FMC Corporation (FMC) Earnings Call Transcript & Summary

Well, welcome back. Our next presenter or next fireside chat is with FMC. And we're pleased to have Andrew Sandifer here as well as Zack Zaki. And before we get started, I'm just going to read some disclosures. I'd like you to please see the Morgan Stanley research disclosure website at www.morganstanley.com\researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative to discuss these in further detail. And with that, we'll get started with the fireside chat, and we'll also be happy to take your questions afterwards. So please be prepared for that. So maybe Andrew, first of all, thank you for coming. Appreciate it.

Glad to be here.

Great to have everybody back in person. And maybe we can just sort of start with a high-level discussion of how you expect to end the year. You obviously put up a strong third quarter. What's left to do in the fourth quarter?

Lots left to do in the fourth quarter. But now it's been a challenging year but a very good year for FMC. Through the first 9 months of the year, we've had very, very strong growth, 7% volume, 12% -- actually 7% price, 12% volume with some FX headwinds. So very strong organic growth through the first 9 months. We'll continue to have a strong outlook for Q4. It's lower top-line growth. We are comparing against a much stronger prior year period, but in the quarter that's dominated by the Americas, Latin America, in particular, but also North America with stocking up for the new growing season. 8% top line, 15% bottom line growth doesn't feel like a simply just walk in the park. It's still a significant business to deliver. But I think we've got very, very good line of sight to the fourth quarter. Market conditions are good. Demand is robust. We have, I think, a good view of supply availability through to meet that expectation and certainly, again, a very solid overall market environment.

Well, it sounds like some of the supply chain or logistics issues that caused issues for everybody in the industry for the last couple of years is starting to abate a little bit. Does that give you more confidence?

Yes. I think certainly compared to 2 years ago, in particular, I think the world is less disrupted. I don't know what normal is anymore. So I'm always cautious about using words like normalizing or anything like that. But I do think the world is less disrupted. When you look at all forms of logistics, they're more available, they're at more reasonable prices. There's less random shutdowns, unpredictable events in the supply chain. So again, I think that the visibility for Q4 is pretty good, both from a demand and a supply perspective. I think markets are solid. So we're expecting a very solid Q4 and a nice finish to the year.

Okay. And you also sort of began to discuss 2023, and there are probably 2 particular pieces of it that I'd like to dig into more. First was sort of your confidence in growing above the market, presumably on volume and price as well as anticipation for some raw materials deflation more later in the year, certainly even earlier in the year. But maybe you can put all that together for us.

Sure. Look, I think probably a bit earlier than we would normally do. We -- last thing on our earnings call, we tried to give a little bit of color and perspective on where we see the world going in 2023, in part because we're quite optimistic. And given the battles we fought in the past 6 quarters, in particular, with cost headwinds, to be in an environment with potentially improvement on costs, but particularly with still a robust demand environment, we still think there's a very good year ahead of us in 2023. So looking broadly at the market, we're anticipating a global crop protection chemistry market that grows in the low to mid-single digits next year after FX. So I think that's an important point to make sure that everybody gets. That's a post-FX number. And we are anticipating that the U.S. dollar continues to strengthen. So that means you're in that mid- to high single-digit kind of organic growth, which for a market that's historically grown in the low single digits, is still a very strong year, not quite the rapid growth that we've seen in 2022, but still a very, very strong year in 2023. And I think when we think about what FMC can do there, that kind of low to mid-single-digit growth, we think we can substantially outperform that much as we've done and outperformed the market for the past 5 years consecutively. We're driven by the strong technology and product portfolio we have and our growing market access. We think we'll continue to grow both through a mix of price and volume because, again, with FX headwinds, you're going to need both. We sketched out -- we're going into the fifth year of our 5-year plan, the 5-year strategic plan we launched in 2018 after digesting the acquisition of the DuPont assets. First time in my career in the chemical industry, we've made it to the 5th year of a 5-year plan. So I think that says something about the strength of the platform despite all the volatility that we've seen in the world in the last several years. But we're very excited about the ability to continue growing at a market -- above market level. So we could use that same range at 5% to 7% top-line growth as a guidepost, which would be a significant premium to the overall market. And that's driven by both volume and pricing. And on the volume side, it is market share. It is growth as new products are taking share from older, harsher chemistries as well as increased market penetration through investments we've been making in market access. So from a revenue perspective, we're very optimistic looking for a solid year again in 2023. I think from a profit perspective, we're also very optimistic and particularly looking to return to our expectations of the bottom line growing substantially faster than the top line. In our long-range plan, we had this algorithm, if you will, of growing the top line 5% to 7% and growing the bottom line 7% to 9%. And we think that's kind of a range that's well within reach for 2023 for the company. To be very clear, I am a CFO, so I like to think about numbers. I don't have a budget yet. We're in the midst of a budgeting process. What I do have is a good understanding of the different inputs and pieces that are going in. And I think as you pointed to, Vincent, I think cost inflation is something that is going to evolve during the next 12 months. We've had massive, massive cost inflation over the past 2 years. We had $180 million in cost headwinds in EBITDA in 2021. Year-to-date through September 30, we've had almost $380 million in cost headwinds this year alone and another quarter of significant cost inflation in Q4. That's hard for any business to keep up with on an immediate time frame. So yes, our profitability has grown a little more slowly than the top line this year. But next year, we think we return to that relationship of growing that bottom line faster. And it really comes from cost inflation decelerating. And I want to be very careful with the words I use here because it's not that absolute cost has fallen just yet. We have a year-on-year cost headwind in Q4. We will have a year-on-year cost headwind in Q1 and likely in Q2 but a decelerating headwind. And at some point around the midpoint of next year, we expect that cost to start easing to where they either flatten off or start becoming less. And in conjunction with holding price and continuing to improve price, that's where we see a swing to expanding margins and that reversal of the relationship where your top line grows more slowly than your bottom. So let me pause there for a second.

Sure. I mean maybe -- it's been such a crazy raw material environment for over 2 years now across the broader industry. What is it you're finally starting to see that's giving you confidence that we sort of hit the peak and now we're going to be on some type of slope of descent, and who knows where we wind up back at, but just that we're past the worst of it and it is going to actually start to finally get better.

I think a big part of it is a reduction in disruption, right? There are base inflation inflects that are real in feedstocks and labor and in energy that are all relatively small part of the cost picture for us. The biggest driver of cost inflation for us has been the availability of supply of some critical materials, many of which are very specialized that are needed to make our active ingredients. And that's been disruption of production either by COVID or by geopolitical disruption or by other factors, which has forced us to go to secondary and tertiary and even quaternary suppliers at times where you don't have the same strategic purchasing relationship. You don't have the same economics. So as we are seeing disruption ease in the world, doesn't mean everything has to get perfect or back to 2019 pre-COVID kinds of normality. But as that improves, we're able to shift more volume and more sourcing back to strategic partners at significantly better purchasing terms. Doesn't mean that we have any illusion that energy costs are going down or that some of these other base inflation impacts are going to go away. But what's been such a significant driver for us really have been this cost of disruption. That's where we're starting to see it. It takes -- to turn inventory about twice a year, so when we buy raw materials, either raw materials directly or intermediates or active ingredients that we need to then sell, it takes a good 4 to 6 months for those costs to flow through our financial statements and be recognized in the P&L for this revenue and cost. So the material we're buying today is what's going to hit our P&L in late Q1 and early Q2 next year. We're seeing that turn. We're seeing it flatten off, and we're seeing in those discussions where things are going. And that's the bend we're starting to see where we go, all right, we can see how this is going to change as we shift more of the buyback to strategic suppliers, as we see some easing in their costs because of their own cost of disruption that they're dealing with, that we'll start to see this change of plateauing and reversal of costs. What we're not anticipating is a big swing. We're not expecting some quick reversal here but some -- starting with a lower pace of year-on-year headwind and then moving to sort of flattening off and then moving to easing over the next 4 to 8 quarters. I think that's the kind of horizon we can see. But again, that visibility is really -- we have about 4 to 6 months on the biggest chunk of our cost of raw materials, intermediates, active ingredients piece of our cost, where we're starting to see those signs.

Okay. I mean, obviously, you look at next year as another good volume growth year for you and for the industry. Obviously, that tightens up the [ SMDs ] a little bit. Are those primary manufacturers that you -- or suppliers that you're working with, are you comfortable with the amount of capacity that they're going to have over the next 3, 5, 10 years?

I think so, yes. And it's so specific to any -- to a very -- each specific active ingredient. But yes, I think, overall, we're very comfortable with that. We've been very consciously diversifying our supplier base to reduce our dependence on any single country or a single point of supply to where we have more capacity now than -- for many of these inputs than we did 5 years ago. So it gives room for growth, just more solid volume growth also gives you room to deal with disruption if it were to arrive.

Maybe just going back to sort of the growth plan for next year. You did talk about sort of the new market penetration initiatives that you're kind of in the early innings on. So maybe you can just help us understand what those are, which geographies in particular and what you're seeing already.

Sure. We -- certainly, we've talked a lot about how new products have been a big part of FMC's growth. But I think the underappreciated part of the story or what we've not talked much about is investments we've been making in commercial resources and technical service resources and deepening our relationships and our staffing around major distributors and major cooperatives in places like Brazil or the U.S. or India, where we can provide more hands-on support to our channel partners as they support growers in helping them understand how to best use what are very technically complex products. So it's a pull-through strategy where we put more feet on the ground and help pull more sales through our distribution and channel partners. But it's showing some really, really strong impact. So Brazil is an area where we've made a lot of investment, specifically in large distributors and cooperatives serving corn and soybean. And over the past 3 years, we've added several points of market share in both of those crops as a result of those investments. And I use the term investments with a little lie because this is SG&A. I mean, this is expenses flowing through the P&L. And certainly, part of our cost headwinds is growing SG&A. Not the biggest part but certainly, there has been growth in SG&A spending year-on-year. And that's a piece of it is really directing SG&A towards supporting the organic growth of the business, pulling through more products. So we've made those kinds of investments in Brazil, seeing very good returns there. We made similar investments in the U.S. and in India. We'll continue those kinds of investments in a couple of places in Europe and Indonesia, where we're looking to continue that path. And it really is, again, providing support to our channel partners to help growers understand and better utilize technically complex products and pull through additional sales.

Is it the case that with the growers, right, they start to get that assistance and that help, and then does it just take time for them to then see the performance in the field to then want to make that switch away from whatever the incumbent product was that they were using?

Either incumbent product or new use to begin with. But yes, it does take some time. And certainly, it becomes self-fulfilling as you go season to season, right? So in cases where we're going to make some additional increments of investment this year, you're really going to see the benefit of that next year as you start that, right? So you had a few wins this year. And somebody tells his neighbor or her neighbor about how well this worked out for them, and it becomes self-reinforcing over time. So yes, this is something that will build over several years.

Okay. And then on the pricing side of the equation, I think you've been up high single digits all year, very strong performance. Next year, I think you highlighted probably more like low single digits. Is that just sort of the compound effect or just as sort of we come off these big peaks of pricing, that you want to try to get it down to a more normal level of price/mix realization?

I think it's the recognition we still -- we have a long way to go still on recouping all of the cost headwinds we've had. But at the same time, we have been very strategic, very surgical in how we've been doing price increases. We've never done surcharges. We don't do formula-based pricing. Our cost inputs are very complex and opaque and very hard to model as you know all too well. So we want to be careful about recouping that cost gap, but doing it in a way that's long-term sustainable and where that price is sticky. So much like our pricing has not ramped up on 40s and 50s of percent like fertilizers or certain nonselective herbicides that are more commodity in nature, they will be a bit slower to come up and a lot slower to come back down. So today, year-to-date, we're up 7% on price, and I expect to finish out the year at similar kind of level. Next year, a little bit lower but still continuing to raise price even as we get to a point whereas we were discussing where we start to see some easing of cost pressures because we've not fully recouped the cost headwinds that we've had cumulatively. And I don't think we have any illusions that we'll recoup all of it in a single year. It will take several years. But I think through that time period, we will recoup the cost, we'll get to a more steady state. But when we look to the growth expectations for next year and that 5% to 7% algorithm, we are going to have FX headwinds next year. I'm not a currency strategist. I can't tell you with certainty, but I'm pretty comfortable there's going to be a stronger dollar next year than today. Is it as pronounced? We'll see. So from an organic basis, we're going to need low to mid-single-digit volume and low to mid-single-digit price to be able to get into that 5% to 7% range of overall sales after FX. So we are expecting to be strong -- solid demand next year, continued market share gain. But we are absolutely expecting to continue raising prices.

Yes. And so to get into that EBITDA dollar range you're talking about, I guess, how should we think about the margin progression exiting this year into next year? If I try to put it together in my head, you still have inflation in the first half of next year, maybe a deflation in the back half. So presumably, the margin progression should be better in the back half than in the first half. But what's the path look like?

Yes. So my one caution is we're in a very seasonal business. The sequential comparisons get messy because you're dealing with different crops and different products and different geographies in each quarter. But on a year-on-year basis, I would think the Q1, Q2 comparisons are more challenging than the Q3, Q4 comparisons because we get to a much more -- we expect to get to a favorable price/cost relationship at some point in the middle of the year next year. So we'll still have price increases, but we'll still have meaningful cost increases in Q1. So whether or not that's a balanced price/cost or a slight deficit, still some margin pressure year-on-year in Q1, similar kind of story in Q2. As we get into Q3, that's probably when the turn really occurs.

And maybe looking out a little bit further, we have started to talk a lot more about new products in your discussions on your quarters, and you're having some success with some of the recent launches. So maybe bridge us from those into what's going to come out of the R&D pipeline over the next 5 years.

Sure. So yes, I mean, we've had great success introducing new products. About 10% of our sales this quarter were from products that have been introduced in the last 5 years. And it's a dual prong. We have a very strong new active ingredient pipeline, where we're seeing the introduction of some of the earliest of those molecules. Bixlozone last year; the Isoflex herbicide -- the Isoflex brand herbicide that we introduced in Australia; fluindapyr, which is being introduced in Argentina and Paraguay this year under the brand name Onsuva, which is a new SDHI fungicide, a very -- the first new fungicide in our portfolio for quite some time. So we certainly have those. We'll -- over the next several years as we get into the middle part of the decade, we have a very interesting rice herbicide that's next to come out. We're working through registrations, all the fun things to get that product to the market right now. COVID delays didn't help, but continue to work through there. But we've got a long list of another 9 active ingredients to be introduced through the rest of this decade that we believe will generate about $1.8 billion to $2.1 billion of sales by the end of the decade against a company that's guiding $5.7 billion in sales for the full year this year. But complementing that is FMC's traditional strength in formulations and continuing to introduce value-added new formulations based on existing active ingredients. So as a part of managing the life cycle of diamides, we've been doing a lot of work in developing and introducing higher-value formulations of Rynaxypyr like Vantacor or Coragen MaX, which are high-concentration formulations of Rynaxypyr that provide very significant value to the farmer and are different from what anyone else can provide in the marketplace, including our partners who we supply in that business. So new product introduction will continue to be a strong driver particularly -- and again, it is that combination of new active ingredients as well as new formulations.

Okay. And then also inorganically, you just did the acquisition of BioPhero in biologicals. So maybe help us understand the sort of the genesis of that. I think it came out of your Venture program and then sort of the overall biological strategy and what 2 plus 2 equals here.

Absolutely. So several -- about 1.5 years ago, almost 2 years ago, we launched FMC Ventures, which is a small venture capital group inside of FMC looking specifically at new and emerging technologies that have either crop protection or related type activity. So biologicals or related types of products around precision agriculture. In those areas in specific, we've got about 6 investments to date. One of the earliest ones was a company called BioPhero, which is a producer of pheromones. Pheromones are naturally occurring chemicals that insects secrete to basically communicate and attract each other. They've been used in crop protection for many years, produced synthetically but at very high cost and used in high-value crops like tree nuts and fruits, but not -- at a cost point where they've not been practical to use in broad-scale agriculture. So the chief innovation that BioPhero was developing that piqued our interest when we were initially investing in the company as a venture investor is they have developed a fermentation technology using genetically modified yeast to produce pheromones in a process that's orders of magnitude cheaper than synthetic chemistry. So it brings into play the vast acreage of row crops of corn, of soybean and beyond. So as we got to know the company and participated as an investor in that company, we became more confident in the technology itself and then the trajectory that the business has. And we had some good discussions, and we ended up buying the company. So ended up closing that acquisition in early July. It's still early days. They did make a very small first commercial settlement in the month of October to a partner company of a preproduction batch. We are scaling up nicely and continue -- every step is continuing to confirm our expectations around the manufacturing cost that this process can deliver. But it's a great example of where biologicals fit into the FMC portfolio because it really is a complement, not a replacement of synthetic chemistry. So when we look at -- we've got 5 specific pheromone products that are being developed for introduction starting in '24 and '25. First ones are all targeted against chewing insects, which is exactly the range of insects that Rynaxypyr treats. So it's a great complementary nature where if you think about managing pest pressures on a crop and if you have bugs in the field, you use Rynaxypyr to kill the bugs that you currently have. Pheromones are used to disrupt the mating patterns of insects. You disrupt their communication, their ability to find each other. So it limits the amount of reproduction that happens so that there are fewer bugs in the next generation. So used in a program together, you can more effectively manage the pest pressure. And it's not just one replacing the other. It's getting a better outcome from using the combination. And given that pheromones are naturally occurring molecules that are directly secreted by insects to attract each other, there's no real environmental consequences from the use of pheromones. So we're really excited about that sort of complementary power of using pheromones with synthetic chemistry. And again, taking it to a very, very broad acreage to really drive what we think is a $1 billion revenue opportunity by about 2030.

So then what's the path? What's the commercial launch program? And when should we start to see that inflection towards that $1 billion?

So second half of '24, we'll probably get the first real commercial-scale products in the market but more significantly in 2025. Then through '26, '27, '28, you see steady introduction. So it will be a bit of a steep curve really and really launching about mid-decade.

In which geographies will you start in?

North America, Latin America.

And then spread it out globally thereafter.

Yes, indeed.

Okay. If we shift to cash flow a little bit, obviously, we've talked a lot about raw materials. We talked a lot about pricing. What do those things do, they increase working capital, right? And so that's been an issue for the last couple of years. So as we move into '23 and those things start to actually move, I guess, pricing is still going up, but raws are coming down. How should we think about working capital and free cash flow conversion?

Sure. Look, we're dealing with the bulls in working capital right now, and it is inflationary. It's like price increases that offset cost inflation and cost inflation flowing through working capital. We're also growing really rapidly. At the midpoint of our guidance for the full year, we're growing 13% in sales. We raised our guidance $100 million for revenue for the full year for essentially for the fourth quarter. And the nature of commercial terms in our agriculture business in the countries that you're selling it in Q4, any sale you make in Q4, you're not collecting until next year. So that $100 million revenue increase is a dollar-for-dollar increase in receivables. Similarly, as we've discussed, we're expecting a pretty robust demand environment going into next year. So we're actually building inventory slightly in addition to dealing with just the inflationary impact on inventory values. But we're actually building and maintaining inventory despite the higher sales so that we're well prepared to go into Q1 and early Q2 with material. So unfortunately, that meant we had to reduce cash flow guidance for the year. I think this is a timing shift, I think, as you see a flattening off or a deceleration of inflation. And as you see, again, we're growing 13% top line this year. We've talked about being in the 5% to 7% range next year. With that deceleration of growth, even though that growth is still substantially above market, that deceleration of growth will ease the pressure of working capital and cash flow. So while we're not happy about having to lower cash flow guidance this year, and certainly, the resulting cash conversion is below our targeted range, we do think we're back into that targeted 70% to 80% free cash flow or net income when we get into 2023 if things sort of level off a bit.

Okay. And you're obviously still generating plenty of cash. You've done an acquisition, you're doing [ $200 million ] of buybacks. How are you thinking about that algorithm going into next year? Does BioPhero tie you up in terms of what you can do internally? Is there room to do something else of that size? Or would it just be sort of bolt-on molecule here, molecule there?

Yes. I think the algorithm is pretty much the same. We start from fully funding the organic growth. And that's sort of baked in the free cash flow to begin with. But to be clear, we invest $330 million in R&D. We'll continue to do that. We'll invest through SG&A and the expansion of market access. Then with the free cash flow that it generates as well as the incremental borrowing capacity from growing EBITDA deployment, we first -- we pay a market median dividend, I think about $270 million this year. It's been growing about 10% per year. So we'll be reviewing that again with the Board in December, and we'll see where we go from there. And then the remaining cash, if there are good inorganic growth opportunities like a BioPhero, happy to fund those. If not, within a very short time frame, again, within staying within a target leverage range, we'll return that cash to shareholders, and that's exactly what we've been doing over the past 5 years. Now I will say in terms of the utilization of incremental borrowing capacity, we could be a bit slower to take full advantage of that incremental borrowing capacity over the next several quarters just as we adjust to a higher steady-state interest rate environment and sort of smooth out the EPS headwind from higher interest expense. So I think there could be a little bit of a push/pull there. But fundamentally, that allocation methodology hasn't changed.

Are there any questions in the audience here? I did get one in the hall that I guess I will just ask then. I think the answer to this is that you just don't really play in this arena, but one of your competitors was out this morning indicating that there's going to be a continued normalization in sort of commodity herbicide prices, particularly in glyphosate, which is obviously the most ubiquitous one. What, if any, impact will that have on your herbicide business?

So on our direct business, none. We have 0 participation in glyphosate or any of the other nonselective herbicides like dicamba, 2,4-D or glufosinate. When you think about market numbers, in part, we've been asked, all right, why do you think the market -- why is the market only growing low to mid-single digits next year? Well, there's been a big chunk of market growth in 2022. There was rapid escalation of glyphosate and other nonselective herbicide price. With those coming back down or at least leveling off, the amount of growth in the market that you get from that will be very minimal next year is our expectation. So that's a part of our outlook of the overall market growth. But for our direct business itself, we don't manufacture, we don't sell those products nor do we sell substitutes for them. But I think we've just been whipsawed like everybody else with the overall market movement with those large price increases.

So does it just help on the margin that the farmer has less outlay for those products and therefore, more budget to spend?

Can't hurt. Can't hurt.

Anyone else? All right. Well, thank you very much, Andrew.

Great. Thanks, Vincent.

Appreciate it.