FMC Corporation (FMC) Earnings Call Transcript & Summary

Okay. Thank you, and welcome back. It's a pleasure for me to host FMC for this next session. I have with me up here, Mark Douglas, CEO and Andrew Sandifer, CFO. The 3 of us all share a similar problem in that we live somewhat close to each other, and we have homes that are infested with this moth called Spotted Lanternflies. And if you don't know what those are, that's great. But let me tell you, it's like a moth that moves in swarms, and they move in swarms by the thousands, and I saw thousands of them drop off of a tree, and they landed on my wife. And that became an absolute urgent problem to solve. I got some bifenthrin from FMC that I got online, completely took care of the problem and everything else associated with it.

He's a great salesman.

So it works, incredible. I got a full face respirator. I know I know how to use this stuff. But again, it's an incredible issue in our area in Pennsylvania and not too far from the PA border, where I live. So it's a problem, but they got a good product for it. But anyway, listen, we got plenty to talk about. And it's a pleasure to have you guys up here, tremendous activity in ag these days, and you got a really interesting platform that look forward to having a lot of dialogue with you here. Do you want to give us a few introductory remarks.

Well, just -- first of all, it's great to be here in person. Looking around the room, seeing people that we know, it's much better than being on the screen. I think the interactions that we've had today have been great. So thanks for hosting the conference. It's much better than looking on a screen, I can tell you. Listen, the world of ag is going through a lot of change. Most of you are aware of the raw material issues that we have, the supply chain issues that we have. And listen, they're not peculiar to any one company in the ag space. You see it across all different industries today. I think you set that against a backdrop that's robust. Soft commodity prices are at record highs, if not quite there, but pretty close. That gives us confidence that the marketplace this year and into the next year will be good from a demand perspective. So we've got a couple of competing dynamics going on that we're all dealing with. I think when you're a company like FMC, and you're really focused on technology and a platform that drives that growth, that gives us confidence that certainly over the next 5, 10 and plus years, that the growth algorithm for the company continues. So positive marketplace, but extremely challenged from a supply perspective. There you go.

All right. Very good. I'd like to start off our discussion with diamides. We have a large database of crop chems. And it's very, very clear to me that for the crop chems that go off patent, they tend to move more or less flat. They certainly don't plunge, and they tend to be more flattish. My question for you is what do you see as the 5- or 10-year outlook for your diamide franchise due to various things. You have a complex array of patents that -- and it's a complicated molecule to produce molecules. You compete against insecticides that are being scrutinized, some being removed from the market. And you've been aggressive about developing partners and going into this patent expiry with well-established plan. What do you think that trajectory looks like?

Yes. You think since we acquired the molecules back in the end of '17. We've grown the diamides franchise from what was just north of $1 billion to pretty close to $2 billion this year. So we've had those high single digits -- low double-digit growth rates. We think going forward, it's going to be in the mid-single digits to high single digits. It will depend on year-to-year. But we've built quite an array of mechanisms to ensure that as the insecticide market changes, and as you just rightly said, there are classes of older chemistries that are going to come off their regulations and be removed from the marketplace. It's not as if we're in a static market. You think of the growth of insecticides today, there are about a $15.5 billion market, 3% compound annual growth rate. By the end of the decade, you're at the $19 billion just in the market growth itself. So we feel very good about what we've put in place for the diamides. Some of you will recall, there is a vast array of patents, not only for the composition of matter patent, but more importantly, for how you produce the intermediates. So you can't make the final product without the intermediates, and we have a patent estate that runs through the end of this decade in some cases with process patents and manufacturing patents, that's 1 piece. The second piece is, we made a decision that we would allow competitors in the marketplace to have access to these diamides ahead of patent expiration, so that they can establish market spaces. And then we have contracts that go longer than the patent expiration with these partners, proving to be very successful. Out of our $2 billion business today, about $700 million of revenue comes through our partner sales. So these are with global partners. We have 5 of them. And then we have about 50, what I would call, localized partners for different markets. The rationale there is we offer them these products. They can then take our products, the base active ingredients. They can then formulate them with their own proprietary actives and go and take market share in spaces that we might not have market access to or we don't have access to those proprietary products. So we've built this model. It's playing out very well today. We expect it to continue, especially as we go through the end of the decade.

And either from your efforts or your partners? Are you moving into any new crops or new geographies that you weren't before?

Yes, certainly. The Rynaxypyr and Cyazypyr, the 2 molecules we're talking about, they're very much focused towards specialty crops. So specialty crops, there are hundreds of them around the world. And that game is all about gaining registrations. You can't sell without a registration on a particular crop in a geography. So we're focused on expanding the range of registrations, so that we can gain access to those other crops exactly as our partners are doing the same thing really.

And when it comes to like fruits and vegetables, every individual vegetable would be a different registration, correct?

You can have different registrations. You can have what are called label extensions. So let's say you're in Argentina, and you're on apples, you can get a label extension to go on to peaches or other crops. So it's quite a complex process in some countries, getting a registration can take 5 to 7 years. So it's a long haul process, but the fruits of that come through over many years because once you've got the registration, you're in that marketplace.

And how do you differentiate between the opportunity between Cyazypyr and Rynaxypyr?

Different molecules, different modes of action. Cyazypyr was the later molecule to be introduced. It has a slightly different mode of action in the sense of how it knocks down pests, the way it helps the plants survive any virus attacks from the pests. So we don't think -- it's a much more specialized molecule. Today, it's about a $400 million molecule. Rynaxypyr is in the $1.5 billion range. We don't think Cyazypyr will grow to be the same size as Rynaxypyr, but we do believe it can grow to certainly be in the next $100 million of stages, so $600 million, $700 million.

And how do you look at the growth of each of the verticals that you have? Is there a differential growth rate? I mean we're kind of highlighting your insecticide platform. Do you see more demand growth in insecticides? Is there more regulatory scrutiny on the older chemistries. They're more resistance that develop in insects faster than you would see it in a fungus or in a plant?

Yes. I mean, certainly, there are a lot of old insecticides out there that are coming under regulatory pressure. You see this every year. We believe that with the diamides and other technologies that we have in insecticides that we can take share from those older chemistries. Mother nature choose through chemistry pretty quickly. Fungus is the fastest one, then insecticides and -- sorry, insects and then weeds. So kind of in the middle in terms of how fast resistance comes, but that is certainly something that we spend a lot of time managing is the whole area of resistance. The one area that we're really focused on, and I talked about it in the last earnings call, is our plant health business, so the biologicals that we're now producing and growing. They are completely different technologies. They are derived from nature. They're not synthetic chemistry. They have different modes of action. They're produced differently. So they bring tremendous utility, not only stand-alone as biologicals, but in pretty sophisticated formulations with synthetics, where you can, first of all, lower the synthetic loading. So you're building a more sustainable platform, but also you're bringing in new modes of action, which helps break that resistance. So they're an important component, not only on their own, there are about a $250 million business today, our plant health business, but that will continue to grow, but they also enable the technologies that we have in the other spaces to grow as well.

Did you ask [Tina Fano] to mention her relationship with you guys earlier today.

I didn't know.

Okay.

I should have done though.

Is there a speed to market advantage of the biologics? Or is it really just complementary with synthetics? There could be a variety of benefits of going the biological path.

Yes. There's a couple of things that I would say are positive and some that's a negative that you can turn into a positive. The positives are, if you think of synthetic molecules from discovery to commercialization, takes about a 12-year cycle and some $260 million to $270 million of investment for 1 molecule today. When you look at biologicals, that profile changes. It can take 3, 4, 5 years to bring a product to market and the investment is in the $30 million, $40 million range. So the faster to come to market, they are cheaper to develop. However, you're not going to see a blockbuster biological like Rynaxypyr, why? Because they tend to be more highly focused, so you're focused in on a plant in a geography. And second, in today's world, a lot of these biologicals are produced from microbial activity. So microbes taken out of the soil, expressed through fermentation and then used as pesticides. Obviously, you just mentioned our work with Novozymes, where we're now looking at enzymes as pesticides. They've never been used before. That's a whole new stream of biologicals. But with that, many countries in the world will not allow microbes to be introduced into their environment that are not natural to that environment. So you may have a product that can be used in Brazil, but it might not be able to be used in France as an example. So you're going to have a much more fragmented market. Now some might see that as negative, we actually see it as positive. If you've got a truly global footprint, and you have market access, then you can use that to your advantage by applying technology in different markets to develop those products for that market.

If I could just add, I think from a capital allocation perspective as well the fact that the investment is smaller and more rapid in biologicals, let you diversify some of the development risk a little more rapidly, let you take a number of smaller bets that come to fruition more quickly, and then large traditional synthetic chemistry investments, which, as Mark mentioned, hundreds of millions of dollars over a decade. So it's a nice balance and complement from allocation of capital with R&D expense.

How do you protect your intellectual property on the biologics?

Same way you do on synthetics. I mean, first of all, you have traditionally a composition of matter for synthetics, you have an active, either Bacillus strain or another type of strain that you can patent. But I think the real value there is not just what that microbe is. It's how you ferment that microbe to express a metabolite, which is actually what you're looking for that has pesticidal activity, that you can patent. You can patent the process for it. You can patent the formulations for it. So kind of like we've done with our synthetic chemistry, you build a whole fortress around the biologicals the same way as you would do with a synthetic.

Are you using any gene editing capabilities in your research platform to amplify the effectiveness of your biologics?

Not at this point. But through FMC Ventures, we are investing in what we call technologies around the core that do utilize CRISPR technology, et cetera, for gene editing. We've been very, very sort of focused with our FMC Ventures activities to make sure that we are looking at new areas of biologicals, whether they be enzymes, whether they be micro peptides, whether they be pheromones, all those types of elements around the core are where we will bring those types of new technologies into play.

And how would you assess farmer receptivity to using biologics? And is it any more difficult to demonstrate efficacy with field trials?

Yes. The biologicals are different. They have different modes of action, especially as bioinsecticides, synthetic chemistry has what is traditionally called very good knockdown you spray it and the insect dies. Biologicals operate -- some biologicals operate in a slightly different way. The insect might not die immediately, but it can be as efficacious over a period of time. There's an education that has to go on here. We have to educate our own sales force to start with how to sell biologicals that are different. You have to distribution, retail and grower depending on how you go to market. I can tell you, I haven't been to Brazil for the last couple of years. Obviously, nobody is traveling. But prior to that, I would say the Brazilian growers, the sophisticated ones, the first questions they would ask me was, where is your biological profile? What's your products that are coming? There is a desire to move in the direction of biologicals certainly in the last 5 years that was far greater than it was before. We have business in Korea, in Japan, in Europe, in the U.S., Brazil, Argentina, it's truly become a global market. And what's really interesting is starts off in the specialty crops where you can have a very niche application. But now as the technology is developing, row crops are becoming in focus, especially with the synthetics. So it's changing dramatically.

With respect to the Brazilian soybean insect control, do you see any risk coming with a couple of new traits that are being implemented down there with the INTACTA 2 or the Conkesta traits. Is that a risk to you?

No, it's not -- our portfolio of insecticides on soy in Brazil is really targeted towards the piercing and sucking pests, things like sting bugs. Those new technologies, now that's second generation of those technologies that you're talking about are more chewing pests. So we have a whole range of products, Talisman, Hero, bifenthrin, as you mentioned, is a very big product for us. That's superb when it comes to the piercing pests. Those new traits in those seeds do not control those pests.

Kind of a high-level question for you given just the ag fundamentals are strong now. You have very high crop commodity prices. Do you see increased application rates in major row crops around the world? Where are you not seeing a response like that?

Yes. I think when you look at where soft commodity prices are, clearly, I think most regions of the world, as we enter the Northern Hemisphere, we're going to plant as many acres as we possibly can at this point. Growers are going to want to protect those acres to get the economic value from the acre. So we're seeing great demand for our portfolio. Those of you that saw our Q4 results. Our guidance for this year, it's a very robust growth. And that is really around how the growers feel about their opportunities this year. Certainly, when soft commodities are as high as they are, you really are going to go for the best input you can to protect that crop, and we're seeing that.

And what about on price? You've obviously had significant cost push, but are you getting price now that's more than offsetting that raw material cost inflation?

Yes, listen, this year, our plan was to have price offset the cost inflation that we're seeing in the year. But you have to look back to last year as well, there was a lot of cost inflation that companies didn't recover. So we're trying to recover back to where we were prior to this wave of inflation that we're seeing. We will continue to move prices around the world as we continue to see cost inflation occur. On the earnings call, we said we're unsure about the second half of the year exactly where is it going to go? I still hold that view that I think it's more opaque. I'm less inclined to believe that raw materials, logistics, packaging, all those cost inflations will abate as we go through the second half of the year. I'm less inclined to think that. So our plan is if we see that continue to move, we will move prices throughout the various regions of the world as appropriate. That's how we view it.

And what can you talk about in terms of what changes you've made with respect to your manufacturing footprint and your sourcing in China and logistics and all of that to kind of moderate that inflation?

Yes. If you go back prior to the Cheminova acquisition in 2015, FMC had a model that was very predominantly based upon Chinese supply, whether it's intermediate or fully produced active ingredients through toll manufacturers. We were probably 90% to 95% dependent on China at that point. Obviously, as you can imagine, as we looked at that, we said to ourselves, we need a more balanced risk profile for our supply chain. And we've set on, what is now, where are we 6, 7 years into that journey. We're probably in the 40% to 45% range of all our raw materials, intermediates, fine chemicals, and active ingredients coming from China. I think we'll probably get into the mid-30s range. It's very difficult to get below that. First of all, you don't want to move totally out of China. The specialty chemicals business in China is incredibly integrated and large. So you're never going to get away from it all together, and you don't want to be reliant on another country either it's to the same degree. So I think if we're in that 35% range, we'll be in a very good position. The rest is in India and in Europe and the U.S. with our own manufacturing sites that we acquired through the DuPont assets and through Cheminova. So we feel we have a good balance today. Our new investment in the pipeline from a capital perspective as our pipeline comes to market. We're investing in India, Europe and the U.S. because that's where we see the most flexibility in terms of where the market demand is going to be. So we're trying to place the new actives as close to the market as we can.

You said India, U.S. and where else?

Europe.

Europe. And is that with multiple sourcing options when you get a new registration, you try to increase your optionality?

Yes. To get a new registration, as I said earlier, depending on the jurisdiction, can take 5, 7 years. What we try to do is when we're registering a new product for the first time, we will register 2 and, in many cases, 3 new sources so that we have flexibility in that manufacturing supply chain.

You commented on your last call about using social media to reach farmers. Can you elaborate on that? How exactly are you doing that and maybe be a little more specific?

Yes. It's interesting when we entered COVID, one of the fears of the commercial organization -- FMC has a good reputation of being very close to our customers. One of our fears was, are we going to lose that some way. What we did was we started to use WhatsApp. We started to use Twitter. We used our own precision ag tools, Farm ARC Intelligence. to really connect with growers so that in the past, if we were in Brazil or Argentina, and we would have a grower event, we would bring all the growers into that area. And we maybe get 100, 150 growers to come see the trials, et cetera. We're using those social media platforms now to reach thousands of growers at the same time. So we have these virtual tours where we will use social media as the vehicle to show them the trial results both on the ground in the field and back in the lab at the same time. And you get a much broader one-shot message to the grower population. We've used it in India. We've done it in China, Indonesia, all over the world. And I don't think that's going to go away. I think we will augment what we did traditionally with these new tools, and what we expect and what we're seeing is that extra growth that extra push from the growers because they're getting the information real time and in a different format. And let's be honest, the next generation of farmers that are coming in around the world to them, this is how they operate. I watch my own 20-year-olds do this. That's the growers that's coming for the next generation. Those are the ones we have to connect with.

On just this past Friday was EPA put a letter out commenting on who -- all of the objections to their chlorpyrifos ban. And one of the 25 objectors to it was the Organophosphates producers association and -- of which FMC is a member of that. I'm just curious as to whether that was an area of interest to FMC to object to EPA's ban of chlorpyrifos because it would seem to us that you would be a clear beneficiary of that ban.

Yes, I mean, listen, we don't produce that molecule. It's not a molecule that we have. And yes, you're right, we have offsets to that molecule. But I think there's a due cost process that industry has to stick to. And we're an industry player. It's chlorpyrifos today, it might be a molecule of ours tomorrow. And I think it's important that as you go through a process for reviewing whether something should survive or not in a marketplace, that, that due process is taken into account. And in some parts of the world, it's not. Europe is a great example of that today. The European Union has -- is exporting an ideology of what they think is the right thing for pesticides, we don't agree with that. And the industry doesn't agree with that. So I think it's important for the industry to stand up and say, listen, "These things need to occur, but they need to be done in the right way." So that's why somebody like an FMC would join as part of that industry association, even though we don't make that molecule because tomorrow, it's going to be another one. That's how we think about it.

Okay. But what's other thing that was really interesting to me is among those objectors where many other countries wasn't just U.S. farmers and U.S. trade associations, Ecuador, Colombia, Southeast Asia, there were a variety of countries that were complaining about the EPA ban of chlorpyrifos, I guess, on the vegetables that they produce, and they use chlorpyrifos, but then shipping it to the U.S. So is that -- is my take on that right that, that ban effectively was more than just a U.S. ban.

Yes. I mean, listen, that's what I'm talking about. You can use the U.S. as an example. These are MRLs. These are the limits that you can have as residues on any fruit or vegetables. You can create a barrier to trade by putting a limit on something that somebody else needs in their marketplace, they then cannot export to your jurisdiction. That's what's happening around the world. It's not good for free trade, and it's certainly not good for growers around the world because you need to be able to sell your products wherever you can. They need to be harmonized, and that's a big issue for the industry.

But to the extent that those regions are now not able to use an insecticide that they previously used could be an increased demand for the diamides.

It could be. It could be other chemistries as well. I mean we're not the only ones that have offsets for that chemistry, that's natural in this industry. There are many different ways to go to market with different products. But yes, you're right. It could be an advantage for us.

Okay. Question about your use of free cash flow over the next couple of years, what would be the priorities?

Certainly, free cash flow for us. I think that's very simple hierarchy of priorities. First, baked into free cash flow guidance and our expectations, what we can drive for cash conversion is fully funding our organic growth. So as Mark described, we have a lot of work going on with our new active ingredient pipeline, both biological and synthetic. While that flows through operating results, that's a key part of the decisions we make that impact cash flow that's generated by the company. And the second thing is where there are good technology-driven opportunities to accelerate our growth through inorganic growth, we will do that. It's been and remains a focus, particularly smaller areas, but some emerging -- we've done some small investments through our FMC Ventures Group in the past 2 years since the some emerging technologies like micro peptides, pheromones as well as some investment into the precision ag space. So I think certainly, you should expect that we will use some cash to help amplify the organic growth of the business. Then the remainder , bluntly is going to -- we're going to keep doing what we've been doing, which is using it as a way to reward shareholders. We've grown the dividend. We pay a market median payout ratio. We've grown the dividend 10% per year for 4 years now. We bought back several hundred million dollars of shares last year. We have guided this year to buy back between $500 million and $600 million in shares. And basically, we look at it very simply. We like to have a little competition for capital. We like the pressure of maintaining an investment-grade balance sheet. And then if there's extra cash, if there aren't growth opportunities, they're more attractive than buying the shares, we buy back the shares. So we managed that. There's an ebb and flow that happens. But that's the hierarchy we see, as we think about that.

Anybody want to jump in here with a question?

Curious to -- since you are the big 4 or 5 global ag chem basics? Where do you see your horizon go in the seed area. Everybody else is playing that game?

There is no horizon for me for seeds. We like our position. We're the only pure-play R&D chemistry biology company. I think we're a great optionality for anybody that doesn't want to bundle technology from a chemistry standpoint with technology with seeds. We have some of the best technology in the marketplace. We have perhaps the world's best pipeline. We're agnostic what see you buy, but we will bring you the best crop protection chemistry. When you think about the profile of the company, a 26% EBITDA margin, high single-digit growth, truly global in nature, 6% to 7% of R&D spend. It's a great profile for a company. We're very fast, we're very agile. I do not think for a second that we're disadvantaged versus my other 4 competitors who have a large seeds business. And frankly, it will be foolish to get into seeds for a company of our size because we would have to cannibalize a fantastic R&D platform to get into seeds and we will be so far behind on trade technology, it wouldn't make any sense. So we're very happy where we are. We think we can continue to grow globally with this portfolio and no seeds.

All right. Fellows, we are out of time. Sure. I appreciate you joining me up here today. Let's all give these guys a round of applause. Thank you.

Thank you.

Thank you.