, we see a future through -- well through the end of this decade of sustained organic growth well above the market, both from the continued contribution of the diamide franchise, but certainly complemented, particularly as the diamides mature by the benefit from the rapid growth of these new active ingredients. And again, the introductions we've had to date with Isoflex and now early stages -- very, very early stages with Fluindapyr, our second new active ingredient. We're really launching minor launch this year and some further launches in '22 and '23. We'll start to see that accelerate. So folks really have an interest in digging into that. And certainly, it should still be on our website or reach out to Zach, we can get to the November 2020 presentation that has a lot of information in it.

All right. Well, with that, I do have some additional questions myself, but if you look at the bottom of your screen there, use the Q&A function or the chat function, if you want to type something to us. Hit the raise hand if you have a question that you want to ask. Just checking my e-mail. I don't see any questions. Maybe while we're seeing if there are others who have a question, maybe a good chance to just kind of build on that new product pipeline question, which is -- there's a lot of focus on the diamides and insecticides portfolio. You guys also have a pretty strong herbicide offering. You've been working to expand your presence in fungicides, which I think is -- you're kind of underrepresented in. Is the technology portfolio going to get you where you want to go in terms of that additional balance in the portfolio? Or in particular, if we think about fungicides, is that an area where you guys might be looking at some potential bolt-on acquisitions to expand your presence?

Yes. Look, you're right. The 11 active ingredients that we're pushing through our current active ingredient pipeline, only 1 of them is a synthetic insecticide. The rest of it is herbicides and fungicides, in part because we're overweight insecticides and we're significantly underweight fungicides. So absolutely, fungicides are an area for both internal development. And if where we could find products to buy, we'd be more than happy to put money to work. We did -- we -- Fluindapyr, the fungicide that we're currently beginning to launch, was developed with a partner. We bought out that partner last year to take sole control of the molecule because we're feeling very optimistic about it prospects. So if there were opportunities to buy out right a fungicide, we bought a couple of fungicides from Bayer back in 2011. We would be glad to do that. We are not waiting around. Obviously, we're pushing on internal development as well. So fungicide is absolutely an area of strong interest. I'd also say biologicals in the plant health space generally are a place where we've done a lot of organic work. We're continuing to do a lot of internal work. But that's a place as well if we would be very pleased to add to the technology portfolio. We can find high-value technology-adding acquisitions. Those tend to be relatively smaller businesses. Just by the nature of biologicals, which tend to be smaller product lines, they tend to be a little more fragmented, a little more targeted, such that these are not huge acquisitions, but they could be very helpful in continuing to build out that platform, which has been -- although it's still relatively small in the grand scheme of things at about $200 million at our $5 billion sales, that plant health platform is a very strong long-term strategic interest to us.

Yes. I actually had a question on plant health. It got called out as a strong grower last quarter. And it's part of -- I think of it -- maybe correct me if I'm wrong, but I think of it as part of this biological opportunity where you guys are using fermentation and maybe some other different types of products in order to build that opportunity? Maybe talk about how that's shaping up relative to your expectations? And maybe I mentioned Chr. Hansen and some of the other work that you're doing on the biological side?

Look, plant health, which includes biologicals, some specialty nutrition and seed treatment businesses product lines for us. It's about a $200 million business. It''s been growing very, very strongly. We established several years ago a global R&D center in Copenhagen, Denmark to really be the base for that business. We've had a number of collaborations with Chr. Hansen on fermentation technology, now with Novozymes, looking at the use of enzymes as an active ingredient specifically. So more to come there in terms of new products to be introduced. But I think that broad space of biologicals, I think fundamentally, we think they are a strong complement to synthetic chemistry. They give you additional tools and additional options to help manage through the growing cycle your pests but also reached some goals on reducing the impact or reducing residuals or sort of the leftovers, if you will, from the growing process as products go to market. So you think of a high-value crop like berries, where you might apply fungicides multiple times in a growing season. You really don't want any fungicide residue when you're sending those berries off the market. So a biological product, which typically has a lower residual time is something you might want to use later in the growing season. So having that as a complement to synthetic chemistry, you might actually get a better outcome and also generate something that customers and consumers appreciate from having less residual chemical when the product goes to market. That platform, particularly strong growth for us in Asia and Latin America, but some continued opportunities in the rest of the world. And I think it's something where, both is an area of M&A interest, but also an area we're continuing to invest significant internal R&D dollars. There should be more growth and a continued part of that overall balancing of our portfolio, making sure we have those complements to synthetic chemistry.

All right. We did have a question come in from the group here. Do all of these partnerships increase the risk of resistance to FMC's relatively mature active ingredients? Does FMC have visibility or control into their partners' sales volume strategy?

So resistance -- in terms of resistance to the active ingredient, these partnerships do have some elements in them that have requirements around how the products are formulated. One of the concerns you have with potential breeding of resistance is using a dilute solution where you underdose and you condition an organism to be able to tolerate the active ingredient. So there are some requirements around formulating standards and the minimum dosing. I think, if anything, by having a stronger collaboration with partners directly, we have a better line at sight and a better ability to control that. than if we -- if the market were to fragment more rapidly with competing suppliers who might try to go off and do things like under -- use a very low concentration formulation as a cost -- as a cost-cutting mechanism, they could help engender some resistance. We've not seen any evidence of resistance to date. It is something we monitor very, very closely. And we do work with our partners both on requirements around formulations, but also on some general stewardship topics on how you manage the products and how they get used to help limit any risk of resistance.

Another question that I had for you. I still -- I think that's the last one we have from the audience. It's on India, which I think is -- I don't know if it's #2 or #3 market for you guys? You mentioned the monsoon season was not totally favorable for you?

Yes.

Maybe talk a little bit about kind of near-term thoughts on India and maybe also touch on longer-term opportunities, given that there's some modernization going on, some farm consolidation and maybe leading to greater use of crop protection chemicals as you get larger and more mechanized farms?

Absolutely. Look, India is #3 for us. It's been a tremendous growth market, particularly strong with the diamides because of the high percentage, specialty crops, fruits and vegetables, chillis, peppers, pulses, other kinds of high-value products that are very useful with the diamides. As I mentioned earlier, we are roughly tied with UPL for #1 in that market. Still a very fragmented market. But depending on whose market research you look at, we're -- we are tied at #1. Fundamentally, India is a very attractive market. It's the biggest area of aerable land outside of Brazil, but has significantly lower yields today than other -- than Brazil or the U.S., in part because of very small farm size and in part because of low usage of inputs, whether that's fertilizers or crop protection chemistry. With the growing demand domestically there as well as its strong export demand, there's a lot of potential for growth in India from driving higher productivity. Some of that will be mechanization. Some of that will be consolidation of farms. A lot of it will be introduction of continued -- of new technologies, because India today is still dominated by generic chemistry. I will say that while right now we've had tremendous success with the diamides, we've also been bringing through other parts of the FMC portfolio and seen some nice growth in crops like sugarcane, where we have herbicide and other insecticide offerings that are quite relevant in India that we have to be tailored a bit but are very -- not dissimilar from what we'd use in that -- in those crops in Brazil. So we've been able to grow there, and we'll continue to grow there with some of the legacy FMC molecules as well. So India, I expect to continue to be a strong, strong part of FMC's growth. The UPL partnership just helps accelerate that quite honestly. And then with the introduction of new formulations with the diamides and continuing to bring in other active ingredients from FMC's pipeline, we have a new rice herbicide that we should be introducing in the next couple of years, tetflupyrolimet, that will be of particular interest in the Indian market. It will take several years before it gets fully registered. But that -- watch for more, that's going to be a particularly interesting product in India for us as well. So I think a long runway for continued growth in India.

All right. I did want to ask just one last question on the cash flow front. You talked a little bit about some improvement in cash flow dynamics. I know 2021, for most companies, was a year when a lot of capital was getting tied up in working capital and inventories as you're working through this challenging supply chain environment. So maybe some of that unwinds next year. Some of the SAP-related spending is tailing off after this year. But with this additional cash flow, the balance sheet is in pretty good shape. I don't generally think of you as being in a position to go out and do big M&A. So I think my view is that most of this free cash ends up going to internal organic investments and getting return to shareholders. Is that the right way to think about priorities going forward?

Yes. Look, I think our cash generation this year, we're guiding $525 million in free cash flow at the midpoint, with free cash flow conversion from net income. It's essentially flat for -- versus the prior year if you adjust for certain timing items at the end of last year. We are seeing a little bit of increase in inventory as we talked a little bit earlier around some of the things we've done to build some resilience in the supply chain, dealing with short-term supply disruptions. Looking to next year, we would expect to grow free cash flow. We do expect to continue improving cash conversion as well. But I think to your bigger question, I think the bigger point, in terms of deployment of cash. Our policy is we fully fund the organic growth that's already built into the free cash flow number. Where we have opportunities to add new technologies, we will do that. In the past 2 years, we spent about $70 million on that kind of acquisition investment stuff. And then the rest of it, we return to shareholders through a growing dividend and buybacks. And in fact, if you look at this year, again, our midpoint of our guidance is about $525 million in free cash flow. We're going to pay about $250 million in dividends, and we expect to buy at the midpoint about $400 million in FMC shares. So more than 100% of our free cash flow going back to shareholders because, as you said, we do have a healthy balance sheet. And while we want to keep a strong -- a solid investment-grade rating, we have used incremental borrowing capacity as a source of cash to deploy, and we'll continue to do that. So we will use the free cash flow and the available borrowing capacity to target leverage to be able to reward shareholders and to compete against investment opportunities. If there's not an obvious or attractive small technology acquisition to do, that money will go back to shareholders. So that's been our policy for several years now. But I think just the math this year makes it, hopefully, very, very clear to people what the commitment is. If there isn't a compelling investment opportunity, we will use the free cash flow and the incremental borrowing capacity at target leverage to continue to reward shareholders.

All right. We have reached the top of the hour here. So I'll stick to our schedule and let everyone get running. But Andrew and Zach, I definitely appreciate your time today and all of your thoughtful responses to our questions. And thanks to all the investors who joined us as well.

Yes. Thanks, Mike. Thanks, everybody, for joining today.

Thanks, Mike.

All right. Take care, everyone.

Take care.

Thank you.