FMC Corporation (FMC) Earnings Call Transcript & Summary

Welcome for those who just dialed in to the ninth annual Bernstein Agricultural Conference. And I'm delighted to have Mark Douglas, CEO of FMC is joining us for this fireside chat. Mark became President and CEO of FMC in June 2020. He's led the company on the commercial, operational and technological side as the COO of the company from June 2018. He was -- he's been with the company a lot longer than that. He was President -- has been President of the Agricultural Solutions business since October 2012, and he joined FMC back in March 2010. Mark it's a pleasure, as I said, to have you on the call today. We have not got any slides for this session. So this will give us maximum time for the Q&A and the fireside chat, which I'm very much looking forward to. I'm sure it will be an exciting mix of high-tech chemistry and agriculture. And we've got quite a few questions actually coming through on the pigeonhole link already. So for anyone that's not yet familiar with the format, we run a pigeonhole system. There's a link in your calendar invite. It's really easy to use. You click on it, you type away and you submit your question or you can also vote on the questions that have been submitted by other investors before. So with that, Mark, did you want to make any introductory remarks, State of the Union for a few minutes before we jump to the virtual fireside.

Sure. Thank you, Gunter. Well, welcome, everybody. Pleasure to be here at the Bernstein conference. State of agriculture is very positive. Let's be clear, we face a very interesting backdrop in the sense of how the markets are performing, where soft commodity prices are. And then that's allied to the fact that we're seeing a lot of interesting aspects from a supply perspective and a cost perspective. So I would say, having been in this industry over 10 years now, this is probably the most dynamic I've ever seen in the industry in terms of total movement, the discussions around food security, given what has happened between Russia and the Ukraine. That hasn't been at top of the agenda for the last few years, but certainly is there now, which creates opportunities. It creates issues for the industry. So all in all, a very exciting time to be in agriculture to say the least.

Excellent. And I saw your name pop up because we're running just 1 big Zoom room here. We're not doing any breakout sessions. I saw your name pop up well early when I was still hosting BASF. I don't know if you had a chance to actually listen to the conference.

I did not. I did not.

I asked a question around Q1 trends were BASF Solutions had very good volume growth, but the pricing growth was below yours and below Bayer and Corteva. So maybe I twist that question around a different way and say that your volume growth, so you reported 8% was higher than the rest of the market. So to what extent do you see that as a result of improved mix, which I think you include in your volume growth, so it's different from how your competitors report and farmers trading up because of the high crop prices that you already mentioned? And do you think you have taken market share from whom?

Yes. Thank you. So volume growth was strong. I think we were also very transparent in saying that the quarterly cadence that you see that is more normal in many industries right now is somewhat changed given the fact that customers and farmers and growers are concerned about supply. So we felt we saw some orders from Q2 that actually moved into Q1. Hence, on the earnings call, we talked about the first half versus second half. Volume was strong. Make no mistake. I think with soft commodity prices where they are, many growers around the world are certainly focused on making sure they have the right materials at the right time to protect those crops. And I think that's an interesting facet about crop protection input company like ours. I often describe our business as being very much like a fire extinguisher for farmer. You could do different things with fertilizers at the beginning of the season. Some people will use less rates. Some people might even skip a year given where we are with fertilizer costs and supply. But if you've got a field full of insects, you need to remove those insects, and that's fundamentally the business that we're in, is supporting the yield and productivity. When you look at 8% volume, mix was certainly a positive factor for us in the quarter. We are seeing the very high end of our portfolio is doing very well. We talked about the diamides, for instance, growing in the high single digits. That's an example of people who are willing to use the best products to protect the crops in the most efficient way to get the highest yield. So volume is strong. Did we take share? Yes, I think we did take share, especially in the insecticides. There's some interesting dynamics in insecticides right now. A lot of the older products are coming under regulatory pressure, which is opening the door to the new classes of chemistry like our diamides to do very well, and we are seeing that. I would say the backdrop will continue, as we've talked about. We don't see that changing certainly in the next couple of years. We expect soft commodity prices to stay high. So that volume growth is very important on top of the pricing that you just talked about.

Does that make your full year guidance very conservative, therefore?

No, not really. I mean we gave quite a wide range of guidance. You look around many companies today, some people are not guiding at all. We're anchored on a $1.4 billion EBITDA for the year, and we feel pretty good about where that number is. Obviously, we're watching costs very carefully as we go through the year. We have a view of cost today. We are offsetting that with price and cost controls inside the company. So I think we feel pretty good about where that number is. I think it's also worth noting that FMC was the first agricultural input company to remove itself from Russia completely. And we have to cover that gap as well. So we didn't change our forecast given the fact that we've removed ourselves from Russia. So in effect, we actually had a, I guess, you could call it a de facto or raise to stay where we were in the sense of covering Russia. So we feel pretty good about where that number is.

Very good. And maybe we can get -- you can get your crystal ball out for ag end-markets. In 2022, you are mentioned, if we look at stock-to-use ratio, other indicates it looks quite tight into 2023 as well, eventually, the cycle will roll over. But what's your best prediction? Where do you see end markets and farmers' profitability over the next few years?

Yes. Look, I do see a positive backdrop for us and especially a company like FMC, where you've had over the last few years, very little market growth, yet we've been growing in that 5% to 7% range, frankly, towards the top end of that range. I do see a positive backdrop into '23. And you would have to look at it and say, what would fundamentally change to reduce crop prices. Over the very long haul, soft commodities do follow oil pretty closely. There's quite a strong correlation. Oil is well above $100 a barrel. You would have to make some pretty drastic changes to bring that down. We see stock-to-use ratios low, as you said. We do see more climatic change around the world, not necessarily the world getting warmer but more volatile weather patterns. We saw -- we've seen that over the last few years. The USDA will always say that you are 1 weather event from a shortage in any 1 region. And I do believe that to be true. So I think that -- and the team here at FMC thinks that 2023 will be another good year for the agricultural industry.

And if you look geographically, it's something I published on before, it's sort of a Matthew's effect where the countries that have high crop yields today have more money to invest in new technologies and are therefore, better equipped to combat any results that stem from climate change and similar effects. Is that something that you see we open up that extra dimension in addition to the crops and the years that you've already mentioned, if we look geographically, where you see the most significant changes and also the most significant differences to growth patterns in your business?

Yes. I mean, listen, we are one of the most balanced crop input companies. We have roughly 25% of our sales in each of the 4 major regions in the world, which allows us to ride through some of those climatic changes. We're not overexposed to any 1 country or crop, which gives that portfolio a good balance. You've got to remember that it's a very fragmented industry, agriculture. We service -- I think I saw a number recently that we touched 3 million farmers every year as part of our selling process. That goes from the very large soybean growers or corn and soybean growers in Brazil and the U.S. and Argentina all the way through to very small hold of farmers in parts of ASEAN and India. So you have different dynamics moving through the organization. So where we'll be focused on certain things in the U.S. or Brazil. We're focused on very different things in India, for instance, where we're bringing equally new technology, but maybe in different types of packaging, different service levels to suit a grower that has a much smaller piece of land. So overall, great portfolio, very balanced geographically, but very adaptable and flexible in how we service the different markets around the world.

Very good. And just the questions keep popping up. So please keep it going is my encouragement on the investor side, is an interesting one. The question is, is there anything that would cause soft commodity prices to be higher for a prolonged period such as 5 to 10 years? Or do you expect things to sort themselves out well before that.

Yes. It's an interesting question. If you look at the ag cycles, when you have an up period -- they do tend to be in that 3 to 5 years. And then when you have a down period, they also tend to be in that sort of time frame. I do think weather will play a more important role as we go forward. Over the weekend, you saw the tremendous flooding in India and Bangladesh, record floods. That's the type of thing we have to deal with. So I think you're going to see those dislocations from a climatic standpoint. Obviously, we have a geopolitical situation that has changed around the world over this year. That also impacts on the soft commodity prices. I don't see either of those unwinding themselves very quickly. And with a growth in the world of the population that needs to be fed, there is constantly that upward pressure on food supply.

Very good. Now Mark, you mentioned supply constraints around the production side already rising raw material costs as well. Can you just talk us through what you're seeing in the input environment, including the logistics side of it as well. So it's still going up. Do you see any signs of easing? And how quickly can you pass on those higher costs through pricing?

Yes. So taking the pricing peers, we have been very aggressive on price. I think you alluded to that at the beginning, Gunther, your biggest weapon against rising costs, obviously, is price in the marketplace. And I think there is a general acceptance in the agricultural space that there is broad-based inflation, whether it's diesel fuel, whether it's seeds, chemicals, fertilizers. So our primary objective is to offset cost inflation with pricing moves as well as cost control. We've done a good job at that. We will continue to do that as we go through the year. I would say from a cost management perspective, supply disruptions, I mean the biggest focus is on China. Obviously, fast populations that are locked down right now has an impact on all industrial companies, FMC included. I don't think it's getting any worse. I think as we've come out the first quarter into the second quarter. Things seem to be somewhat stabilized because it means to say they are absolutely fantastic, but at least it's not getting worse. I think on a logistics standpoint, we still see expensive maritime freight from China to Europe and to West Coast of the U.S. I don't think that's getting any worse at this point. Road freight in the U.S. is getting better. As we've gone over the last couple of months, things seem to have used a little bit. And we are seeing benefits in packaging around the world, especially in Latin America, where things are starting to ease. So I think versus where we were earlier in the year pretty much as we expected it to be, not particularly getting worse, not particularly getting better. We'll see as we go through the year, we think things should start to ease as we get into the end of the year. And certainly, into the beginning of '23, we should have a better backdrop in terms of the disruptions and the costs that are associated with those disruptions.

Will that then limit the opportunity and the necessity to increase prices to your customers?

Well, look, I think obviously, we have been moving prices on a constant basis. We will continue to do that. I mean, we don't intend to lose margin over the long haul. I think that will -- pricing will abate as cost abate. We don't actually need costs to go down significantly to improve our margins. Our margins are already in the 26%, 27% EBITDA range. So we're operating at a very high level, but we think there is more margin there once prices start to -- costs start to stabilize, price tends to be sticky in the agricultural field. So we expect to see some margin come back as we go through '23 and into '24.

Very good. Your new product revenues were up pretty substantially from $400 million to $500 million -- sorry, to $600 million, if I'm not mistaken. Where does that come from? Is it mainly the pipeline? Are you seeing a higher hit rate than normal? Can you just talk us through the moving parts there, please?

Yes. We measure new product introductions on a 5-year time frame. So the $600 million that you just referenced are from products that have been launched in the last 5 years. The reason we do that, it can take a while to get products into the marketplace and get moving, and peak sales can occur anywhere from 5 to 15 to 20 years from launch. So you have to look at it with a little bit more of a longer-term time lines. We believe that $600 million will continue to increase on the strength of 2 things. First of all, the R&D pipeline that is now coming to life and products being introduced. And then second, something that we've always done at FMC, which is what we call local development. So this is developing new formulations for different crops and different geographies that bring new products to life. So you might have 2 different molecules that you've never really used together, but the pest spectrum that is out there needs those types of active ingredients. We'll build and formulate a product. It tends to be more shorter term in terms of cost and time to market, but it adds significant growth because you're constantly expanding your market access. So you bring those 2 pieces together and you look at the long-term pipeline that we have, it's a very healthy picture for that new product introduction. And the piece that is more important is those new products tend to be at a higher margin. There are different technologies. They are formulated for a specific need, so you get more value with the grower. So that $600 million, we should see that higher in 2023 and '24 as well.

And with that, the margin accretion that you just mentioned as well. Can you talk us through some of the most important R&D pipeline assets that you're most excited about and how they're progressing?

Yes, certainly. Last year, we launched for the first time a brand-new cereal herbicide. It's a grass herbicide. A very different mode of action. It was launched in Australia. It's done extremely well in Australia for use on cereals. That product is also getting launched in Argentina as we head into the next season, the '22, '23 season. That product is going to have $300 million to $500 million of revenue around the world. Europe comes next after Argentina, so '24, '25 in Europe, which is a big cereals market. And it's not a market that FMC plays in. So we like the fact that we're bringing products to market in new market spaces. Second is a new fungicide called Fluindapyr, that gets launched this year in our specialties business. And then U.S. and then other parts of the world in the following years, again, another $400 million to $500 million molecule. And then next, perhaps one of the most exciting ones is a brand-new rice herbicide, a grass herbicide for rice with a brand new mode of action. So there is a lot of resistance in rice in Asia for This is a new tool that growers will have. And once again, we think that is in the $400 million to $500 million of revenue. So you can see as we launch these products over the next decade, we have a very strong pipeline that takes us through the end of this decade and well into the next decade of growth.

Very good. And just how is that pipeline of growth comparing on the other side to registration losses?

So when you look at registration losses for us are actually 2 things: registration losses and products that we will remove from the marketplace proactively. We have about 150 basis points of drag on revenue every year from registration losses. It can be as low as 50 basis points, it can go up to 200 basis points 250. It moves around, but a good average is about 1.5% of revenue. When you look at the new product introductions, when you think about $600 million, we're $5.5 billion revenue company so round about 11% of revenue comes from those products that have been introduced. So you're far away at the drag on revenue from registration losses with the new products, and that's really what you want to be doing. You want to be accelerating your growth with the new products.

Excellent. Switching gears a little bit. Can you give us more color around the plant health and biologicals group? It seems to be a big driver to revenue growth, but maybe you can shed more light on that part of your business.

Yes. Listen, it's a very important platform that we've built over the last 9 years, and we call it our plant health business comprises of biologicals, micronutrients and seed treatment. The business today is in the $270 million range. It's growing north of 20% makes above-average EBITDA margins, and it is one of the sustainable platforms within the company. Biologicals are growing very quickly. There is a lot of, what I would call, really good science being applied to the biological space today. So we can learn and take what we do with synthetic chemistry and apply that same rigor and process around the research process for biologicals to bring those new products to life. We have plans for that business by 2025, 2026 to be north of $500 million. So it's becoming a meaningful part of the portfolio. And I would say, more importantly, we get a lot of questions from growers around the world about biologicals today, what can they do? How do they work? What opportunities are there for growers to use biologicals either in conjunction with synthetics as part of a spray program or as part of a formulation or a stand-alone. So you should expect us to talk a lot more about Plant Health. We have been over the last year. We will certainly be investing more in that business in terms of looking at M&A from an inorganic growth perspective, really around technology. And then also from a just grow the business it's interesting because biologicals work in a different way to synthetics. So you have to train your own sales force, our own agronomists. And then we have to get out there and train farmers, distribution, retail. So it's a bit of a long process at the beginning, but we're now making traction. We have that critical mass. I very much like this business inside the company. I think it can go much further than the $500 million over the long haul and become quite a meaningful part of the company overall.

You just alluded to it already, but how much of those revenues are incremental? And how much of it substitute existing best decide, usage by the farmer?

Yes, we're not seeing any real, what I would call, cannibalization of our current portfolio with the biologicals, they tend to be much more complementary. For instance, if you're going to use a biological on a fruit and vegetable, you can use biologicals right at the end of the spray program because they have very low residuals. So you could literally spray it and then move it into the supermarkets. So it's a very different type of product, and we don't necessarily have products that fit in that type of spray program. So for us, it's all brand-new incremental market share and growth.

How sticky would you think those revenues are when eventually, at some point, the ag cycle will roll over and farmers income will be a more normalized level.

Well, the only analogy I can give you is my experience over the last 10 years, FMC has been growing in that 5 to 7 plus percent range, no matter whether soft commodities were low or high. So we know we have the ability to continue to use technology to take share because fundamentally, at the end of the day, the whole sustainability environmental aspect of what you do, if you can bring products to market that use less products that are more environmentally friendly that can have less impact on soil, water or beneficial insects, all those things really matter. And if that's your mantra of what you're driving through distribution, retail and grower then you will have share of mind. You will be able to grow, and that's what we've been doing. I think -- put it this way. in a $65 billion market, I'm bringing new technology. I don't need the market to grow up 5% for me to be able to grow 5%. There's good 92% of the market that we don't have.

That's a very good conduit actually to my next question, which I've asked Croda and BASF earlier today as well around the Farm to Fork Strategy as part of the European Green deal. It's quite something that's been thrown at not just FMC, but the whole industry. I hear you when you say that FMC has grown in the 5% to 7% range for more than the last decade irrespective of crop prices and bearing legislative frameworks. But what's your take on the European Commission Farm to Fork Strategy and the implications on a business such as yours?

Yes. Well, I'll give you my view of what I think of it, and then I'll tell you what it means for us. I think the pronouncements they've made recently were the 50% reduction of pesticide usage by 2030, they're now saying that's more of an aspiration. I think truthfully, reality is biting. The EU is legally bound to do an impact assessment. I'm very interested in what that impact assessment will actually be when you factor in what they're trying to do. There's been a couple of studies independently done that suggest they're going to need 30% more land to grow the same amount of crops. I think that is more of a reality than just saying you're going to reduce pesticide usage. None of us sell excess pesticides. We're spending $320 million, $350 million a year on R&D to bring newer, more focused, safer chemistries to market. That has to play a role. And think about it this way. The European Union is a big union. It is a large market. We continue to grow in that market. Why? -- because the people are investing, the people who are making those calls on the new technologies, those are the technologies that will ultimately win in a market that is going through change. And for us, we see it as an opportunity. If we can bring and get registered these new technologies in Europe, they will win. They are more environmentally friendly. The biological space is absolutely made for Europe in the sense of if you don't want to use synthetic pesticides, well, use biologicals, just make it easier to get them registered in the sense of time lines and then you will have a whole new way of looking at the marketplace. I think all those things need to play out. But fundamentally, I think it's flawed. I think reality will come home to bite. But a company like FMC will be in that market, and we will be introducing new products. So for us, that's a positive.

Thank you for that candid answer. Do you think that a movement on the legislative side in Europe is a likely outcome? I'm asking because with BASF, I just have that chat and the comment was quite intriguing that given the current food prices or crop prices, the European Commission might be more open to allowing technologies, new technologies such as gene editing. That was more on the seed and trade side, of course. But do you see a similar aspirations or movements on the Crop Protection chemical side as well?

Yes. Listen, I think the European Union and the commission should have an open mind on the new technologies. We're not in the seeds business, but when you look at the advantages of those gene technologies in other parts of the world, they are considerable. Now we all know that Europe will not go down the road of GMO, but there are new technologies coming that they are not just applicable to seeds, you can apply some of those gene editing techniques to yeast to allow you to produce different types of products from a fermentation process. Those are technologies that we're investing in as a crop protection company. So I do think this area is getting more complicated. There are some really, really interesting new cutting-edge tools to use to provide products that are more sustainable and more environment friendly. I do think the EU is going to have to listen to that and really engage in a discussion with the industry to say what can we put in place that allows us to use these new products to take away some of the older products.

And more specifically to your company, then what opportunities do you see from an environment or change such as Farm to Fork to a diamide business, particularly.

Well, I do think when you look at a diamide as 1 of the very high value in use products that has a very favorable environmental footprint. Those are the types of products that we'll take share from organic phosphates or neonicotinoids or the other types of chemistries that are getting removed from the marketplace. At the end of the day, if you have an infestation, you have to remove those pests. I mean a great example is sugar beet in France, where neonicotinoids were banned. There is a certain type of pest that can't be removed by any other means. The French government allows a derogation to use those products again. That's reality biting. That is mother nature, saying there are product -- there are pests out here that can only be removed in certain ways. You either grow that crop or you don't. So I do think that, that introduction of new technology like the diamides really does benefit the grower. And people have to recognize food security is a real live subject today, and it's not going away.

Yes. Yes. Mark, can you talk a bit more about your Precision agriculture or digital agriculture offering? And have FMC Ventures been able to support this?

Yes, certainly. So I'll take the ventures piece first. We set up ventures about 2 years ago. It's a considerable effort. So we basically have our own best capital fund inside the company. And we're investing in what we call technologies around the core. So for instance, we've invested in drone manufacturing. We've invested in sensing equipment. We've invested in peptides that are potentially used for pesticide manufacturing. We've invested in fermentation companies. All these are areas that we don't have expertise inside the company, but we do believe will impinge on agriculture in the future, and therefore, we want to position in that space. That has allowed us to bring the precision ag area and the ventures area in R&D, all closely aligned. So I think from a Precision ag perspective, we have our own detection system called Farm Arc Intelligence. This is the first predictive model for insect pressure in a grower's field, so we can actually predict given all the constraints around when insects will come. That's a very sustainable approach because we can cut down the number of sprays. We can help the grower spray, the right product to absolutely the optimal time, so you don't get a reoccurrence of the festations. That is what we use Precision agricultural for. You have to have an unmet need that we can solve. If we can solve that, that's value to the grower.

Excellent. And FMC have been very active on the agriculture venture capital seen. What impact has that had on your revenues. And what do you see in the pipeline of venture capital that you're particularly excited about?

Yes. At this point, it's not a revenue-generating activity. It really is an activity that's based closely with research and development to really get us access to technologies that we can learn from. So not only do we learn from those technologies, but that helps [ farmers ] how we're running our research process. For instance, we are looking at artificial intelligence in terms of plowing through the massive amount of data that we generate every year in R&D to help us understand some of the trends that you might miss using traditional methodologies. So today, it's not a revenue generator. It is really about technology. That will play into revenue in the future as we bring those technologies to life and they become part of the overall portfolio.

Very good. And then just coming back, not just on this year's outlook, but you're coming also to the end of your current 5-year plan. And if you strip out currencies, then you'll be likely very close to achieving all this despite the macro stuff let's say that's going on. What will be your considerations, key trends or any factors that you may want to consider when you think about the next strategy and the long-term vision for the company?

Yes. Thank you for the comment. It's not often a company is 4 years into its 5-year plan has still talks about that 5-year plan. They usually get removed a lot quicker than that. We are very proud of where we are with our plan. Certainly, a lot of external shocks to the system, but we're performing very well. You're right. We will be putting a new plan together with the Board over the next year. And then at the end of '23, we will be coming to the world with a new view of where FMC goes. I think fundamentally, the company is very solid in terms of technology and sustainability, both central planks to where the company will go I think some of the things that we're looking at is expanding that technology base, as I said, growing the plant health business, how do we do that faster? How do we make it bigger? I think market access is something that's very important to us. We've been adding resources in different parts of the world to gain more boots on the ground thinking about how we service the grower, how we service retail, our distribution in certain parts of the world. I think that will play a bigger part of our strategy as we go forward, just thinking about how we can take more market share with the new technologies that we have. The industry is changing. I mean everybody can see that. You have the invent of online purchasing. You have distribution thinking about what do they do from a supply standpoint. How do they service their customers? Customers looking at who gives them iconic information. So all that is in the mix to change. But I do think market access is something that we need to be spending more time and effort on for the long haul.

Very good. And I have one last question that's just been submitted online. So if any of the investors have got any last follow-ups then now is the time. But for now, it's a question around the differences between the Asian markets and the rest of the world. And you mentioned your broad geographic exposure already. Are you seeing a lot more growth elsewhere in the world? And what are the key variations?

Well, for us, Asia is generally speaking, one of the fastest-growing regions of the world. If you think of our portfolio, we're not over-indexed to the row crops. So I think something just north of 20% of our portfolio is soy and about 9% is corn. The rest is specialty and niche crops. And that's 1 of the advantages of our portfolio and the way we operate. Asia produces 40% of the world's fruit and vegetables. So for us, it's a very important market, whether it's India, all the way through ASEAN into Northeast Asia and then obviously down to Australia and New Zealand. We do see that market growing faster than the rest of the portfolio, generally speaking. It can be up and down in any 1 quarter. But the investments we're making in terms of manufacturing, in terms of sales resources, Asia is 1 of the highest growth rate areas. I would say the second, if you're exposed to soy, then Brazil and Argentina would be the fastest-growing markets, purely because Brazil has land that they can dedicate to agriculture from [ pasturan ]. So you have that natural expansion of hectares and acres every year. I would say North America would be the third area given the weight of the significant row crop exposure in the U.S. And then last from our perspective is Europe. Europe really hasn't grown in terms of overall dollars over the last 5 years for the industry. And that's because of the different policies that the EU have put in place. So Asia, Latin America, North America, Europe is how I would look at it.

Very good. Thanks a lot for your candid views again, Mark. I really appreciate that, and it's been an absolute pleasure hosting you at our conference.