FMC Corporation (FMC) Earnings Call Transcript & Summary

Great. Thanks for joining us. Again, my name is Arun Viswanathan. I'm the Chemicals and Packaging analyst here at RBC. So delighted to have FMC presenting at our Fifth Annual Chemicals and Packaging Conference today. We have Mark Douglas, CEO; and Andrew Sandifer, CFO. FMC has been a very solid operator over the last several years, definitely amongst the top of our coverage. And that being said, there's been a lot of volatility that we all have expressed and experienced. Over the last couple of years, FMC has managed to manage through that. I guess several important discussion topics to have today. The first one, top of mind for most investors that we're hearing, I guess, is if you could just touch on if there is any Russia and Ukraine exposure that we should be aware of within the portfolio, and then we can move on from there.

Very good. Thanks, Arun, and thanks for inviting us today. It's a pleasure to be with you. So Russia and Ukraine for FMC is about $100 million of revenue up through the season. We have one small formulating and packaging facility in Russia. We have no manufacturing facilities in the Ukraine. So relatively speaking, on the back of a $5.5 billion company, the exposure to Russia and Ukraine is relatively small.

Great. Thanks for that. And beyond that, I guess, obviously, there's some knock-on effects that many of us are considering, the first of which is energy costs. Energy typically isn't as large of the cost structure compared to some other parts of my coverage, but how would you kind of characterize the exposure on energy overall to FMC? And if there's specifics as it relates to your business in Europe, that would also be helpful.

Certainly, look, energy for us is not a major component of the cost structure. It -- when we have significant escalation in energy costs, like we're saying right now, obviously, we'll have some impact. Our largest portion of our cost structure is intermediates and used to make active ingredients or the purchase of active ingredients themselves. They're so far down streamed from petroleum inputs that their pricing is really disconnected, largely supply-demand driven by specific demand for the specific chemicals. And that said, we do use energy in our synthesis process when we're manufacturing active ingredients, largely natural gas, a little bit of other energy exposure as well. But it's a relatively small part of our cost structure and one that we're working very carefully on both making sure we have a availability of the right levels of energy, but also managing through the cost. So I would just put that in a broad bundle of the cost headwinds in general that we're fighting and navigating through this year, continuing on the trend from the part of this year.

Great. And what about other costs? As you noted, there may be some logistics cost inflation. There may be some labor cost inflation. There may be some other procurement cost inflation that we're not necessarily aware of. I know it's not necessarily linear and simple to quantify and put exact ranges on those, but I guess -- and obviously, a lot of that would not necessarily have been contemplated. This scenario obviously wouldn't have been contemplated in your guidance, but your guidance is obviously somewhat wider than normal. If I remember, the low end at that 132 included statements like significant cost inflation, limited pricing ability, significant FX pressures continuing. So what could you help us understand as far as how your guidance kind of encapsulated some of these pressures, if at all?

Yes, I'll start and then Andrew can give you a little more color detail. Yes. I mean, listen, when we put our budgets together at the end of 2021, we had some scenarios related to market growth where we said, we felt the market growth will be in that sort of low single digits. You have to remember that we're forecasting in US dollars for global market. So any FX changes will obviously impact the overall -- our overall view of the marketplace. That's not to say that we don't expect a pretty robust market in terms of volumes going forward for this year. We are coming out of the Brazilian season now, and this has been a good season for everybody. It's a little dry in the South, but apart from that, it's been very good in the Northeast and Northwest. So as we enter what is going to be the North American and European seasons, we feel pretty good. The long-range weather forecasts are for -- it looks like a very good start to the season in the U.S. and in Europe. That will bode well for the rest of the first half as we go into Q3. And then obviously, we'll be facing the new season in the Latin America area as we go through September, October. So overall, we feel pretty good about our assumptions on the marketplace. With regards to cost, I would say, I don't think we feel any better today than we did in the fourth quarter of last year when we last put out the sort of initial view of the world. We have not seen raw material prices abate. In fact, availability is still probably as bad as it was as we went through the second half of last year. We still see logistics challenges in terms of cost and availability, especially for maritime freight. Add on top of that, what we see today, which is more people inflation cost, salaries benefits, et cetera, around the world as inflation starts to bite. So I think the view we've had is, first half, we've got a pretty good handle on, a couple of moving pieces. Second half still remains somewhat opaque to us in terms of overall costs. Now to offset that, we're moving price, and we've been very aggressive on price. We just announced on March 1, another price increase in the U.S. We're announcing right now more price increases in Europe and Asia. So we're on the move with price, and as we said at the last earnings call, our intent is for price to more than offset the COGS impact and for volume to help offset the FX and the SG&A investments we're making as we continue to grow. Andrew, do you want to add anything else to that?

Yes. Just to build on Mark's comments on cost, particularly this issue of availability. And when you look at all of our major cost streams, I mean, certainly active ingredients and the intermediates make some of the biggest chunk of it. But even with packaging materials or with logistics, there's a level of base inflation that's a piece of the cost pressures we're seeing, but this availability issue or say differently, the supplier mix issue is a big part of what the headwinds we're facing as well. And when we're having to buy from whoever has product available when it's needed, means you don't get the concentrate you're buying on a preferred supplier and get the kind of economics you might normally get. So there is a definite piece. Certainly, there is base level inflation, but there's a definite piece of these cost headwinds that we're fighting, which is really waiting for supply chains to normalize, to level out. Whatever that -- normal is probably a tricky word, but whatever that next normal level is, it's not 2019, but hopefully, it's better than 2021 in terms of the degree of disruption in supply chains. As those supply chains level out a bit, we should be able to take advantage again of more favorable supplier mix regardless of what the base inflation levels do. But that mix component is very, very real. You think about -- as Mark was commenting on logistics, all right? So it's not just the price per container of ocean freight, it's the fact that we end up having to use more air freight instead of ocean freight because of availability or because of short times between when product is -- when we can actually get our hands on the product and when we need it to produce and be able to meet our customers' demands. So certainly, while the second half of this year is a bit murky as we keep looking forward, I do believe there is a path to where supply chains begin to stabilize into a new normal pattern. And that, that -- when that happens, that has some easing on these mixed pressures regardless of what happens with sort of base inflation levels.

Okay. That's helpful. I guess maybe we can do a regional roundup, and maybe we would start with Latin America, just given you're finishing up that season. Last year Q4, little bit more normal weather versus Q4 of '20, where we saw some issues there. We had some issues on the custom side in Argentina as well previously. Those seem to have abated. How did the Latin American season kind of turn out for you guys? And how would you kind of characterize the price versus FX and cost opportunity there? And maybe if you could touch on inventories as well, that would be helpful.

Sure. Yes, Latin America has been a very good year for us as we close out. Brazil was very strong. Good growth on the soy complex, especially with insecticides. We've put a lot of effort into that space. We often talk about sugarcane, cotton, coffee, a lot of the more specialty types of crops, but we've had a concerted effort over the last few years as we improve our market access to grow our business on soy and on corn. That's gone very well this year. So Brazil was very strong for us, very good growth. Argentina, similar. We have very good products for the soy complex, but also for cereals. So 2 major crops down in Argentina. Weather has been good down there. We've had no issues like we had before with supply chain. We fixed all of that. We do formulating in country now, which helps us to get products across the border. So all very successful down there. And then I would add the third area of Latin America that we don't often talk a lot about, but it is a major ag producer, especially on the specialty side of the crops is Mexico. Mexico was very good, very good weather patterns this year. Overall, demand was strong. We introduced a number of new products. So Latin America was very good for us. Channel inventories for us are normal, if not low in some parts of Latin America. We've had very strong demand. A lot of that demand was used during the season, which is always a very good sign. So I think with soft commodity prices as they are, you're going to see that trend pretty much everywhere in the world where products are getting used to make sure that the growers are getting the highest yields they possibly can. When you have record prices for soy, corn, wheat and you name your crop, cotton, sugar, they're all up there. People really want to protect those crops. So we see that demand side being very strong.

Thanks for that. And just to finish off this region then obviously, you have to go into the next season. But would you say that price capture kind of met your expectations? And what would you say as far as the outlook for -- I know second half is still a ways away, but would you be concerned with FX versus price at this point at all for your Latin American business?

No. I think we've done a pretty good job as we've gone through this season. We still have some catching up to do just on a pure cost perspective, and we've talked about that not just for Latin America, but for other parts of the world. Hence, why we're still continuing to raise price as we go through that lag period. One thing about the Latin American market, especially Brazil is, they're used to price changes on the back of FX. So if FX goes against us, we will have the ability to further increase price, which we would do. I would say, right now though, Latin America is not our concern of FX, it's really the European region. Andrew, perhaps do you want to just talk a little bit about that?

Yes. I think certainly, the conflict in -- with Russia and Ukraine is not helping European currencies. Obviously, euro is a major -- euro and related currencies are a major exposure for us. We are hedged. We are managing that risk, but certainly, you don't hedge 100% of your risk, not economic. So there is some impact out there. And with that generalized weakening of European currencies, it is a bit more of a headwind in Europe than we might have anticipated initially. That said, Brazilian real has actually held up pretty well in the first quarter, probably better than what we would have expected. But again, all of these currencies are moving quite a lot these days. So I think it's important we take a very structured approach to looking at our currency exposures and really trying to layer on hedges over a rolling period well in advance so that we can not necessarily negate the impact of the currencies, but be able to respond in a way that it reduces the risk of moving away from our expectation, moving away from what we've been able to guide. And that philosophy remains in place, and that approach is unchanged, even though we have a bit more volatility in the world right now in currencies.

So it sounds like -- I know your guidance for Q1 had assumed some FX headwinds. I think you would assume mid-single-digit pricing. So it appears that it's still within the cards, and if anything, there could be upward bias to both of those statements as you need to go out and get more price to cover this inflation. Is that accurate on the FX side?

Look, I think at this point, still in the middle of the game, but certainly, BRL has been better than expected. Euro and related currencies have been worse than expected. Net-net, I don't see a big difference in FX at this point.

I think on the price side -- Arun, I think on the price side, we've been very explicit. We'll continue to move price as we need to, and movement in March is another example of that. We're moving once we're pretty much close to, if not in the season in parts of the world. So you should expect to see us do that if conditions should deteriorate from this point on.

And we talked about the cost side in Europe. There's a lot of challenges there. Have you seen any impact on demand? Again, you have the $100 million of sales in Russia, but is there any other impacts that we should be aware of, whether it be again, increased use of non-European crops? Or again, we heard that potentially Europe, the EU is easing restrictions on GMO and pesticide use, but do you have any insight there?

No, we really haven't seen any demand destruction in that sort of sense. I mean, listen, I've been very vocal as a company and as part of the industry that we felt for some time that the European farm to fork methodology of what they wanted to do with pesticides is not necessarily sustainable, and they never actually yet published an impact assessment, which tells you a lot. I think what you're seeing now with constraints of soft commodities, that's going to start to bite. So we would expect that if growers in Europe want to keep their yields or improve their yields, then yes, they are going to have to use the right pesticides at the right time, but we haven't seen any demand change at this point.

Okay. Great. And then in the North American market, one of the -- we went into the season thinking that there was going to be some acreage growth on the crop side, on the row crop side. Maybe that was tilted a little bit more towards corn. I don't know if that has changed at all. You guys have a larger position in soy and then obviously, you have a larger position in the specialty crops also. Maybe you could touch on your outlook for North America, if there's been any changes, and if there's been any impact to FMC that we should be aware of.

Yes, no real change. I think our view of the world is, we expected slightly more soy to be planted than last year and slightly less corn than last year. I think our view still holds that, that's how we see the world. Obviously, we're getting close to planting soon. So we'll -- I guess we'll find out exactly how many acres go which way. Frankly speaking, we do have more exposure to soy, but really, our latest technologies, especially around the fungicides are guided towards the corn complex. So we're happy to take that new business on fungicides in corn. And if soy continues to grow, that's only good for our pre-emergent business and our insecticide business. On specialty crops, we expect once again a robust season. We've seen it all over the world. As people are coming out of COVID, those types of foods they're buying, the restaurants opening up, that only bodes well for specialty crops. So California all the way through the horseshoe through to Florida, we would expect to see that continue to expand as well as introduction of new products, which also impacts those areas.

And would you say that in North America, there's a little bit of an easier comp on specialty crops just given some of the drier weather we saw in the summer in the West Coast last year?

Yes. We didn't really see a drop off, to be honest. Our business held up very, very well on the West Coast. So I'm not so sure I would say it's an easier comp. We continue to grow in those areas, and you know what, we expect that growth to continue this year, given what we're doing in terms of resources to grow our market share. I don't think it's an easy comp, and it's a very robust business.

Okay. And then I guess if we could continue on to Asia, you guys have really experienced a lot of nice growth in the region, especially in India and Pakistan -- or Pakistan, I should say, but you now have the partnership in India as well with UAP. So can you just touch on some of the drivers of your Asian business? And how should we see kind of growth evolve in that region?

Yes. I would say, there's sort of really 2 big drivers. One is new product introductions, two is market access expansion. So when I think of new product introduction, Asia is really the vanguard of our plant health business, which is our biologicals used on specialty crops in Asia. So places like India, Korea, Japan, where there are very high-end markets, so plant health has been very robust for us in excess of 20% growth rates. New product introductions also on the synthetic side, especially Australia, with our Isoflex, which is a new herbicide for cereal applications gone very, very well for wheat and barley in Australia. And then obviously, the diamides business in India continues to expand as we put new products into that market as well as new herbicides. And then we've really spent time and effort -- one of the things we talked about earlier was costs. We've invested in SG&A resources, mainly sales and agronomists in Southeast Asia, India, parts of China to grow our business. In other words, we have pretty good market access, but we don't have perfect market access. So we're investing salespeople and agronomists, Indonesia, Philippines, Vietnam, Thailand, where we know our product portfolio fits very well for rice and specialty crops. That's a big driver of our growth engine in Asia.

Would you say -- just thinking about the regions then, it sounds like in the past, one of the benefits of the FMC portfolio was balanced growth across all of the regions. Would you now say that that's still the case? Or do you feel a little bit more confident on certain regions, let's say, Asia over Europe? And how does that evolve over the next couple of years, just given a lot of progress that you've made?

Yes, I think -- listen, one of the things -- you're right, we've touted as our geographic balance around the world. We do see Asia as maybe the fastest-growing region for us. I would say, closely followed by Latin America and North America and then Europe. That's kind of how we think about the dynamics. Now Europe, you can't really think of it as one entity. For us, it's EMEA, so Europe, Middle East and Africa. And so we are putting more resources into those places as well. Western Europe tends to be flat in terms of how much pesticides are used every year. So the growth is really coming from the areas around the EU 27, if you think of it that way.

Got it. I guess the other question that some folks have had is just on the investment outlook. You've leaned into a couple of interesting areas. I think you've decided, or explained that you want to grow your fungicide business as well. You've had some new partnerships come along. How should we think about growth from here on? FMC, again, potentially have some opportunities for increase. I wouldn't say -- I don't know if it's necessarily JVs, but partnerships, some asset-light models potentially? Or would we -- should we expect larger acquisitions? Or how should we think about how the growth that FMC evolves, whether inorganic or organically.

Yes. So look, I mean we're coming towards -- we're in the fourth year of our 5-year plan. We've had a target of 5% to 7% growth at the top line. We're healthily in that range. So you should expect that to continue. I do think from what I call a technology and venture standpoint, we are investing in new areas of technology that we believe will impinge on agriculture, and these are technologies that we're not core in at the moment. Pheromones, enzymes, peptides, all new areas that we're investing in with other partners and through FMC Ventures so that we can -- should those take off, we will be in a very good position to use those as the next generation of pesticides in the world market. I think from a fungicide perspective, you're absolutely right. We have done work recently on our pipeline where we have new products coming. They don't impact until later this decade. We are always looking to acquire either brand new fungicides or market access for fungicides, so that's something that's constantly on our M&A screen. And then just purely from that inorganic piece, anything related to market access or technology that we can gain more market share through use of new technologies or into new geographies, we'll be looking at that as well.

And putting cash to work perspective, and certainly, what we've done over the last several years, as Mark mentioned, we've had a number of small investments through our FMC Ventures group into some early-stage technology companies, very capital-efficient way to learn about technology and understand an emerging marketplace better. So investments in pheromones, like in BioPhero or micro peptides, a company called Micropep, a couple of different precision ag start-ups as well. We've also used a number of partnerships. Mark mentioned specifically enzymes. The partnership we have with Novozymes. I'm really looking at enzymes as a class of chemistry that could be used for pesticidal activity and it's a new area, and that one is more of a traditional collaboration, less capital-intensive. So it is a balancing of being able to grow through -- our own organic growth through leveraging partnerships that can be capital-light as well as some of these targeted smaller technology-driven investments. Some of these technology-driven investments could get to $50 million, $100 million kind of investments over time. The initial investment is pretty small, but they're not $1 billion investments of cash, right? So I do think it's important to emphasize that piece is that we can do things to continue to sweeten our -- expand on our organic growth through some technology organic -- inorganic investments, but these are not huge acquisitions.

Okay. That's helpful, Andrew. I guess we should talk about cash flow a little bit. It looks like there could be a slight dip in your '22 cash flow just around working capital and some of the other moving pieces. So could you reiterate -- I mean the 3-year rolling average on conversion is still very high. And I think the expectation is that conversion goes back up in '23, and then we're not talking about a low level anyway. It's already up in the 60% rate. So it's pretty high. But could you just go through some of the dynamics for '22 free cash flow? And then as a follow-on, I guess, on the share repurchase side, again, that's been a large area of cash deployment, too, over the last couple of years. How should we think about how that evolves, especially since you're coming up on the end of that 5-year plan?

Sure. Look, from a free cash flow perspective, we had a really strong year in 2021, $713 million in free cash flow, well ahead of what we had guided. I think very strong collections and higher prepays were big contributor to better working capital performance. As we get to a little bit more normal working capital this year, we do see a bit of an easing. And I think that's why -- part of the reason why we've tried to introduce this framing, looking at a multiyear rolling average because there just can be lumpiness and some timing shifts with free cash flow. We think this business ought to generate free cash flow conversion from adjusted earnings from net income in that 70% to 80% range and sustain that on a rolling basis. We're at 71% on a rolling basis at the midpoint of our 2022 guidance, even though our cash conversion in 2022 is about 66%, if -- at the midpoint of our guidance. So as we go into '23, certainly, we would expect to continue to stay in that rolling 70% to 80% range. So it would certainly imply keeping in the 70% -- that 70-plus percent range of cash conversion. And as Mark mentioned, we're in year 4 of a 5-year plan. I've been around the chemical industry a long time. It's the first time I've ever made it to year 4 of a 5-year plan. And the good news is, particularly from a cash perspective, one of our key goals was to demonstrate that the cash-generating power of this portfolio. And we set a goal to generate up to $3 billion in cumulative free cash flow over the 5-year plan. At the midpoint of our guidance for 2022, we're at $2.2 billion. So it implies something in the order of $700 million to $800 million in free cash flow at '23. We're not guiding anything for '23 today, but just the math is pretty simple there. And that's not inconsistent with continuing to see the kind of profit growth we expect from the business and being in that 70% to 80% cash conversion range. So what you're seeing this year literally is lumpiness of shifts in working capital and continuing to grow. We've gotten past that period of our history, where we had a lot of cash drain for transactions and integrations and SAP implementation and those things. That kind of transformation spending is essentially a 0 in 2022 and should continue to be in the foreseeable future. So it's been a very, very good situation with cash generation and continuing to improve. And that fits your -- the second part of your question around deployment, particularly around share repurchases. We've had a very clean hierarchy from -- since September of 2018 when we launched this plan. It goes without saying, the first thing we do is we fund the organic growth. I know it's built into the free cash flow number, but we always want to reiterate that we are not starving this business. We are investing to grow the business through fixed capital and through working capital. After that, we pay a market median dividend. It's continued to grow at 10% compounded rate for 4 years now since we reset the dividend in September of 2018. Once you get past those 2 years -- those 2 steps, now it's about can you amplify the growth through inorganic growth investments. We talked a little bit about the areas of technology. We're interested in size for talking there. That means there's pretty substantial cash flow as well as incremental borrowing capacity left that can be used to further reward shareholders through share repurchase. And if you look at what we've done since we launched this strategic plan, basically, we started off with a $200 million buyback in Q4 of 2018. Since then we bought another $850 million a share. So well north of $1 billion in share repurchases in the first 3 years of the plan. We've guided to $500 million to $600 million in share repurchases this year. So you keep extrapolating that out with both free cash flow generation and borrowing capacity with an investment-grade balance sheet target leverage. There's a lot of money that's available for share repurchases through '23 and beyond.

All right. Great. That's very helpful. I did want to take one last minute and just discuss the high end of your guidance. I know that obviously, it sounds like there's obviously a lot of risks out there, a lot of uncertainty. But the market growth, mid-single digits, better than anticipated mix, which of these areas would you say that you have any, if any, visibility on, has that materialized at all? I mean what are you guys most optimistic about as -- we've already talked about the risks. So I just wanted to get your thoughts on what you're potentially more optimistic about.

Yes. I mean, listen, I think volume is one thing that we're watching very carefully. There is obviously good volume demand out there. Now I would say, the other side of that curve is, can you deliver all that volume demand given some of the constraints you have through the networks. Mix could be a good mover if it goes in the right direction. We tend to forecast every year sort of what we call average pest pressure. So insecticides and fungicides, we kind of know where herbicides are going to fall out. If we get a very strong past year, that can swing the mix pretty well given the types of products we sell into insecticides. So I would say, that would be something we'll watch carefully as we go through the second half of the year.

Great. Well, I think we're out of time. So I definitely want to thank Mark Douglas, Andrew Sandifer from FMC Corporation, and we'll leave it at that. Thank you again for your time. I hope to see you again soon. Thanks.

Pleasure. Thanks, Arun.

Thanks.

Thank you.