FMC Corporation (FMC) Earnings Call Transcript & Summary

This conference once again integrates chemical companies. Very excited to have you here. We've host this event for 2 decades. We hope to create, as usual, a unique forum for investors to gain a comprehensive and global perspective across the entire food and agriculture value chain as well as chemicals. We have over 100 companies here in the next 2 days and hope it's going to help you all, all the investors, explore key issues to identify investment opportunities through engaging presentation in panels and interaction with management. So we do want to thank all the management teams for being here, the investors, our tremendous BMO sales team and our internal staff and our conference coordinators. I wrote down like a bunch of themes that we could potentially investigate across the next 2 days. I don't feel like reading them right now. It seems like a long list and nobody wants to hear. But I think in general, really, I think we've seen investors really question what they want to be involved in ag stocks last couple of years. It's been tough. I think people haven't really probably given a lot of the crop producers and agribusiness companies, maybe their fair share of valuation. So we hope to see -- look for green shoots to this conference and look for good reasons to invest in these names. Obviously, lots going on lots of geopolitical issues, wars, macro returning from kind of a destocking to restocking. We'll see what the growth rate like is for restocking. We're seeing a lot of ag tech in the industry. We'll see how that is, how things are progressing. We're seeing how consumers and companies are navigating the challenging consumer spending environment. And so we have a lot of good fireside chats. We have a great keynote panel the next couple of days. We have a great keynote panel today that I'll be moderating with my colleague, Andrew Strelzik. It's going to feature BMO senior commercial ag lenders that many of you hear at our following spring calls. We're going to discuss the state of the farmer, crop supply demand dynamics and the agriculture operating environment. We're also going to have a panel tomorrow that will investigate how private equity firms are managing their existing portfolio of companies and deploying new capital, and it's very uncertain markets currently. So if you have any questions, please feel free to raise your hand during the fireside chats. We have an app. If you submit a question on the app, I can integrate them into our conversations with the tablet I have on stage. So let's kick off our conference. We're going to start off with a fireside chat with FMC, who is, of course, a very large global producer and distributor of crop protection chemicals. Here with us today is Mark Douglas, who's the CEO; and Andrew Sandifer, CFO. Gentlemen, come on up.

Thank you for having us.

Again, so what I'll do is maybe later in the presentation, I'll poll for anybody in the audience, so raise your hand if you have questions. But you can start off too by -- if you have the app on your phone, which you can get by the back of your name tag. There's a bar -- there's a QR code to do that, as Mark just nicely modeled. So Andrew and Mark, thanks a lot.

My pleasure.

Why don't you give us a brief overview of the business and the outlook as you see it currently for FMC and crop chems?

So many of the audience know FMC pretty well. We are a global supplier of crop protection chemicals, active in over 102 countries in the world. Pretty much 1/4 of our revenue comes from each of the 4 regions of the world. Research-based. So technology plays an important part in this industry as we look to fight resistance, whether it's insects, fungus or weeds. I would say the growth prospect for not only us, but the industry in general. I would also say that the industry has been extremely challenged over the last year. I think many of you are aware of all the issues we've had coming out of COVID, with supply chains, with destocking, that's something that's on everybody's mind. Certainly, it's on Andrew and I's, my mind. I think as we go through the rest of this year and as we certainly go into 2025, you're going to start to see more normalization. It's not going to be smooth, it's going to be bumpy. But we're getting to the end of this destocking period. And I think that's an important facet for investors to recognize that supply chains can't empty forever, and they have to replenish. That's the phase we're in now. We call it a transition this year. I think that's an apt description. But 2025 is where everybody should be focused and what does that mean for the industry in general.

So I think when we look at crop chems and other chemicals in general, there's a question out there about when we do go back to restocking in the coming months, will demand be normal? Or will it be a little more muted than -- and again, it seems like it's the question being asked across the entire chemical chain. What's your view on that?

Yes. I mean, these are complicated supply chains. From us placing an order to ourselves for raw materials, to actually delivering it to a customer in a warehouse, that's a 6- to 7-month cycle. So here we are today, we've been running down inventory since last year at this point. So we're getting to a point now where our inventories are getting lean. We don't have the same flexibility that we've had in the past because we're not carrying the inventory. Neither is the next person in the chain. And back of us, our suppliers are asking us, "Hey, when you start the engine, we need to know as soon as possible because it takes us months to get fired up." So I think there's going to be this period of there may be shortages out there in certain products because the supply chain is just so lean. This industry has never run just-in-time. The signals that we get because pest pressures change, so therefore, demand changes for us. Well, we can't carry that much inventory. Our suppliers can't carry that much inventory and distribution and retail don't want to carry the inventory. Something's got to give here as we go through this recovery.

What's going to give? What do you think that's going to happen?

Well, I do think there will be dislocations. I think it's almost setting up the next cycle. It's a typical chemical industry cycle. We go from boom and then we go down the other side. Well, we're on the other side of that. So what's going to happen? If you want certain products and they're not there, you're going to have to look for alternatives. If they're not there, it's going to get tight, I think, in certain areas. So we are now -- Andrew and I talk a lot about this, we're now starting to fire up our manufacturing units for the first time in basically 1 year. So we see demand coming. So we've been very careful. We don't want to build too much inventory, but we're getting there. So we feel the signs now, and we're starting to place orders on our suppliers. So the machine is starting to turn, but it's going to be an interesting year going forward, I think, from that aspect.

Why don't we talk about more regional? So we're talking more broad. Maybe you can break down each region and talk about where the -- how we're flipping from destocking to restocking and how you see inventories in each region right now.

Yes. I think there's been a lot of commentary around the different regions of the world. North America is probably the furthest along. It was one of the first regions to get hit by this change. I would say, distribution is still a little high. Retail and grower is very low. So North America is in pretty good shape. Europe is the next that is going through their season now. So they started to deplete last year, depleting a lot more now. Asia is a mixed bag. India inventory is very high that we have high inventory. Others in the industry have high inventory. That's mainly due to weather, though not necessarily the same dynamics as we see in the rest of the world. And then Latin America. I mean, Latin America is finishing its season now. It's not bad. It's not exactly where it should be, but it's getting there. So as we roll into the '24-'25 season in Q4 this year, it will be in much better shape.

I want to come back to Latin America a little bit. So we just talked earlier about just-in-time purchasing. It just doesn't really work for this industry. So I mean do you see structural changes happening? And maybe if you go back to a decade ago, we had another restocking -- destocking cycle also. I don't know if you were there, if you go back and think what happened then and afterwards, and like will we see structural changes happen in the industry?

I'm not so sure you'll see structural changes. The industry is pretty consolidated in our space from a research perspective. There are only 5 research companies in crop protection chemicals. That's pretty consolidated. For any of those to get together would be very difficult. From a generic standpoint, there is opportunity for consolidation. I mean this is a tough time. If you don't have a strong balance sheet, if you don't have good financial strength, you're not probably going to come out of this in great shape. So there may be opportunities there. From a vertical in the sense of distribution retail, there are changes going on there. We see that. There are people in our space looking at distribution, going around distribution to the grower. I think all those things are in flux. Brazil is one of the best examples of that. We see that more in Brazil than we do anywhere else.

Let's talk about Brazil. So there were lots of questions about your visibility in Brazil the last couple of years. You've done a big reorg, you brought in a new head of that business from outside. Talk about what was happening, why the changes and how it's looking now. I think only a few months into the new person, but maybe talk about that.

Yes. It's the first time that we've brought in a president of a region from outside the company. We have a very strong talent pipeline. But we did feel that with all the changes that are occurring in the Latin American market, everybody focuses on Brazil. Argentina is important. Mexico is important. We wanted a different view of the world. So we brought somebody in who has a lot of crop chem background, but also has distribution and retail background. And that for us is a different way of looking at the world. In other words, how are our customers in Brazil actually operating and what drives their business rather than thinking of it from a technology sell. So that's a different angle that we've got on Brazil right now.

Okay. So your '24 guidance is very back-end loaded, which isn't really atypical. It's typically what FMC is, how the earnings will line up. But it seems like it's really driven by 20-something percent or mid-20s percentage volume growth driver in the second half of the year. So big volume recovery the second half year. So can you talk about that and how new products are contributing to that as well?

I'll jump in on that one, Joel, help out a little bit here. The second half, we're seeing a return to more normal market conditions as a part of the second half. We're not talking about a snapback or a sudden return to the overheated 2022 conditions. But the percentages in the second half seem really large when you look out 23% at the top line, 56% at the bottom line, if you look at the midpoint of our guidance range. If you've got to put them in the context in the absolute size of the business, and we've had 4 quarters in a row where we've had volume drops in the upper 20%, right, the size of the business is significantly lower. And while it's a big percentage, the amount of sales we're pointing to in the second half is essentially the level of sales we had in 2020 or 2021, right, before the overcorrection that we saw in 2022. So I do think when we think about the composition of the sales and the seasonality, you're right, historically, our business is more heavily probably 55%, 45% weighted second half. It will be significantly more pronounced this year because we're coming out of this channel reset. But look, again, I think the biggest point I would make on our outlook for the second half, we are not looking for some return to overheated market conditions. We're merely saying that there is an inflection point coming this quarter. Even in the second quarter, it's the first quarter in 4 quarters that we've guided to a volume uptick, right? We do believe that channel inventories have been drawn down substantially. That consistent pull-through from the grower and that consistent use and -- actually consistent and growing use of product on the ground by growers has helped bring down that inventory. Manufacturers have put less into the channel with lower -- dramatically lower sales in the last 4 quarters. So that's going to start rebalancing and flowing through. And it's -- and again, it's getting back to a size of business that's several years ago prior to what the current -- the 2022 overheated conditions.

Again, also, you've implemented some cost-saving initiatives and optimization programs. Maybe talk about the lowest hanging fruit for the organization and how that plays out on the next call. You talk about you should see some tailwinds in '25.

Yes. So the 2 dimensions on costs, I'll talk about first on restructuring, we've been pretty aggressively going after SG&A. We started this in the second half of last year with some very, very draconian spending controls. What we spent a lot of time this year is both continue to increase the reductions in SG&A, but also doing the hard work of changing how we work through changing our systems, how we work, how we manage processes, doing some automation, moving work around to different locations around the globe to make those cost reductions more permanent, right? So you saw a very significant drop year-on-year in SG&A in our Q1 results. That comparison gets a little tougher as we go through the rest of the year. They'll still be very favorable, but not to the same degree that you saw in the first half. So I think for the restructuring program, certainly on the SG&A and back-office expense portion of it, very, very good progress. Also doing some things to fine-tune our manufacturing footprint. We've adjusted some facilities, continue to look at certain locations. We just exited a large toll relationship as we rebalance it and where we have manufacturing capacity and then make sure we have capacity that's in line with current market conditions and where we see growth happening.

You might also want to comment thinking about 2025, because there's a lot of headwinds right now. Talk about how they'll...

Yes. I think to take Mark's lead here, shifting away from restructuring, just thinking about what's flowing through our -- particularly our COGS line. In Q1, we had a tailwind at COGS. Throughout the year, we do see lower raw material costs for our business, what we have as a push and pull between parts of our cost structures. At the COGS line, again, Q1 with pretty significant benefit from lower raw materials year-on-year. That benefit continues to the year, but it becomes, as we go through the year, offset more in full by higher unabsorbed fixed costs as we're continuing to work through all of the lower manufacturing activity we had for the last several quarters. So as that flows through, that becomes a bigger headwind. And we're actually seeing some increasing logistics costs in the second half as we start to see returns in volumes. So whereas in Q1, we had a cost tailwind. In Q2 through Q4, we have at COGS a cost headwind. Now the highlight here, though, I think, is this is a part of the transition. As we restart manufacturing lines as we start building both from a cash flow perspective, rebuilding payables, but also from an operating perspective as we start absorbing more fully fixed cost. And that headwind goes away as we go into '25. So that absence of a headwind from an absorbed fixed cost that we're really having to battle with this year becomes a tailwind as we go into next year.

So maybe you're allowed to ask a question on the app, like this one. It's a 2-parter about Brazil, though. But first is it's going back to the question about new management in Brazil. It's early, but what do you expect from new management and strategy in Brazil?

So when I look at our market shares in Brazil, big crops such as soy, we have single-digit market share, yet the technology platform that we're building and the technologies we're bringing, we should be able to enhance that market share, especially in soy. So I think the management there now is really focused on where do we go outside of the business that we have today, which is a healthy business in Brazil. Where do we now go and grow with the technologies we're bringing? It takes 12 years to bring a new molecule to life in this industry, cost about $270 million, $280 million. So it's a long burn. Our research pipeline is now getting to the point where these products are becoming real. So here we are getting ready for Brazil. It's really a great opportunity to say we've got expansion opportunities. We've got the technology. How do we now execute? That's the biggest focus.

Okay. And then a near-term question on Brazil also, following -- sorry, the flooding in the Southern regions of Brazil, any thoughts on that?

Yes. I mean, listen, it's a catastrophic event. I mean, most people in the room will have seen the news. I mean, what is going on there is just unheard of. Now it's hit at a time when you're at the end of the main seasons, and you haven't started the next season. So in a way, it's fallen right between the 2 seasons. So we don't see any impacts today. We don't expect any impact in the next season because they should -- the floods should have receded by then. So no impact at this point, but from a human perspective, a huge impact.

Okay. So we talked a bit about '24 to '25. So you've -- at your Investor Day in November, you've kept it -- you put out 2026 targets of midpoint $1.4 billion EBITDA. You're going to do a little under $1 billion this year, so maybe 40% plus growth over the next 2 years. Can you talk about as you see it now, how does that growth -- to hit those targets, how does the cadence of the growth across '25 and '26? Is it linear? What are the most reasonable things, the easiest things to achieve there? What are the hardest things? So how will it split between '25 and '26?

Okay. I'll take a high-level view and then Andrew, you jump in. I think there's a couple of things. First of all, on the top line. We are expecting more normal market conditions as we go through '25, '26. This industry generally grows at 2.5% to 3.5% on the long haul. So you've got that underlying base growth, which is driven by the need to produce food, fuel for a growing population. I think everybody kind of knows that. We need about 3% productivity gains every year just to keep food production in line with population growth. So that's your underlying basis. For us, technology is playing a bigger role in our growth. We have a metric that we call NPI, new product introduction. That basically means products that are introduced over the last 5 years, how much of your overall revenue do they compose? Back in 2021, it was about 10%. Today, this year, it's about 17%. So that's a big boost to the top line. That's all market share gains. There is some cannibalization, but it's mainly market share gains. So the technology growth is what drives that top line. And then Andrew, do you want to comment on the -- below the top line?

Yes. So certainly, if we look between '25, '26 the cost structure, right from -- and we mentioned restructuring earlier. By the end of '25, we expect to have about $150 million or more in run rate benefits from the actions we're taking in our restructuring program right now. So that will help amplify any volume flowing through the cost structure. So we mentioned a moment ago, getting past this period of high unabsorbed fixed costs as we start getting volume back to more normal levels and more fully utilized in our plants. That will be a big step-up in improvement in cost structure in 2025. But I'd be careful, Joel, not to think of this as linear, right? I do think you do have a combination of factors. You'll see a big step up in '25 and a continued step up in '26. But you do need those normalizing market conditions. You need to get some volume back through the system. We do need the benefit from all of our new product introductions, the substantial amount of new formulations in particular, over the next 2 years that we're bringing to market that should be very helpful both to volume and to mix. And then the benefits from cost, both restructuring and from relevering -- getting volume back through -- getting back to proper leverage on the overall cost structure.

I'll get cheeky a bit here. So I don't know, $200 million of growth each year.

You said it's not linear.

I know. North or south for '25. Okay. We're about halfway through the fireside. If anybody in the room has a question, you can raise your hand, we'll have a runner come get it. Anybody have a question in the room? Okay. So looking back on the growth through '26, hit the targets. One thing that was interesting to me when you revealed these targets 6 months ago was, if I remember, you're assuming a 5% sales CAGR for the diamides and a 5% sales CAGR for the rest of the portfolio on diamides. It's nice, it's round. Can you talk about that? It was interesting to me that they're exactly the same number.

Yes. I think there's a lot of discussion about this class of chemistry called the diamides, which we own, which has been and is a tremendous franchise. It will continue to grow. It won't grow at the rates that it was growing at 10 years ago, 5 years ago, which were in the double digits. It's going to grow more in that mid-single-digit range. But I think what a lot of people have missed in the story of FMC is truly the value of that new technology pipeline. That's what's driving that 5% -- perhaps even more growth. And the reason for that is these are new molecules in new markets that we're not exposed to today. So when you look over the long haul, that's a tremendous growth algorithm for us. So yes, the diamides are incredibly important, very profitable. They'll be there. They'll continue to grow. But I think people are missing this secondary leg, which we've tried to explain, especially during our Investor Day, that those technologies are the ones that really drive the growth of the company. We're seeing that already today. 17% of our revenue coming from those new products, it was 10% 3 years ago. That's going to go into the 20s as we go over this next decade. We have 2 molecules we've just launched, a new fungicide and a new herbicide. Those products are over $1 billion combined. So that's a growth that's already occurring. Following that, 2 more herbicides. And one very important one, which is a new rice herbicide for grass. Think about it. Rice is actually a grass. So trying to kill the weeds that a grass is very, very difficult. We have a new patented technology that will be launched in Asia in 2025. It will be used on other crops as well. That's another $500 million molecule. The one after that is another broadleaf herbicide, particularly for corn and soy. That one comes as we go through the '26, '27 time frame. So you take those 4 big molecules, there's over $2 billion of growth there. And that's real growth that we know because we've already seen it with 2 of them. They're going to contribute something like $100 million to $150 million of growth this year, the 2 molecules that we've launched. Technology is needed in the industry. That's what we're providing. I think that's what's been missed in that growth that you're talking about, that balanced growth.

So talk about maybe for people that don't know, talk about as the diamides lose exclusivity in some of the patents across the decade and it will start in the different regions and you've been signing partnerships and agreements. Talk about how that all plays out.

Yes. I mean this industry has a record of new active ingredients coming off patent and then becoming more generic. It's not like the pharma industry. Everybody talks about a patent cliff in the crop protection market. It doesn't exist. You can go and look at all the different curves for price and volume. Nothing falls off a cliff. What usually happens is price declines over time, but new markets are opened up, so volume increases. So volume generally offsets price as you go over the long haul. We're expecting the same thing for the diamides.

And just if I can add, I think this theme of new product introduction and technology innovation that Mark's pointed to applies to the diamides as well. If you go back to our November 2023 Investor Day, we laid out a pretty clear story and plan on where we're continuing to innovate with higher-value formulations of diamides, whether they're higher concentration, so more efficient for the farmer to use, or combining with other active ingredients in ways that give a different pest coverage or a different functionality of the farmer. Many of those formulations themselves are patented, right? So it is a part of continuing to rejuvenate even the diamide portfolio and the composition of matter patents that might be rolling off continue to bring new products and it's something that is very hard for a generic entrant to try to compete with.

One of the first beachheads or one of the first areas where we're seeing this test in the diamides has been in India, where you've been starting -- you've got some things going on and you've been trying to defend your patents in some court process. Maybe give an update on that and how you see it playing out.