FMC Corporation (FMC) Earnings Call Transcript & Summary

Okay. Welcome back, everyone, to day 2 of Farm to Market. So remember, we want this to be interactive. So if you have any questions, you can please submit your questions via the conference app. I'll see on this tablet, and I will ask Mark and Andrew and everyone else presenting today. So we'll start off the day today with FMC, who is, of course, a very large global producer and distributor of crop protection chemicals. We have here today, Mark Douglas, who's the CEO; Andrew Sandifer, who's the CFO. We haven't seen each other for a long time, certainly not during 2-hour dinner last night. I'll try to integrate some of that into our conversation today. What can we talk about?

Okay. So why don't we talk about -- Mark, I think and Andrew, you've talked about having some disappointment in the share price performance after what seemed like it was a good guidance increase a couple of weeks ago, a few weeks ago on the Q1 release. I think there are some concerns about maybe volume this year, not being as strong as people think. Why don't we talk about how you see the year playing out and maybe some of your disappointment in the stock price?

Yes, sure. Look, I think any time you hit your numbers and you raise your EBITDA for the year, and you watch the stock go down 8% on the day of release. Yes, that's a disappointment to say the least. I think there's a lot of talk in the industry about volumes in the marketplace. I think it's worth putting what is going on in the industry in perspective. When you think about actual volumes on the ground, so what is the grower using, volumes are very good. So we're seeing acreage increase overall in Brazil, good conditions expected in the U.S., especially in the Midwest, other parts of the world in good condition. So the actual volume on the ground, what a grower is using, it might not be as high as 2022, but that was a record year. We're still at extremely high volumes. Where the volume discussion is, is what is happening in retail and distribution. There is a concertina effect as people are managing their inventories, mainly because of the cost of capital today after many years of free capital. We're seeing that around the world. That does not mean to say that the industry is not healthy. It is healthy. Growers are planting. And they will continue to plant, and we'll see increased acreage. So we feel good about the ultimate volume. It's managing through what is essentially the end of all the COVID supply chain issues that we've had that are bouncing through distribution and retail. So my message is really good volumes down on the field. We see that all over the world. There are pockets where it's not so good, and we can talk about that later. But overall, volumes are good.

Okay. Fair enough. And I mean you've talked about the other week -- so with higher interest rates and customers want to run leaner supply chains. You talked about it. Maybe talk about how it's playing out with your diamide partners and your non-diamide business? Is that dynamic the same? Or is it different? Is it nuanced?

Yes, I think it's pretty much the same. Everybody in the chain is reducing inventories. We are. We're significantly reducing the amount of inventory we're carrying. Obviously, that has an impact upstream of us. I think you see that through the grower retail distribution. That will continue for some time. It will go through this season depending on how low people want to go, then it may stretch into early 2024. But it makes sense when you think about it, you're going to be buying, I think, closer to the market. So what normally happens is people get ready for a market, they're buying ahead, they're filling their supply chains. What we see happening now is the sales are occurring closer to the actual planting time. Now that creates a lot of stresses in the supply chain. This is a very large industry and it covers a large importantly area. So you've got to move material around very large countries. So there is somewhat of a risk by playing the game of reducing inventories to be very low, but it makes perfect sense, and it's exactly what we're doing.

Okay. Maybe give an update on -- let's go around the world and talk about the different regions because you're very diversified globally across different regions, which is a good strength of FMC. Talk about maybe how you see the dynamics in the market and channel inventories across different regions. I know India has been a little more challenged and the weather impacts in South America.

Yes. Start off in North America. We feel very good about where the U.S. and Canadian markets are. We had a very good first quarter, which is getting ready for the season. Obviously, the planting season, things are going well. So I think the U.S., assuming the weather patterns hold, should have a very, very good season. Don't forget, soft commodity prices are still high. They're not at record highs, but they're well above average. Most of the 10- and 5-year stock-to-use ratios for many of the soft commodities are below the averages. You have more weather impacts, as you just said around the world. So I think growers are feeling bullish about their ability to actually earn more money from what they're producing, which is always a good sign. So U.S., North America, all good. I would say, in Europe, Northern Europe, we're gearing up for the season once again. Northern Europe is in pretty good shape. Southern Europe is dry. You look at the press on what is happening in Spain, parts of Italy, northern part of Italy, a lot of rain. So guess what the trend is I'm talking about here, it's volatile weather patterns, much more than we ever used to see 10 years ago. But Europe, overall, pretty good. Southern Europe, a little dry. Asia, India, we've talked about a number of times. We have channel inventory in India, so do other people in the industry. A couple of bad years of monsoon, rice acreage reductions that is hopefully turning around this year. So we should work our way through that as we go through 2023. Australia, very dry, unexpectedly. We had 3 years of very good weather. Now we're in a drought situation in Australia, which impacted Q1 in Asia. Latin America, Brazil, the North Mexico, all good, the south of Brazil and Argentina, I think it's been well documented, extremely dry in Q4 and in Q1. That has continued. Argentina being the worst impacted. So I would expect channel inventories in Argentina or in the south of Brazil as we go through this season will remain elevated. So it's as usual, a mixture of what we see in the world. But what we do see is those more volatile weather patterns occurring all over the world now.

Is weather volatility good or bad for FMC?

Depends. Good or bad. They always say there's no such thing as good weather in ag. It's always bad weather. But at the end of the day, we have a very large insecticide portfolio. The general rule is that when you have warm or hot weather, there are more growing days for insects. So you can actually have more pest pressure from warm weather. That's good for us in the sense of how our portfolio plays out. We saw that last season in Canada where there was a lot of pest pressure. It was warm. We were ready for that. It worked well. So I would generally say, warmer weather is better. If you're selling a lot of fungicides, you want warm weather and wet weather. So it depends what your portfolio looks like. So it's different for all of us. But generally speaking for us, if it's above average temperature, not too much, it's generally good.

There's a lot of discussion last night, so we're going to bring in here about what's locked in for the second half of the year because obviously, you're pointing to a very large Q3 and Q4 is pretty good too. But talk about what's locked in Q3, Q4 for cost or price for volume? What do you know? What are you still trying to figure out?

Yes. I mean we talked about the second half of the year being a good second half of the year for FMC more flat in the first half as we work through what we've seen in the marketplace. Q3 is really predicated upon cost, and I'll let Andrew talk about that in a second. From a market perspective, really, the second half of the year is driven predominantly in Q4 by the Latin American season, so Brazil and the start of the Argentinian market and also the U.S. gearing up for the '24 season. So Q4 is very much getting ready for the new seasons in Latin America and getting ready for North America. Do you want to talk about the cost side, Andrew?

Yes, certainly. Look, I think well known, our industry, and we, in particular, have been facing some pretty significant cost headwinds over the past 8 quarters, particularly on input costs, the things we use, raw materials, intermediates that we use to make our active ingredients with, which are really the lion's share of our costs, and we've seen tremendous inflation over the past 8 quarters. As we get into Q3, we see input costs turning into a tailwind. So when we look at the year-on-year comparison, in Q3 of last year, our total cost headwind at EBITDA was $169 million, all right? So we will -- the input cost portion of that was the lion's share of that. It will be -- and we expect that to be a modest tailwind in Q3. We'll still have some growth in operating expense. But it's a huge reversal year-on-year in terms of the cost situation. So when we look to that second half, I mean, certainly had strong revenue growth, 12% revenue growth in the second half at 16% EBITDA growth in the second half. It's really amplified by that swing in input costs. And this is something we've been signaling for some time. We have pretty good visibility to our input costs, just given the timing with which we buy materials, how it flows through, our manufacturing supply chain and into customers. And we feel pretty comfortable with that cost base going into the third quarter.

And you talked about like Q3 costs are generally known, locked and loaded? And then how much uncertain do you have on maybe mix and price, second half?

So mix and price, mix has generally been good for us. If you look at our overall portfolio, we've been introducing new products over the last 5 years, which amount to about $800 million of revenue this year out of roughly just over $6 billion of guidance. So that engine of bringing new products in has been very strong over the last few years and will continue. In the second half of the year, we see that continuing, especially as we develop the products for Latin America. So the new products being launched in Latin America, that's an important facet of the company because new products are generally at a higher margin than your established products. And unfortunately, as we've seen all the wave of inflation come through the company, that mix improvement at the margin level has been masked. But we know that as we come to the other side of the inflation curve, the mix will be more apparent, and that's very strong. $800 million now, in 2021, that was $340 million. So the rate of increase has been rapid as we've introduced new technologies from our pipeline. Pricing, over 60-plus percent of the price we need for the year has been achieved in the first half of the year. So there's less pressure on the price in the second half. We talk about low single digits in the second half versus what was high single digits in the first half and then mid-single digits as we go through the first half of the year. So less pricing. We're lapping ourselves for a couple of years now on price, and the price increases have been substantial over the last 6 quarters. So you should expect to see that price start to taper off a little bit. So less pricing in the second half of the year, but still a substantial amount year-on-year. Do you want to add anything, Andrew?

Yes. Look, I think important, the balance between price, volume and cost this year on a full year basis, we're expecting revenue for contribution-to-growth to be relatively balanced between price and volume. It is, as Mark described, the price impact is much more substantial in the first half than in the second half. We get the significant cost relief in the second half. So that's why you see very much the tale of 2 halves for us this year, where the first half is essentially flattish, top and bottom line. But the second half, we get strong growth both from pricing and from volume and mix as well as flow-through to the bottom line with cost improvement.

Mark, I think you had some commentary on the call the other week that, I may have the language wrong, but upside drivers are becoming more likely than downside drivers to the midpoint. Do you see something like that, remember that, Mark?

I did, yes.

Why don't you describe? Thank you very much.

Thank God.

Why don't you elaborate on that?

Yes. I think there's a couple of factors as we put our guidance together for the year. Of course, we're always looking at what could a downside case be, what could an upside case be. And where do we sit in that. I would say, from a mix standpoint, we're seeing better mix than we thought, so that's positive. We're seeing better market share gains. We've spent a lot of time over the last 2 years putting in resources into the U.S., into Canada, into Brazil, into Argentina, where we're adding sales resources and agronomists to help pull through the product through the chain. And we're seeing the benefits of that. We talked last year about 50% of our growth in Brazil really came from those new assets. So that market share piece is helping us think about where we get to in terms of the upper end of our guidance range. We did raise guidance by $10 million. We did outperform in Q1, but that shows this confidence there. I would say those are the 2 big pieces of why we feel we're moving more from that midpoint upwards.

So, to a generalist, so over the years, there's been concerns as your diamides portfolio, which has been a tremendous portfolio acquired from DuPont, 6-ish years ago, great insecticides portfolio. It's been great -- you've done great with it. As it starts to roll off this year some exclusivities and patents across different regions across the decade. So it's just been concern that, hey, you're going to see the business fall off. Can you describe why you don't believe that maybe for a generalist, how would you describe how we'd know it's going to grow and flourish?

Yes. And you're right. It's been a fantastic acquisition for us 5 years ago. When we bought that set of products, they were about $1 billion in size. Today, they are $2.1 billion. So we've more than doubled that business in 5 years. The chemistry is some of the most recent chemistry as an insecticide. It's very targeted. It has a great environmental profile. What we've done over the last 5 years is a couple of things. First of all, there is a very strong patent estate around these products. The composition of matter patents for one of the main molecules came off last year. However, there are numerous process patents, et cetera, that follow on from that, that allow us patent protection in some countries through 2029. What we did was also apply for more registrations. So for a generalist in this industry, it's one of the most regulated industries in the world, and you cannot sell a product without a registration. And that registration basically says you can sell this product at these rates, application rates on this crop in this geography, and you can't sell without that. What we've done is applied for more registrations for these products around the world on different crops in different geographies. So we still have a long runway of registrations to come. Something like 60% to 70% of the registrations we have, there is an additional amount to come. So we know we have a runway of taking share in markets where the products are not currently registered. That's good for us. It's good for the industry. The second piece is really the insecticide market is about a $16 billion market around the world. And there are some older chemistries that are losing their registrations around the world. Now when a product is removed from a registration, it means you can't sell it but the grower still needs products to sell -- to buy to take the pests away. So we're taking share from a lot of the older chemistries. So I think sort of the mid- to longer-term growth rate for these types of products are in the mid-single-digit range. I do see the fact that those molecules are very large now. I mean Rynaxypyr is one of the largest molecules in the world. You're reaching the law of big numbers. So mid-single digit for a $2.1 billion portfolio is a good growth rate. We believe that will continue as we -- as I said, take the registrations, take market share from older chemistries.

Maybe you'd like to ask questions, everyone, by the way. No one's going to start. Something on the diamides -- question. You have one. Do you have a microphone? Okay, speak up. I'll repeat the question, go ahead.

You talked about supply chains, and you talked about no one holding the way I heard it, inventory, someone's got to hold inventory, unless you get like the auto sector became after the '80s and just-in-time worked perfectly. So who's going to end up holding -- who's going to end up not having a chair to sit down when the music stops, if I could use that analogy?

Yes. Listen, I think it's not that people are not going to hold inventory. They're not holding as much as they did. I think everybody is bringing it down to what you would call a safety stock level. So...

Is that an evolution of the technology to allow less slack in the system because you don't have to have it?

No, I don't think so. I think people are going to run it down to a level where they feel the risk is appropriate. I would say, the only difference with this industry is if you have pest pressure, let's say it's an insect. You can't wait a week to have material, you have to react the same day. So I think there's going to be variations in how much inventory are kept around the world. But ultimately, it's going to be lower. And at some point, that will rebuild back again to what I would call a more sustainable level. But right now, it's been drawn down. We're doing exactly the same thing. We're pushing our inventories down to the absolute limit.

What happens when something breaks?

Well, you're going to have what you had over the last 3 years where people go from I'll buy anything you've got to don't send me anything. You're going to have a whipsaw effect. And unfortunately, that's what happens, right? I mean we've seen it before and no doubt, we'll see it again.

So you've got some of the best margin in the business and pricing, general -- talk about how pricing works in your portfolio. You don't seem to get the same swings in price other the -- you don't have to do live [ visit ], for example. So how do you think of pricing through the cycle?

So, first of all, pricing, we talk about mid-single digit, high single digits. This is not a vanilla industry and certainly, we're not a vanilla company. We sell thousands of products into thousands of separate markets around the world. So there are some places where we'll move prices 20%, 30%, 40%. There are some places where we might only move 3%, 4%, 5%, depending on dynamics in that marketplace. It's not a cost-plus business. So this is not your commodity-type chemical business. We sell value. And the discussion really with the grower is, I have this product. You use this product, there is this much productivity. When we're pricing, we're deciding how much of that value are we taking and how much are we giving to the grower. So it's not transparent that we're raising price 5% because raw materials have gone up 5%. There is no correlation between the 2. So it truly is a fine or specialty chemical mentality in the sense of prices don't go up like a commodity, and they don't come down like a commodity either. So there is that ramp up, and then there is a plateau. And in some cases, prices come down. In some cases, prices don't come down. So I would say sticky price is a feature of when you're selling technology and value, that's how you keep the margin over the long haul. And margin is what we've talked about a lot in terms of getting the margin back to where we want to. Andrew, why don't you talk briefly about that?