FMC Corporation (FMC) Earnings Call Transcript & Summary

So good morning, and welcome to the start of the Jefferies Industrials Conference. I'm Laurence Alexander with the Jefferies Chemicals team. Up first is FMC Corporation. And today joining us returning to the conference is CEO, Pierre Brondeau and CFO, Andrew Sandifer. Gentlemen, thank you very much for starting off so early in the morning. Just to start off, let's start with FMC's competitive position and how you think it has changed since before COVID.

Actually, as most of you know, I actually left just during the COVID period, it was a good timing for me to have my successor deal with that issue. The industry, I would say, [indiscernible] back, and COVID is behind us, hasn't much changed. It's about the same. FMC itself I would say the company is different, but as strong as it was. I think if I look today at FMC, we do have a different portfolio. First of all, I think coming back, it is the first time I see FMC launching that many new products. We have 4 new molecules coming onto the market with a couple of them having a different mode of actions. So those are very important molecules, each of them, about $0.5 billion of market potential. So that's for the new product. We do have a broader portfolio. As most of you know, we've moved into pheromones. We have a growing biological business. So all in all, a broader portfolio, new technologies coming to the market. On the other side, of course, we have our diamides business, which is getting closer to the end of IP protection by '26, '27, pretty much all of the patents will be gone. And that's the time when we are switching toward a formulation strategy rather than a solo molecule strategy. So all in all, it's a different story. We are not relying on the solo molecule diamide as much and moving that towards a formulation strategy, but we do have 4 very important new molecules coming to the market. In between '23 was the first -- in '26, and we do have a broader portfolio.

And can you just give an update on the state of the industry? Any significant shifts in order outlooks or patterns or inventory levels, particularly for Latin America since the second quarter call?

Yes. I would say that if right now, I would be doing the second quarter call, I would be saying the same thing. What we saw when we had the call at the end of July, we see about the same thing and the seasons are going as we were predicting. So in summary, we see Europe and North America situation normalizing. We believe by the end of the year, we will be closer to a normal channel situation. I think for Latin America and most importantly, Brazil for us. Things are going well. I know there is a question about draught. There is a question about fire, but -- but all in all, what we see is what we were predicting with a situation in the inventory, which will be maybe a bit later than Europe and North America, maybe call it towards the end of the first quarter when the season 2 of -- say, Part 2 of the season of Brazil will happen. So by the end of the first quarter 2025 will be a normalized situation. I think the wildcard for us remains Asia. Asia had all of the issues, other regions of the world had plus a situation in India with 3 very bad monsoon in a row. So I would say Asia to get back to a normalized situation for us. It will take 2025. So that's the place where we have the less certainty around the recovery of the market.

And 2023 seem to be a particularly tough year because of increased generic competition. Now that we're getting into a more normalized environment as a volume lift, it sounds like it's 2025, the problem could just be more, the majors fighting for share as volumes improve. Is that fair?

I would characterize '23 a bit differently. I think the year was difficult by far because of the channel situation, not because of the specificity of the generics. Generic was a sub issue, but the channel was loaded with product. It came from a post-COVID situation when we have supply chain issues. And through this long and complicated channel, they were way too much ordering of product, creating too much inventory in the channel. The generic -- I would characterize the generic situation a bit differently. What happened in the '22 post-COVID beginning of '23 period and '22, generic companies so opportunities. With the difficulties some of the ag suppliers were having to supply product. So they came -- and you saw a new generic take the case of Brazil, for example, you saw new generic coming and flooding the market with generic product. First of all, it was an issue mostly for the other generic company, the company which were in this market and a company like us. This company don't have a long-term presence in the region. And in 2023, they did not see their inventory moving as they were expecting. So they took advantage of an opportunity, didn't happen the way they were expecting. So they had to take spot action to turn this inventory into cash, which has been putting pressure on the pricing. But I see that more as a short-term action. Generic and engineering, of course, it impacts us in some of the less differentiated product, but it was really a channel situation much more than generic.

And when you think about sort of demand normalizing over the next 2 years, are you going to see any quirks in your price mix and incremental margins? Or is it going to be pretty predictable like as volume recovers, it just drops straight through?

I think -- do you want to address that or...

Sure. I can jump in a little bit for a moment here. I think Laurence, historically, we've had volume drop through about 50% to EBITDA. The dynamics in next year -- there's certainly some -- and we talked about this on our earnings call, we've got some strong raw material cost tailwinds as well as improved fixed cost -- fixed cost absorption, elimination of volume variances and additional benefits in our restructuring. So we do expect pretty strong cost tailwinds going into 2025. Yes, I think at this point, from a price perspective. Certainly, we're not -- too early to really anticipate too far ahead to the next season. We're not seeing major pricing trends 1 way or the other. And then continuation of mix improvement, I think as Pierre mentioned, significant emphasis in our portfolio on new products and bringing 4 new synthetic active ingredients bring the pheromones platform to market. And through 2025, you'll see particularly fluindapyr and Isoflex contributing to growth in 2 of the new synthetic active ingredients we've been introducing across the market. And that will help with continuing to improve mix. So I think that combination of things suggests a pretty strong drop in '25 and then more normalization as things continue to settle out in '26 and '27.

And then, I guess, on the technology, you alluded to it at the beginning -- can you just give a sense for the new APIs that you're launching, what are the key time frames or data points to watch over the next, say, 3 years, where we will know that you're on track, that these really are going to be on track to be $1 billion platforms.

Yes. I think -- when you come back after being away from the company 3 to 4 years, you look at what has changed and is worse and what has changed and is better. I think there is a place where I feel pretty satisfied right now is with the new technology on multiple front. I think we're still very active on the formulation side. We call that new product. They are very often patented, the new formulation based on diamides, we get protection until 2040s and we have formulation -- diamide formulation, non-diamide formulation with a shift right now because our patents expiring in '26 '27 to working more towards MI protection. So I could name, it would be worrying to everybody, but I could name about 10 to 12 products of new diamide or non-diamide formulation, we're launching on the market between '24 and '26 we're expecting are going to be providing significant growth and helping us fighting the post patent period. Then we have 4 molecules we are launching on the market, including one with a new mode of action. 3 herbicides, 1 from this side. Both products, you've heard the name, Fluindapyr, Isoflex, Dodhylex and Rimisoxafen. Those products combined new mode of actions for some, combined allowing us to penetrate some markets we were not participating in like Fluindapyr, which is a fungicide for soybean. We were not in this market. So they are completely additional to what we used to do. And those 4 platforms are coming to market between '23 and '26. That's where you see the growth. Right now, we would see for each of those products by the early '30s $50 million potential for each of them. So it's about a $2 billion with those 4 product platforms we are contemplating right now. Additionally, we are launching the biological product which are 2 main grouping, the pheromones and biological, each of them being above $1 billion. Our target is to get those products -- it's a potential of $4 billion new products. And what I like about the situation is some have registration, which is ongoing, IP is there, and sales are starting. So it is not something product we're going to put to the market in the 30s with an impact in the 40s. Those are being launched right now and our policy rating fluindapyr is a key seller already in Q3 and Q4 this year. This product is taking off very fast. So from a new technology standpoint, I think it's a place where the company is as well positioned as it could be at a time when diamides will not have the same IP protection we had in the past.

And then on the biologicals and pheromones can you talk a little bit about your competitive position, the degree to which either you're differentiated in terms of your R&D approach, the types of modes of action you're pursuing, how you blend into formulations, and you cross-sell. Can you just give a sense because there's been quite a lot of consolidation in that market and vertical integration. So can you just characterize how you're approaching it?

Yes. Still early. I mean it's -- I mean it's still a good business, growing fast, a couple hundred million dollars for us. So it's a real business. It's growing. Still early to say exactly how the chemical crop protection, pheromones and biologicals when those markets are going to get to the billions. We're going to be interacting with each other. But the way we look at it is they are allowing a broader protection. We are looking at them as complementary to our chemicals, which means we're going to use them in connection to chemicals. And they are also going to play a very important role in decreasing the resistance we are seeing today to some of the chemical products. So that's the way we are positioning all of those family of products.

And I guess on the third front, EU, Canada and China appear to be leading a global shift to accept gene-edited row crops. That industry can't help, but they always talk about their ability to go after disease resistance, insect resistance in new areas, rice, wheat and canola that traditionally haven't had the solutions. Can you talk about how FMC is positioned to either react to that or benefit or complement? How should we think about the implications?

I'm going to make an answer Laurence. I'm not making light of the question at all, and I never make light of new technology because that's the way -- but since I've been back, I've got that question a few times. And it's taking me back 20 years ago when people were talking to me about GMO and the fact that crop chemical products were about to disappear because of GMO. Here, we are gene editing. It's a bit different from GMO. Okay, in 1 case, you bring a gene in, and the other one you modify the gene. But those technology are very important to the ag industry. They're going to allow the seed industry to progress, to have more product. But exactly the same way we've seen it with GMO, you're going to have the same resistance. So you're broadening what your seeds can do, and you're having the same need, which will be requested after a while, 2 year, 3 year because new disease appear or resistance in existing. So the way we are looking at it -- it's more of a variation of GMO than it is a change in technology, which is changing the way we should look at crop protection.

And then I think another one where it seems to be -- it comes in and out as a fad, but it's persistent is precision ag, particularly lately, kind of the intersection of drones as a way to apply precision ag more efficiently. I've even heard some of your peers say that drones are now competitive on CapEx and OpEx compared to the traditional application technology. What does this mean for FMC? And are there opportunities to sell into niche markets there or change your formulations for the -- to target that?

We like the growth of the usage of Jones to spray. I think it's a very important tool. It's important especially in places like Asia, where you have small farms in India, less than 1 acres farm. Let's face it for the farmers, it's a safer tool because there is still places where they do manual spraying and it's just not as safe as drones. It allows to reach parcels, which were not reachable with traditional equipment. So we are very supportive of this technology. We believe they are good for crop protection companies in general, FMC and others. It's a good tool. I think we should not always think that drone spraying translate in less crop chemical product being used. I think it's the same thing. It's just a different mode of action. I think Precision Ag could impact some market when you look at the CN spray technology, for example, but that is more for product like nonselective herbicide, doesn't concern us, more threatening for some other companies. That being said, it's still a very expensive technology and still way to go. So those are different. Spray, we look at that more of that as a drone. We look more as a better way to spray product. Precision Ag is a different story impacting nonselective herbicide, which is the way to go and which is expensive.

So this brings me to 2 related higher-level questions. First, are there internal growth investments FMC should be doing now to make sure it is better positioned in the 2030s within the crop protection chemical market either -- it's a higher rate of R&D, kind of building out, kind of certain regions, building out the channels. And just give a sense for is the level of investment the company has been doing in the last couple of years? Has that calibrated properly?

I think we are. I mean, if you look at the number of products, the portfolio we have, and I'm feeling pretty satisfied. You would ask that question to our VP of Technology. I'm sure he will tell you that it needs 20% more than what he's got. But I'm feeling pretty good about where we are in terms of -- in terms of spending in R&D. The way I look at R&D for crop chemical company, generally speaking. And that comment is not specific to FMC, is how you use those research dollars you have because the ag industry is a brand of global industry where you develop molecules, which stay and you adapt to the region and regional research. And it's very much a balance of making sure you don't shift the temptation for short-term benefit will be to shift a lot of your research toward the region and do less on the early stage research and that's a difficulty all of the crop chemical company has. But from a spending standpoint today, we've been protecting that spending. And I think we are about the right level.

And then secondly, what can FMC do to reduce its working capital burden or an improved free cash flow conversion, ROIC longer term? What levers are under your control?

So I'll jump in on that one, Laurence. Look, I think the story on free cash conversion for FMC is we're an agricultural inputs provider, not a traditional chemical company, although we procure as if we were a chemical company. And we collect as if we're an ag inputs company. So that does give some imbalance in the working capital cycle. When we are growing, we use cash to grow receiving. It's just the nature of the business. We worked very aggressively to induce number of different financial tools to help share credit risk and help improve the efficiency of provision of credit in agricultural markets. But that is something that is a part of the structure of our industry and our business. The counter to that, however, is on the fixed asset side, the kind of chemical synthesis we do is pretty boutique and pretty small. This is not petchem. This is not big heavy assets, and we're going to spend less than $100 million of CapEx this year on $4.5 billion in sales. I mean that's -- it's not a capital-intensive business. So when we look at the overall dynamics from a cash flow perspective, certainly, working capital is a piece of it, receivables, in particular, and we work all the levers across working capital, working with our suppliers and payables. We've done a lot to bring down inventory in the last year with the market correction. I'd say the second factor and one that has a higher impact right now the moment as our earnings are bit depressed, is legacy liabilities. FMC is the stub of an old conglomerate, and we have legacy liabilities from businesses that FMC hasn't been in decades. They're relatively fixed. They're not fundamentally growing, but it's a load of both environmental [asbestos-type] legacy expenses that aren't going away. So the best answer for improving percent cash conversion in that dimension is to dilute them by growing the earnings. We are on a very good trajectory of that through '22. That will -- as we recover out of this correction that will return. So I think from a free cash flow perspective, and it's being very careful in the way we manage working capital, but acknowledging and recognizing that how you grow in this industry is investment and particularly in receivables, balancing with the growth of earnings to help dilute on the impact of the legacy liabilities. At a ROIC or another kind of return on capital metric, those factors flow through. I would observe this, we still put up a pretty positive ROIC last year, meaningful premium to our weighted average cost of capital in a very poor performing year for the company. We'd expect to see that spread expand again as we continue to grow the earnings base of the business. And again, this is where the fixed asset base being relatively light for the business, despite the working capital needs, does have the recipe for mid-teens ROIC. So it can be a very, very strong return on capital generating business.

And I guess, just lastly, I'll just ask one question about operating culture. It's been a few years now since the integration of the acquisition from DuPont, there was a lot of concern at the time about the differences and cultures between the 2 firms. Where do you see FMC is at in terms of how successfully has the integration gone? Or is there still things you need to work on? -- what challenges remain?

I think it's been a good integration. You would not be able today to go to FMC and see what part of the organization is legacy DuPont and what part is FMC or even what part is Cheminova? I think -- 2 factors. FMC was very fast-acting flexible company. We could adapt to multiple situation. DuPont was bringing more structure and process. And I think the beauty of this integration is that it was an acquisition without being an acquisition in a sense that DuPont employees knew they were being separated from the company. It was not a hostile takeover. And they were neighbors, they were next door. So for them, FMC was the best possible option in terms of the home. So when there is 2 companies where all the employees are excited and happy to join force, it is not like a hostile takeover, it makes for an integration process, which is much smoother and much easier. The only painful part we had in this process, but it's way behind us now is when we made the decision to use that acquisition to go back with a brand-new SAP platform. And we completely changed our SAP platform, and that was a painful year and a half process. But at the end, it finalized the integration. We have great system in place. But I can tell you, I will retire before having to do that again because that was painful, but if not, the integration is -- we're in a very, very good place.

Okay. Great. And well, that's the time we have. So thank you very much for starting off the morning. And thank you for your time. Thank you, everybody.