FMC Corporation (FMC) Earnings Call Transcript & Summary

It's my pleasure now, as part of our afternoon series, to introduce FMC. Joining me is their CFO, Andrew Sandifer. And without any further ado, if you just want to quickly introduce FMC to the audience, and then we'll jump to the discussion.

Glad to. Thanks, everybody, for joining this afternoon. As Laurence said, I'm Andrew Sandifer. I'm the CFO of FMC Corporation. We're an agricultural sciences company based in Philadelphia, with about 75% of our revenue outside of the U.S., guiding to about $5.6 billion in revenue this year, $1.4 billion in EBITDA. We are 1 of the 5 innovation-led crop chemistry businesses in the world and the only one that is exclusively focused on crop protection, whereas all of our peer companies also have seed businesses. We think that gives us a competitive as well as a return advantage over our peers, something we can go down on to if there's interest. But certainly, we are a fast-growing highest margin in the industry-focused crop protection player.

And great. So let's start with that sort of R&D focus and the notion of the ag transition. Over the last, call it, 7 years, there's been more and more themes advanced as a potential threat for the conventional crop chemical market, precision ag, biologicals, sustainability, less toxic chemistries. Can you talk about what this means for conventional crop chemicals over the next 10, 15 years?

Sure. Look, I think conventional crop chemistry continues to be a major, if not, the most significant tool for yield management, yield enhancement for farmers for the foreseeable future. There's certainly a lot of great new technologies in the biological space. I mean we just recently made an acquisition in the pheromone space, we can talk a little bit about. But when you look at just the magnitude of the industry, crop chemistry is about a $65 billion industry, and growing in the low single digits over a very long period of time. Biologicals and other plant health solutions are a $10 billion, $15 billion business, growing much more rapidly in the high single digits, but still a much more fragmented and much smaller part of the market. The truth is we need all of these tools to be able to meet the needs of a growing population in a hungry world. And I think the recent events geopolitically in the world that have highlighted how precarious food supply really is in the world, only highlight the need that we have a fast-growing population, particularly in developing economies, with an increasing appetite for calories and for higher quality of calories. We continue to see significant demand for all of the uses of agriculture products, be that food, fuel, fiber, feed. None of those are going away. All the demographics are pushing for even more production. So I think it's good news that we have a lot of different techniques that are being developed to help continue to improve yields and provide greater output from relatively finite acreage base that we have to produce from. So that said, our -- certainly, our core and our historical strength is in synthetic crop chemistry, which we still think is an anchor of what the world needs to be able to have the inputs and tools to deliver yield. But we also see some very, very interesting opportunities, particularly in biologicals and the better use of data and managing agriculture to keep driving higher yield from that same acreage.

So there's quite a bit to unpack here. Maybe let's start with the conventional crop chemistry. Can you talk a little bit about what FMC has done to sort of affect sort of the toxicology concerns, the concerns about endocrine disruptors? And from an investment perspective, kind of the perception that there is sort of a lingering kind of litigation risk over the industry? How much of that is a vintage problem that should drop out over time? Or have you had to change your R&D process to detect problems early and weed them out?

Yes. Look, I think that for FMC, sustainability has been a key aspect of our innovation for many, many years. 100% of our R&D is spent on products and development and maintenance of products that are more sustainable. A lot of the trends you're talking about, in terms of increased concerns around product safety and whether it's adverse impacts on unattended species, whether it's endocrine disruption, just raise the bar on your ability to identify, test, and develop improve efficacy of molecules. So when we look at all of the various investments we're making and developing new active ingredients, certainly, that factors in how we evaluate molecules and how we search out for new molecules. And also it fits on how we defend the portfolio that we have today, which includes specifically the diamides, Rynaxypyr, and Cyazypyr, which have a very, very favorable sustainability profile when compared to other insecticides. And in fact, they've been growing at multiples of the overall insecticide market because of that improved -- better -- not only better performance, but overall, better safety and sustainability profile. So look whether or not the industry is a target, there's certainly -- when you have large agricultural chemicals and disputes and what their impacts are in the U.S. legal system, in particular, there's obviously been a couple of high-profile lawsuits. That's not changed our belief that crop chemistry is an essential tool for feeding the world and that there are plenty of good ways that you can use safely and develop safe products that continue to contribute to that. So I think, again, synthetic chemistry is here for the long term. It will be complemented by and accelerated by other technologies. We need all of those tools to be able to deliver what the world needs.

And you alluded earlier to the pheromone acquisition in the biologicals. Do you think FMC has sufficient scale here?

I think we have growing scale. Sufficient scale is a good question, right? The biological space, plant health, broadly speaking, which for us includes biological crop nutrition, think of it vitamins for plants and seed treatment. Those are all areas which are very fragmented and lots of opportunity to continue growing. We've got about a $250 million plant health platform and revenues this year, growing 20% per year. About $100 million of that is actual biological products that are growing about double that rate. So it's becoming more significant within the confines of a $5.6 billion portfolio. It's still a relatively small part of the portfolio, but it is becoming more material. The acquisition of BioPhero, which we closed on July 19, adds pheromones into the suite of technologies we have to use for insect control. And it's an interesting play because pheromones and crop pest control applications have been around for years. They just have new produce through synthetic chemistry processes. They're very expensive. It's about a $500 million market. It covers about 1 million hectares a year. And it's -- the limitation has been the cost. And what BioPhero, what attracted us to them, we made an initial investment in the company a little over 2 years ago as a venture investment, with some technology they had developed to genetically modify yeast that allow us to use yeast to produce pheromones. Now the pheromones are chemicals that the bugs themselves naturally produce to attract each other. And we use them basically as a disrupting mechanism. You go out and spray them in places to draw off the males away from the females, so they don't reproduce. So where most of our insecticides are actually targeted at killing the bugs, while they're actually eating the crop and doing damage, pheromones are a complement to that by reducing the number of insects in the subsequent generations. So we see a lot of synergy and a lot of opportunity to help manage not only Rynaxypyr, but our other insecticide products to manage the life cycle to extend their lives and to limit development of resistance by using pheromones as a part of an integrated pest management program. But again, the big opportunity here with BioPhero is just a massive expansion of the addressable market. Now when you use yeast in a fermentation process as opposed to a very complex chemical synthetic process, it's orders of magnitude, lower unit cost. So while we're still going through scale-up, and we don't expect that commercial revenue until 2024, we can see a path where we very rapidly penetrate markets that have historically been inaccessible to pheromones. So think corn and soybeans and large row crops and places where it will pull in insecticides as well that we don't currently penetrate as fully. Because, again, it's a part of an overall system for managing pest. We'll give a more balanced and more sustainable approach. So BioPhero is something we're super, super excited about. Like I said, we've been involved with the company for a little over than 2 years. Irina Borodina, the technologist and founder of the company is staying on with us as the Chief Technology Officer for that business. Business is located in Denmark right down the street from our global headquarters for our plant health platform and our innovation center that leads all of our plant health activity. So that's a super exciting acquisition for us.

And you had some pretty punchy 2030 sales targets when you announce, which is unusual for you to set those out. How does the degree of confidence on those compared with when you put out a peak sales number for one of your own AIs?

So when we look at our own internal synthetic active ingredients that we develop -- by the time in the development pipeline, and we're starting to do the work to get them registered and then start commercially launching them, we have pretty high confidence that the chemistry works. What we're doing then is proving out all of the safety and efficacy in field trials and going through what is a long and arduous process up to 7 years in some countries to get them registered on the market. The analogy with BioPhero, it is clear that pheromones work. They've been on the markets for decades. They're just too expensive. So it's all about the scale up and ramping up production, and we have high confidence there, but we haven't done it yet. So we're in the process of ramping that up. And again, we'll start some commercial sales in 2024. But any uncertainty about the efficacy of the chemical is none. There is none there. So I'd say from a balance of risks, we feel pretty -- I put it on a pretty even footing with our in-house R&D pipeline. With the individual elements, there might be a little more manufacturing scale-up risk, but a little less efficacy risk, probably a little less registrability risk given that these are, again, naturally occurring chemicals that have been used in this kind of application for a long, long time.

And can we touch on another couple of secular things? So digitalization and digital ag vertical farming culture proteins. If you put those 3 together, they're all trying in different ways to break the link between population growth, acreage growth, chemical demand, volume of chemical demand, and aggregate grain demand. How do you see how FMC needs to reposition its business model or its portfolio to just allow for what those threats look like 7, 10 years down the road?

Yes. So look, fundamentally, when we think about ourselves, we think of ourselves as an agricultural sciences company. We do not think of ourselves as a chemical company. When we think about purpose, mission values kinds of things, our purpose in the world is to enhance agriculture through sustainable production of crops. However, that crop, whether that's a food, fuel, fiber, or feed application; however that crop has gone, whether that's vertical, horizontal, indoor, outdoor, or even -- and the far reaches cultured versus raising of livestock, our story is we want to be a part of delivering yield and deliver -- helping growers produce more with a limited set of inputs. Because no matter what technique you're using, you're dealing with finite resources to try to meet a growing demand. So specifically in Precision Ag, we've made a lot of investment in our Arc Farm Intelligence tool, which allows farmers to monitor the insect pressure in their fields and using some patented algorithms, predict the increases in pest pressure, so you can be more specific in the time you apply insecticides to get a better bang for the buck, higher value use. That, I think, is a good example of how we see precision agriculture and the use of data helping enhance our business. Look, we don't sell pounds. We don't sell gallons, we sell yield. We will reformulate products on a regular basis, oftentimes in ways that reduce drastically the volume of product that are applied to get the same kind of benefit. It doesn't change the value we've been able to capture from that. So as opposed to somebody who takes a mindset of a chemical company pushing gallons or pounds or tons, our KPIs are all steered around value. They're all steered around generating yield and collecting a portion of that value through economic model. Vertical farming. Very interesting in terms of being able to do things in a different kind of footprint. Also often some interesting opportunities in that you have a contained controlled environment that if you have a pest outbreak, you can very rapidly have catastrophic failure, right? So not a big market for us right now, but something we're watching very, very closely. And certainly, you can imagine through our ventures arm, looking at some of the early-stage technology on how you might partner with or piggyback on some people who are developing some of the technologies for managing those kind of operations. So I'd say just more to come, but an area we're very aware of. Cultured [indiscernible] less directly applicable to us at the moment. Certainly, you can see if it were to scale substantially, would that have any impact on feed uses of grains in particular of oilseeds? But at the same time, we think about fuel uses and the increasing demand on soybeans in particular, for biodiesel. I'm not overly concerned even at a very accelerated, very optimistic penetration rate of cultured [indiscernible] than in any of the next 2, 3, 4 decades, that has a material impact on agricultural demand.

And are you far enough along with the digital ag experiments to see whether your value capture relative to yield gain is improving or stable?

Yes. Look, I'd say everybody, I think, is still experimenting with different business models around precision ag and the use of data in agriculture. We have -- Arc farm intelligence, we use as a tool for building engagement with farmers. We don't charge for that service. But we have hard data that shows that growers that we work with and utilize Arc farm intelligence buy substantially more product from us. So we do see a direct return on investment from that activity, although it itself is not directly a revenue-generating activity. So as we look at other alternatives and how we build out other functionality into Arc and look at other opportunities in space, we're continuing to think about what kind of models may be there. But at present, it really is -- it's much more about driving engagement with growers and bring -- building pull-through of products as it is as opposed to actually being an independent revenue source.