FMC Corporation (FMC) Earnings Call Transcript & Summary

Good afternoon, everyone. Cheers from New York City, excited to see everybody live. This is Mike Sison, I cover chemicals for Wells Fargo. Want introduce FMC Corporation. It's one of the only pure-play ag crop protection companies that's on our coverage list. The company reported record results in '21. Again, here, another really good quarter, 1Q '22, where the company is able to maintain guidance. And the company is a little bit unique. They have a fundamental, good, strong outlook for ag over the next year or so. And we have -- I think what's interesting is the stock hit an all-time high last week, I think, at $1.41, $1.40, and it's still up year-to-date. And I'm hoping to have FMC's CFO, Andrew Sandifer, kind of help us get us back that momentum over the next a couple of quarters.

So Andrew, I thought we'd just simply start. FMC is unique amongst a lot of chemical companies and ag companies. Maybe just kind of share with folks how FMC fits in the ag world and be mostly crop protection and the only pure play out there.

Yes. Certainly. Look, first, good to see people in person. It's only been a handful of in-person conferences so far this year, so it's nice to get back to a little richer dialogue time. The online is helpful and wonderful, but nice to be able to have some richer discussion as well. Look, FMC has been on quite a journey. I've been with FMC for 12 years. When I joined the company, we were a much more diversified chemical business, and we've narrowed and focused the portfolio the following decade to really become a pure-play agricultural sciences company. So our core is crop protection chemistry, where really, as I describe it, we don't sell kilos, we sell yield. We work with growers and those around growers to help them drive higher productivity out of every acre that they put into production. We are unique in the sense that we're the only of the top 5 innovation-led ag science companies to be solely focused on crop protection. We do not play in seeds. We do not have any interest in playing seeds. We don't believe there is any synergy between crop protection and seeds, and I think we can certainly click down on that as it's helpful. But we very much like having the position of being able to work with growers and all those around them that are helping drive yield and being independent of -- and agnostic to which seed gets used. It's really a matter, right, with you've made the choice of what seed you want to use, how do we help you get the best yield out of that product. That allows us to be focused and allows us to put more R&D investment into crop protection solutions, both traditional synthetic chemistry as well as more emerging technologies like biologicals, micronutrients, other plant health opportunities. And thinking about some of the newer business models that are out there that really are combining the power of data and precision application, the use of data and the use of agriculture. So it is a unique place in the value chain to be. Again, of the big 5, we're the only one who really is just purely crop protection-focused ag sciences business.

Right. Great. I think the company also is pretty well diversified, right? You've got -- you're not focused in one geography versus the other. So I thought maybe we just sort of walk around the world and give us a quick update on how the ag markets are. Why don't we start with Europe, given this first quarter is very Europe-centric? And a lot of questions with slowing down, regular economy, war and how is that affecting ag, I guess.

Sure. Yes. And I think, Mike, your point well taken. FMC's very well balanced both from a crop mix as well as the geographic mix. We mirror the distribution of sales on both dimensions more -- the broad industry without being overweight on any particular crop or geography. In Europe, absolutely Northern Hemisphere, a important part of the season there, sort of peak season for our business in Europe. Europe has been tough for the past couple of years. It's a tougher environment from a regulatory perspective. It's a harder place to continue to innovate and grow, and making some good progress in that over the years. But this year, in particular, following a couple of years of less-than-ideal weather, some hot and dry summers, I think hopes are very high for a good season in Europe. Unfortunately, we've had the rise of the Russian invasion, war in Ukraine just really disrupted things in Europe. I think our belief and certainly the performance of our business ex-Russia and Ukraine in the first quarter has been very strong. We grew our business in Europe at 11% organically in the first quarter and a bit of a -- more than a bit. A significant euro headwind sort of wiped that out and reported U.S. dollars, but an underlying growth of the business is pretty strong. The key development we have right now is dealing the fallout of the war in Ukraine. FMC made the decision a couple of weeks ago. We were the first crop inputs company to withdraw from Russia for a combination of reasons, but not the least of which we saw a clear and compelling evidence of war crimes and hostilities. And while we do believe very strongly in supporting food security for the world, once the Russian government made it clear they were going to use food as a strategic weapon and by withholding it from countries they view as not friendly, that and the combination of the sanctions regimes and the war crimes being committed in Ukraine, we discontinued to operate in Russia. So we've withdrawn from Russia, creates about a $25 million headwind for us in the remainder of the year. We can talk a little bit about that later, again, know more about guidance issues. And that's unfortunately the down low on Europe right now is Russia and Ukraine because highly productive, fertile areas of the continent. Ukraine, we're still operating in. We are still selling. Farmers are planting, although a greatly reduced acreages compared to the potential there. And we're going to do everything we can to continue to support them. But generally speaking, if you step back from the specific crisis at the moment in Ukraine, we feel pretty good about Europe. It's a good market. It's one where, because of the tighter regulatory scrutiny, newer, better-performing, more sustainable chemistry, which is really the heart of FMC's portfolio, is pretty highly valued. And certainly, I think the renewed emphasis and recognition of the importance of food security may help evolve some of the regulatory approaches in Europe to allow a little more growth than what we've seen in the past several years. It's still a very highly profitable market for us and a very attractive one. And again, I think if we get more normal weather this year in the rest of Europe, despite the loss of acreage in Russia and Ukraine, it could still be a very strong year in Europe.

Right. I mean the important question about Europe is how is the [ Brondeau ] season? Is it going to be a good season? Your past CEO had a really good...

Yes, I think I'll defer to Pierre and Mark on that one.

Shifting gears to Asia. I think there's a -- I don't think a lot of folks -- India is a bigger region for you. But just in general, why don't we just talk markets. There's other issues in China and logistics, but just kind of where you see the opportunity for growth in Asia going forward?

Sure. Look, Asia is another -- yes, it's a very important region for us. It's been the fastest-growing region for us for several years now. India, a critically important part of it, it's the third largest country that we do business in terms of our size of the business. Growth in the first quarter is really driven out of the ASEAN countries as well as out of Australia, particularly building on the very strong introduction of a new active ingredient Isoflex, which is a herbicide for use in cereal crops that we introduced last year and seeing a very strong continuation of growth there. India was a bit more tepid this quarter. We had a dry Q4 in India. Led to some reductions in acreage, particularly for rice in India in the first quarter, so a bit of a slower quarter in India for us. We are anticipating that improving. It all depends on how typhoons go and monsoon season goes through the next quarter or so, next 1.5 quarters. But I think our belief around the long-term potential for the growth of particularly more differentiated, higher-performing chemistries in India is really, really promising. When we think about end markets itself, China is a smaller end market for actual consumption of our products, largely a generic market, but it's an important supply point for us. And certainly, we can come back to that, Mike, as there are some important developments in what's going on in China there. But I'd say, broadly speaking, for growth and sort of market conditions in Asia, it's a very healthy market. Little bit of catch-up and cleaning out of inventory in India needs to happen as we recover from the dryness in Q4, but lots of good growth prospects across all of ASEAN and Australia and New Zealand, in particular.

Right. Okay. Why don't we shift to North America, the United States. It's the season now, so any quick thoughts on that? That would be great.

The U.S. -- look, the U.S. market is still going gangbusters. We'll see how planning continues to proceed in early season, but it's been a good start to the season. We had very robust sales growth in both Canada and the United States in the first quarter, and it is one place that I would know we definitely saw some advanced purchasing, all within the season for products that should be used within this growing season, but that blurring between Q2 and Q1. Certainly, there were heightened concerns among retailers, distributors and growers on availability of materials. So we did see some early plays in the orders, and quite honestly, we had a very, very strong Q1. We could have sold more, but we ended up with more demand particularly for products that aren't quite -- it's not quite the time for them to usually be consumed that we weren't prepared to produce just yet. That demand has been very, very strong. We see those conditions continuing. See how, as always, anything on the ag business, you're always asking about the weather forecast and looking ahead. But depending on how the rest of the spring plays out, it could be a very good year. And in particular, given the overall global situation with reduced acreage from the loss of production, you've got Russia and Ukraine, overall low stock -- historically low stocks-to-use ratios, key rains and pretty high -- based on historical patterns, crop prices. And we see a pretty good market in the U.S., not only for this year but for several years.

Right. Well, I'm based in Cleveland. So it's cold, crappy, but luckily, it's not a big ag area. So -- and finally, why don't we go to Latin America and I think folks think about Brazil. But Argentina is pretty big, Chile is pretty big. And when you're going to host your Analyst Day there next, Argentina wine country or Chile wine country would be great, but...

I think that's a lovely idea.

I think it's a great idea. So any just general thoughts on Latin America and how you see that shaping up as we enter that more in the fourth quarter?

Yes. I think we're really winding down at this point from the previous season and the wintertime now in Latin America. Look, Latin America has been a big part of FMC's growth and certainly our strength historically, Brazil being a key anchor. But we've seen tremendous growth in the past several years in Argentina, which is now a multi-hundred million dollar business for us, big soy position there as well as cereals, and Argentina is a very interesting position there. And as you pointed out, we're seeing some interesting growth in a number of other smaller countries across the Andes, not -- Chile not the least of them. Peru and Ecuador, a little further up, we get into there as well. And often cases, in a mix of specialty crops. So again, it comes back to that crop diversity of FMC and our ability to address a bunch of different end markets not being over-levered to one crop globally. So we're very excited, and I think it's going to be -- continue to be a very strong season. We grew 25% in Latin America in the quarter, and I think a big part of that is actually share gain, particularly from increased penetration in soy markets in Brazil. Part of our focused strategy our team has there -- growing our products with large soy growers. So it's been a good market for us and one we're, I think, very optimistic about the next season as well. Again, thinking about the global backdrop.

Right. I wanted to dig in a little bit on sort of this notion that there's growing concerns regarding food scarcity, food inventories are low. And the reason I asked, I went to Disney with the kids for spring break. There's plenty of food. I mean the people I saw there were well fed, right? So I didn't see any food scarcity at Disney, but maybe I'm missing something a little bit there. And -- but maybe talk about that and how that could affect the cycle and growth for the next couple of years.

Sure. Look, the Russia, Ukraine war -- the Russian war and Ukraine is taking probably 70 million, 75 million of acres out of production and a global production base that isn't fundamentally growing. Now the EU is allowing some environmental reserve land to be put back in production. There are some marginal things. But all those other levers are essentially going to keep acreage at best even on a global basis, with a growing population and a higher demand for calories every year. And unfortunately, an acre is not an acre. Some of the most fertile farmland in the world is some of the farmland that's currently disrupted because of the war. That need for productivity is there. You pointed to stocks-to-use ratio, so the sense of how much of grains or other agricultural commodities are stored versus the annual consumption are at or below 10-year lows for most crops. There have been pockets of dry weather in key growing regions that might impact yields coming out of current growing seasons. So there are a lot of reasons to believe with -- again, with the addition -- no net addition of real acreage that crop -- the demand and pricing for crops and cells could be very strong for quite a long period. There's no quick fix to suddenly replace some of the production from the world's most productive, most fertile farmland. Over a longer period of time, the fundamental challenge is still the same, which is acreage isn't growing meaningfully. Population and food in partic is, and the only solution to solve that problem is to increase productivity. And crop protection chemistry has to be a part of that. So we do think that for the next several years there's a good backdrop for -- both from a global supply/demand perspective and from a crop price perspective that it would be a solid ag economy and that, that will support continued strong performance of crop protection businesses and particularly technology-driven crop protection businesses like ours.

Right. And I think, if you look historically, you've tended to be sort of crop agnostic. You're well diversified amongst crops and vegetables, fruits, grapes. Hopefully, that doesn't affect line production, but they might. But are there other opportunities, specifically in a certain crop or so for FMC, if this continues to be an issue?

Look, as you pointed out, we are pretty well balanced across the broad set of crops grown in the world. I would say that certainly we are growing our participation in soybeans. Brazil is a focal point for continuing to grow that. That's a part of increasing, as we described it, market access, our ability to reach and interact with customers, we've made some big investments down there to do that. In wheat, which is certainly a question -- a crop of great interest right now given, again, Russia and Ukraine supply being a big part of global wheat supplies, is other geographies try to increase wheat production. We have Isoflex, which is a wonderful new cereal herbicide that could be helpful, and working along with our SU product line of herbicides and helping bring on higher wheat productivity. So there's some interesting places to play. There's not a single one that I'd say that we're over-levered to. But certainly, those dynamics of, again, trying -- seeing some rebalancing of where production is made and trying to deal with the disruptions in supply -- disruptions in the crops being grown. There's some good opportunities for some of the newer technologies we have to help bring some extra productivity.

Right. Shifting gears a little bit, let's maybe talk inflation. I took my son to a soccer tournament this past weekend and took them to fast food and my bill, I'm like, oh my gosh, right? I mean, a hamburger at Five Guys is over $10, at least the one I went to in Cincinnati. So inflation is certainly something that has impacted you, has impacted a lot of my other companies. Maybe just quickly what happened in '01 -- I'm sorry, '21, where are you at now? I think in your recent guidance, you sort of nudged it up, the outlook again, and how you're able to handle that with pricing and such?

Look, inflation is real, and this is the first time in many decades in my lifetime that we've had this kind of sustained inflation. The inflation that we are experiencing as a business, though, is a combination of sort of base inflation where material costs and labor are flowing through. As much as -- there's as much a factor which is really availability. And it's a byproduct of both disruptions and the deglobalization of supply chains. So where we -- over the past decade, we've gone purposely and built out supply chain to where we have multiple sources of all of our key inputs. Just great from a resilience perspective and dealing with disruptions in the kinds of disruptions we've had with COVID and other political disruptions, but tough when it fragments your purchase or your scale economics to where you're not getting the absolute efficiency. So not only are we dealing with higher wages and higher costs and higher cost of the Five Guys burger, we're also dealing with the fact that our spend is now, instead of being focused on one strategic supplier for a particular input, is now spread over 2 or 3 or 4. And you're losing some of that procurement economics, if you will, losing some of that scale. So compound that with lots of cost headwind from logistics, not just inflation. Yes, rates for a container are much higher than they were a year ago, if you can get one. Rates for air freight are higher than you could get than a year ago if you can get a slot. It's also trying to get a slot and having to shift the mix of the logistics that you used to use more, air freight, more high-cost venues. So we are seeing a compounding of inflation, which is, again, base effects, but also availability and deglobalization types of impacts. We had a very large cost headwind last year. We're seeing cost headwinds well in excess of that. Quite honestly, the cost headwinds we see this year is going to be a multiple of what we've seen in prior years. Now that said, we are moving aggressively on price. In the first quarter, we raised prices about 8%. We're guiding that we'll be raising prices mid-single digits through the first -- through the full year. It is our expectation and our intent that prices should offset or more than offset COGS increases. We're also trying to offset some FX-related price impacts as well, and then we'll use volume to offset growth investments in SG&A and R&D. But I think first quarter is a very good start in that path and really demonstrating the pricing ability we have in the business. And again, that algorithm, pretty clear, we need price to offset COGS and we'll use volume to offset SG&A and R&D investments.

Right. Another subject that comes up sort of within that inflation sort of thought is China. You have a lot of manufacturing over there. It used to be a lot more. It's -- I think you said on the call, in the low 40% range. Have you been affected -- obviously, you've been affected. But with the current shutdowns, what's the impact? And then I also recall Mark's saying he hopes to get that positioning down to 30%, so.

Yes. Look, we've made a big transition. Again, this has been a multiyear transition to shift to having multiple sources of ingredients and diversify our sources outside of China. Prior to 2015 when we acquired the Cheminova business, in 2017 when we acquired the assets from DuPont, we were about 95% sourced from China. We brought that down into the 43% to 45% range now. We'd like to get that down into 30s. I think practically speaking, given the installed base of the chemical industry in China, there's no way you're going below -- much below the 30s in terms of your direct exposure to China. And that's fine. I mean it's a great producer. It has been a great place to do production. It's just one thing that we've seen and certainly learned through the past several years of pandemic is it's important to have some resilience and some flexibility in our supply chain to deal with disruptions, so not having all of your products sourced in any single location. And that's a lot of the story of investments we made over a multiyear period to allow us to be more resilient through these disruptions. So current situation in China, I'm sure everybody has seen the news with lockdowns and other disruptions. Last count I saw, there were more people currently locked down -- under lockdown orders in China than there are in the United States, so it's a pretty disruptive event. Our operations have not been directly impacted to date. We have a large plant just north of Shanghai in Jinshan. It's still operating. But in large part -- and like to give great thanks to our employees there, who are basically living in the plant. Because if they leave the plant, they can't get back in. So we're doing a lot to support them. And trust me, we're rolling out the red carpet in every way we can, but that's a great sacrifice to ask from your employees to continue operations. So we're certainly hopeful that both the outbreak will peter out in China, but also that the approaches for managing future outbreaks will evolve. I'd say from a direct plan operations of our suppliers and our own direct plants in China, things are continuing well. Logistics is the challenge, both shipment among plants in China and then particularly trying to get product in and out of China. You may remember that last year, when the U.S. news was dominated about port blockages in the United States from -- Long Beach Port in L.A. was so backed up, there are about 100 container ships waiting to unload. As of yesterday, there were 507 anchored waiting to load or unload at around Shanghai harbors. So the risk to disruption in the broad set of supply chains, I think, is very real. We've been -- let me be very clear. We've been managing these kind of supply chain disruptions for 5 years now. When China went through its Project Blue Sky in 2018, 2019 and the rolling shutdowns of different chemical parks that disrupted a number of our Chinese producing partners to going into COVID, to going through the Suez Canal blockage and the Texas freeze, we have been working and improving and building on a very resilient supply chain that allows us to shift production around and have a capability to manage logistics at a truckload level to move things around. In the early days of COVID really in Europe, I'll give you an example, plotting out truck routes to get around border-crossing blockages among different countries in the EU before green lands were established, right? So that very granular level of logistics management is a capability we've built up and has been very important to our ability to not be excessively disrupted by these kinds of issues. But I think certainly, as we've looked for the remainder of this year, one of our concerns and one of the risk factors is clearly what are the effects through the rest of the year of this current backlog in Chinese ports.

Great. We have about 10 minutes left. So if anybody has a question, feel free to raise your hand and we can take it. If not, I've got about 30 or 40 more, so.

[indiscernible]

I can't directly speak to purchases of crop commodities, which is where I think a lot of that activity will be more focused. We do see concerted efforts by governments and industry groups to make sure farmers have the inputs they need to maintain continuity of supply. In some smaller countries where that is managed more directly by government agencies, we are seeing a little more activity, but I can't really speak to -- at the wheat level, for example, if there's more coordination going on there. But I think the risk factor you point to in terms of the risk of political instability in cases of shortage of food supply, it's one of the reasons why we think the world needs to really focus on ramping up production and doing everything it can to drive increased yields. That, to us, is a positive because one of the key tools you have is more efficient use and better use of crop chemistry to do that.

So from where you're sitting, where are you seeing [indiscernible]?

Certainly, from a scarcity of food supply, basically look at most of the African countries that are net importers of wheat would be an absolute concern, some smaller Asian countries. The secondary effect would be edible oils. The block up of palm oil in Indonesia is not a good move, not a good step for global stability. So again, I think the world is pretty flexible and you can see rerouting of both where crops are produced and how shipments are routed around the world. We saw this a bit with swings between the U.S. and Brazil for soybean sales in China over the past couple of years, but it's not instantaneous. So I think this year is going to be a bit bumpy.

Great. I thought we maybe talk about the diamides a little bit. They've been a fantastic business since you've owned it. I think approaching $2 billion in sales, something like that, and the growth rate has been mid to high single digits for a long time. So what's your outlook this year? And maybe a little bit on you license a lot of that technology out as patents are supposed to expire. So maybe a quick update on those 2 subjects.

So diamides, the Rynaxypyr and Cyazypyr are the 2 key products, have been a tremendous franchise. We acquired them from the former DuPont in 2017. We've grown them from being a $1.2 billion business to a greater than $2 billion business this year. They grew about high single digits in the first quarter, and we're expecting similar kind of growth for the full year. We've owned this business for about 5 years now, which is the duration of time it takes really to do a lot of what FMC has great historical strength in doing, which is taking an ingredient and formulating it in different ways to create different value propositions and create more value for growers. And you're now starting to see the real benefit of FMC-led innovation on top of these molecules. So we introduced late last year a higher concentration formulation of Rynaxypyr called Vantacor in the U.S. market. Now, similar formulation called Coragen Max in the Canada market, tremendous growth. Brings a lot of value, making it much easier to use and a much more concentrated product to manage when they're applying-ed. We also introduced Elevest, which is a combination of another FMC insecticide bifenthrin along with Rynaxypyr. It has a nice balance of immediate knockdown of pests and long-term control of pests. So we're doing -- what we're seeing now is the next phase of real growth of diamides, which is first phase, which continues, is displacing older, more harsh chemistries. Diamides continue to take shares away from OPs, from carbamates, from some of the older chemistries out there. But now the second phase of that is creating value-added formulations. And our partners are part of that solution, right? I'd say our partner sales growth is mirroring our own internal sales growth. And one of the reasons -- one of the many reasons we entered into some of these partnerships is our partners have access to other active ingredients that they can build formulations around that will offer different properties and different value propositions to customers. And it's all about tailoring a product to continue to maintain the focus on the value that the product brings, not the number of units of the product you're selling. So as the patent portfolio, your other point there, starts to mature, we start seeing some of the early composition of matter patents start rolling off the end of this year and next. We'll continue to protect that business both from other patents, a number of process patents and patents on intermediates that continue out well into the second half of the decade, but also through having these higher-value formulations out there. And by having broader adoption of the chemistry through going to market through a number of partners at the same time, you don't leave a lot of space for other people to come in. So we think that the diamides as a platform will continue to be a strong grower well into the remainder of the decade. We still have a lot of intellectual property that protects them well into the second half of the decade. We've been very successful in enforcing that intellectual property. You may have seen last week, we got a permanent injunction against the Chinese producer for infringing our manufacturing patents, including the award of damages, which is not common in Chinese intellectual property cases where they've been permanently enjoined from producing and they are paying us damages from infringement of our intellectual property around the production process for making Rynaxypyr. So we will continue to aggressively enforce and defend the intellectual property. And then we use the commercial strategy to amplify the growth and continue to broaden the platform. And we've had some great partnerships, we're really excited about a number of those partners and partnership. We signed with UPL last year, it's just really spinning up and will be another great partner for growth. Also the first time that we're using a partner to help us manufacture, so very capital efficient for us to help growing the capacity we have for diamides and to take advantage of a very well-regarded manufacturing company's prowess to look at how we're doing and see if we can do better.

Great. One last question. The Analyst Day highlighted a really big discovery pipeline. Seems more exciting than James Harden has been for the Sixers. But it's -- the goal is for $2 billion in sales in 2030 and higher as it peaks. And I know we only have 2 minutes, but you practically spend the whole time on it. Anything in particular? Isoflex is gaining a lot of traction, and you had a bunch of other names that I can't pronounce, but...

Tetflupyrolimet. That's one to learn about here shortly. Look, I think you're spot on. We have 10 active ingredients we're bringing to market through the rest of this decade, with the expected sales by the end of the decade of about $2 billion. Isoflex, which is a herbicide for use in cereals crops, blew away our initial expectations in its introduction in Australia last year and growing very strong in this year. We had sized that as a $400 million to $600 million revenue at peak opportunity. Everything we're seeing is pushing it to the higher end of that range. Fluindapyr, which is a new fungicide, is starting to be rolled out this year, very excited about its prospects. And then, all joking aside, tetflupyrolimet, which is a rice herbicide, that starts being introduced in 2024. We have tremendous, tremendous excitement about first new mode of action for controlling weeds in rice in several decades. So it's going to be a really exciting product when it comes to market.

Great. Well, thank you very much. It's all the time we have. Andrew, thank you again, and thanks, everybody, for sitting in.

Thanks.