FMC Corporation (FMC) Earnings Call Transcript & Summary

Got it. So maybe that's a good pivot on to the cost side because it -- kind of one of the important things you said on the first quarter call was we've got a lot more visibility and confidence on the cost layout into the back half, certainly in the third quarter. which year-on-year should flip to be a meaningful tailwind. Help us just think about the key buckets there that are more significant tailwinds? And how reinvestment on the SG&A on the R&D side, maybe you're getting funded with some of that cost savings?

Absolutely. So when we publish bridges in our earnings, and we talk about costs, we're talking about total cost. So it's input costs as well as operating expenses, right? So on the input cost line, the things here are COGS. We still have -- in Q1 and Q2, we still have cost headwinds. We -- in Q3, we will see that reverse, where input costs will start becoming a tailwind. Now most significantly in Q3, we had the all-time high cost headwind, quarterly cost headwind in Q3 of 2022. We had $169 million of cost headwind in that quarter to just reversing that is a massive swing year-on-year in Q3. So certainly, expectation, we might characterize our guidance and our earnings growth this year as being back half loaded accurate since we're essentially guiding to slightly above flat first half. But of that second half hit strongly Q3 loaded because of that strong reversal in input costs. So input cost for us, biggest element of input costs are raw materials and intermediates used to make the active ingredients in our products. It's a really fragmented buy. Many of the materials are either bespoke or made for very few other uses and the costs are driven a lot by supply-demand forces. So during the peak of COVID disruption, a lot of our cost inflation really came down to availability at any cost of the key materials we needed to make our products. I think it's across many supply chains, you've seen the world improve. I'm cautious about using the word normalized because bluntly, after 3 years of pandemic, I'm not sure what normal is anymore. But certainly, the level of disruption has reduced substantially across many supply chains and particularly for the suppliers and to our materials, there is much, much less disruption, which means not only do the base input costs to go into production and go down, but the premium we were paying for availability from suppliers or having to fragment the buy over more suppliers rather than concentrating with a strategic supplier has provided some pretty significant input costs really. So that, I think, is a factor as we go from first half to second half will be very significant as a swing to input cost being a tailwind. Now the counter to that is operating costs. We are continuing to invest in growing SG&A and R&D. So operating costs continue to be a headwind throughout the year. Now what are we investing in? Well, in SG&A, it's an additional resources to go help growers understand how to better utilize our products. So it's agronomic resources, it's marketing, field marketing people, technical support, people who work in concert with the distribution channel and depending on the nature of the distribution in a specific country to help, again, to help growers really understand how to get the best impact from our products and to drive adoption of our products. On the R&D side, it's continuing to fund the growth of our new product pipeline, whether that's new active ingredients or formulations. And in 2023, there is a bit of a lumpy step-up. We acquired a company called BioPhero last year, which is a biological producer of Pheromones for use and insect control applications. And basically, all of its cost is essentially R&D. So as a step-up this year where we're digesting a bit -- moving to a different steady-state level of R&D with the addition of BioPhero activity. So this year, we're anticipating built into our guidance is SG&A growing at or above the rate of sales and R&D growing at a couple of hundred basis points faster than sales, which is very different from when that relationship has been over the past several years. Now in the first quarter, it didn't work out that way, particularly as we got past the midpoint of the quarter, and we started seeing a little bit of weakness in a couple of markets. We chose to defer some spending and control spending in SG&A, particularly a little more aggressively in the quarter. So as you look at our financials, SG&A was actually down quarter-on-quarter in Q1. We still plan on continuing to ramp up those investments. But should there be any further disturbance in the market or any weakness that we're not anticipating, we have that as a lever to modulate. And I think if you look at our performance through the past 5 years and particularly going through the pandemic, one thing we've demonstrated is our ability to move quickly to control costs if needed to offset other forces. So I think that whole cost balance to the year, net-net, you end up with a modest headwind for the full year, but a tailwind in the second half.

Yes. Okay. Maybe that's a good segue on to the more medium-term outlook. You guys are going to have an Analyst Day later this year. You've previously had a 5-year targets to 2023 mid-single digit kind of 5% to 7% revenue growth, 7% to 9% EBITDA. I'm not saying give those new long-term targets today, but how -- as we think about the next several years, is there anything that's meaningfully different in FMC's growth algorithm that we should be cognizant of given kind of the product pipeline that you have, the market loss that you have today in the business understanding side.

Well, certainly, just [indiscernible] plug, we do have an Investor Day in mid-November in Philadelphia at our headquarters, 2 Block walk from 30th Street Station, a quick trough from the [indiscernible] if you'd like to come and join us. We will be giving both midterm and longer horizon targets. Unlike our last Investor Day, where we gave a fixed 5-year horizon, our intention is to give you a 3-year horizon that we will update on a more frequent basis as well as some decade-plus goals for the overall portfolio. I think the general theme is not to steal too much thunder because we are still in the process of defining all of these elements, been going through a pretty lengthy strategic planning process internally. But I think the general themes are going to be a continuation of what you heard from us in the last several years. First and foremost, it's organic growth at a premium to the market regardless of what the market does. And that's because it's driven by technology, new product introduction, whether that's synthetic chemistry with new active ingredients, new formulations, whether that's importantly with biologicals, including the Pheromone acquisition I mentioned earlier, where there's a significant amount of growth in the next decade to come from those products. I think you'll continue to see very strong technology-driven growth. I think it's an organic growth story principally, with some ability to complement that with technology-driven smaller acquisitions. And then I think you will continue to see us invest in expanding our market access in different geographies, allowing us to get closer to customers and help customers help growers and work with our distribution partners to help growers better understand how to take full advantage of our products. I don't want to steal too much thunder, but I think you should think that it's more evolution than revolution in terms of thinking about what the company can do. But fundamentally, we believe we're a long-term strong organic growth compounding company and we expect to maintain the highest EBITDA margins in the industry, which is what we've done for 5 years now.

Yes. So just on that last point on the market access and expanding geographically. You're pretty balanced already globally. Is there any -- other than -- off top of my head, I would say China, but there's probably unique competitive dynamics there. Other than that and maybe Russia with the geopolitical environment, other major agricultural regions where you think you are significantly under-indexed given the portfolio of mix of the products that you have today?

I think it is a combination of geography and crop because we are -- one of the distinctive factors about FMC. We are much more balanced, both geographically and across crop mix than most of our major peers. So there are pockets of opportunities for us to continue growing. For example, we've made significant inroads in soy and corn in Brazil. Now we're still a relatively modest player and it's not an outsized position. But we've had good growth and market share gain over the past 3 years in those markets. So it is both country and crop where there's opportunities for us to improve market access. I would say, geographically, though, the one place that I think is underdeveloped is Africa. Now lots of challenges with accessing that market, but we are looking at different ways that we can expand our participation. We do participate today, not broadly been in a select number of countries in Africa. As you look for the next several decades, I think the hope is and the opportunity there, that there's a substantial opportunity to expand agricultural productivity. And that's core. That's what our business is. We help farmers drive yield.

Okay. And there will be -- if there are questions from the audience. There's a microphone that we can circulate. Happy to take them. I can keep going if you want to keep listening to me. But happy to open it up to the floor if anybody has questions. I will keep going. So maybe as we think about that long-term plan, your most -- your biggest business is your -- it's a diamide insecticide franchise. It's over third of your revenues, has carried above average margins, it does have kind of a patent to state that is gradually rolling off over the next several years. How do we think about that patent estate rolling off and kind of competition and pricing kind of factoring into that medium-term growth and the confidence that you have that your company cannot just grow sales, but EBITDA [indiscernible]?

Absolutely, absolutely. Look, diamides, we acquired diamides from the former DuPont in November 2017. In the time that we've owned them, we've more than doubled the sales of those products, grown it now to about a $2.1 billion franchise. We think that franchise continues growing and compounding the mid-single digits through the rest of the decade. Some of the earliest patents which are around the composition of matter, composition of matter of the fundamental active ingredient molecules started rolling off last year. Despite that, there's not a single legal competitor in Rynaxypyr in the world today that said differently, that isn't buying it from us. Now there are illegal competitors and have been since before we bought the business. So there's been a legal material, particularly in China and India, always. But there are no current legal entrants in either of those markets where a the initial composition of matter patents have expired. And that's in part because that's just the beginning of the story around the patent protection. We have patents on manufacturing processes. And the diamides are 15- and 16-step process is to produce a molecule we have patents on many of those individual steps. We have patents on the composition, a matter of many of the intermediates that are produced in those steps. Many of those intermediates have no other commercial use of this to be made and further refined into being Rynaxypyr or Cyazypyr. We have patents on formulations of products. So while we had a couple of patents roll off last year, we also had a number of new patents granted, including for some value-added formulations of Rynaxypyr, some of the new product growth we were talking about earlier. So the patent of the state is not a static asset. It is something that we're continuing to invest in, and we're continuing to renew. We have always presumed that over time, there would be generic entry into this marketplace. That's one of the reasons why we so aggressively pursued partnerships. We have partnerships with 5 major global players along with 35-plus local players, something north of 50 independent contracts that -- where we supply Rynaxypyr to others, and then they go to market. So we've had competition in the Rynaxypyr market, the entire time we've been in the business. So the idea that new entrants from generic production are going to change that dynamics. Certainly, that will add different pressures but it's not to say that there hasn't been price competition or feature competition among Rynaxypyr-based products, there has been for a long, long time. So I think we've managed very aggressively that patent estate, the branding, the partnerships, continued innovation around those molecules. And while certainly, yes, we expect -- you're not going to grow doubling every 5 years forever, law of large numbers comes into play. But we do see that the diamide family continuing to compound in that mid-single-digit range through the rest of the decade and continue to grow profit dollars, not just growing revenue.

Okay. That's helpful. So we got a couple of minutes left. I'd be remiss, hosting the CFO for a fireside chat, if I didn't ask at least one question on cash flow.

Absolutely.

So if I think about the business, you targeted a 70% free cash flow conversion. Yours is a lumpy business seasonally with working capital. It's always hard to see that in any given period. Maybe why is 70% the right target for this business? And what can -- given the working capital intensity that you have, what could you do over time to push that boulder up the hill a little bit more?

Yes. So look, free cash flow, that's has actually been a very good news story for FMC over this horizon. In 2018, we had free cash flow conversion from net income of about 18%. Last year, it was 55%. A year before, it was 81%, right? So we have demonstrated that this business can operate north of 70% free cash flow conversion on earnings. And our goal is on a rolling 3-year basis to have cash flow conversion at above a 70% rate. Now we're running -- at the midpoint of guidance this year, we'll be about a 67% conversion ratio on a rolling 3-year basis. Think about rolling 3 years just because cash flow is lumpy. And we measure it at an arbitrary time slice you can have things that shift from 1 year to another. So that 3-year metric is something we think is important. So why is 70% plus the right number? We are unlike a lot of other material or chemical companies, we are not fixed asset intensive. We have less than $1 billion in PP&E to support $6.15 billion in sales. We are working capital intensive. And if we grow, we consume cash for working capital. Our goal is to consume less cash as we grow. But if we are to grow, we will consume cash for working capital. That in concert with some legacy liabilities from our former businesses we haven't been in a decade that aren't growing, but are pretty much stable and pretty recurring stable drain on cash every year, they limit how high you can get that conversion. But the thought I'd leave with you on cash conversion, Adam, is simply, in our business, the working capital is the reinvestment to grow much more so than fixed assets. And when you look at our return on invested capital, which is in the high teens, it's pretty high value reinvestment in the business to be able to invest in a high-teens return and grow the business in the mid compounding in the 5% to 7% range or slightly above over the past 5 years. 70% is the right kind of range. It could be as high as 80% in a given year. But that -- again, if we're growing, we're going to consume some working cash for working capital, but it's very, very high return, high value reinvestment.

Okay. Well, I think we're just about out of time. So I think we will leave it there. Andrew, thank you very much for joining us. Thank you, everyone, for joining. Hope you enjoy the rest of the session.