FMC Corporation (FMC) Earnings Call Transcript & Summary

Okay. Welcome back. Pleasure to be hosting this next session with FMC, and it's a delight to have both Pierre Brondeau and Andrew Liveris here with us -- Andrew Sandifer, sorry about that. Both of these fellows were -- have been with FMC for 15 years. Pierre has been the CEO -- the Chairman for 15 years. He was the CEO up until 5 years ago, and he's back in the CEO slot since mid-last year. Andrew Sandifer has also been with FMC for the last 15 years, and he's held that CFO role. Both of them were previously at Rohm and Haas, which -- I share a little bit of that history with them. So it's awesome to have them both up here. Pierre, I'd like to pass it over to you, get some opening remarks from you on near-term outlook.

Certainly. Is that working, yes. Thanks. Thank you very much. Yes, we just found out we were on the same plant at Rohm and Haas at the same time. So never saw you there. Did you work? I was -- so yes, where are we first quarter. I think, listen, we had, as you all know, an interesting earnings call. But I would say we are now 2 months into the quarter. I'm very pleased with where we are. I think as difficult as the decision had to be made to put the company back on track, if I look 2 months into the quarter into the year, I'm quite satisfied with where the company is. First of all, I think from a financial standpoint, this quarter is looking quite good, in line with where we think it should be. But most importantly, because looking at the financials for this quarter, most importantly is the work we are doing to put the company back on track from an inventory standpoint. And 2 months into the process, it's even going better than what I would be expecting. It's clearly a situation where product is moving into the ground, and we have very prudent sales into the distribution system and to the growers, which is allowing very fast to bring inventory level to where we would like them to be, and we have all the reasons in the world at this stage, 2 months into the quarter to believe that we should finish Q1 at or very close to where we would like to be especially in North America, in Latin America and Europe. Asia is a different situation. It's a different situation for everybody and for us. For us, from a financial standpoint, from a customer behavior, they are behaving exactly like we're expecting even in North America, the retailers and the growers, and our control over a selling process to put inventory back on track is exactly where I would like it to be. Additionally, I have to say it was one of my top priority, when I came back 8 or 9 months ago. The Rynaxypyr strategy now is in full motion. It's launched, and I'm quite pleased with the trajectory we are taking at this stage. So I know it's very early into the year. But where we are is in line with what we are expecting to accomplish in 2025.

Maybe take us around the world. Your business is fairly equally distributed around the world. Where do you see inventory levels around the world and overall health of your end markets?

I think the inventory around the world is, if I talk about the industry, and I think we'll be with or better than the industry at the end of this quarter. I think North America, we can qualify North America as normal from a market situation and inventory level. I think we can qualify Europe very close to normal. There is a few countries -- I was there last week, I was with the team in Europe. There may be a few countries, Eastern Europe might still be, but very low. I think we can qualify Europe as normal. Latin America, still a bit heavy, but we have a pretty high certainty that by the time we get into the second quarter of this year, we're going to be very close to normal also in Latin America. The place where there is still complexity and inventory is in Asia. That's a place which still -- we believe we'll have to wait until the first quarter of '26 for us to have a better sense of where the situation is going. So our business is going to be very well aligned with this and where we would like to be. Of course, for us, and I'm sure it's of interest to everybody is in terms of business health and strategy and what we have to do besides the general work we do on inventories, focusing on Rynaxypyr, which is a very important franchise, which -- product will be off patent at the end of the year, and putting in place the strategy we need to defend and grow these product lines.

And with respect to Rynaxypyr, what would you say surprised you the most about what happened? And maybe that kind of leads into the comment you just made about inventory levels in China or in Asia remaining still very elevated. Was there just a very significant capacity expansion broadly in Asia across crop chemicals, including Rynaxypyr? Is that what happened? And did that come as a surprise to you?

So Rynaxypyr, let me talk about where Rynaxypyr is today, and the situation in India and China and what we are doing. Rynaxypyr, let's not forget, Rynaxypyr is patent protected in 2025, which means in all of the large countries, we have been able to successfully defend that molecule and prevent generic to come in. So we talk a lot about generics today in Rynaxypyr. But you take all the large market, the U.S., you take Brazil, you take Western Europe or EU 2027, there is no generics. So you will find some in India, in China, some in Argentina, Turkey, are places where you'll find. But in the big scheme of things, in 2025, it does not have an impact on us in terms of major market share. I think there was a lot of noise made around Rynaxypyr because I have to believe that some generics in India and China believe they will be able to penetrate large markets. They were not able legally to penetrate the market. They were sitting on very large inventory, and they had to convert that in cash in places where they were allowed to sell, which were India and China and Argentina. But for the broad market, it's not a real issue for us. I think Rynaxypyr, what is very important for us is not what is happening in 2025. That is not the concern. What has happened -- what is important for us to prepare the company to be growing in a strong defense position in the first quarter in 2026 when generics are coming. And to that extent, I think there's a few things I'd like to say about Rynaxypyr. First of all, Rynaxypyr is very often in high-end crops which are very expensive and for which a switch to generic is difficult to do. I'll give you a simple example. Simple example being the U.S. Most people wouldn't know, but our largest market in the U.S. for Rynaxypyr is tree nuts, and mostly in California. And tree nuts are permanent crops. You don't harvest and [ test ]. And tree -- nuts produced after 7 years. And if you want to change a product, you need to use a -- what's -- a certified crop adviser. And those are the people who sign off. It's a difficult process. You can't afford to take the risk. And if you take tree nuts and fruit, for example, it's 60% of FMC Rynaxypyr market in North America. If you add vegetables, where you can't afford the slightest defect, it becomes 70% of the market. This is just to say that there is technical crops where Rynaxypyr is a very significant product which are not -- regardless of our technologies, are not crops, which are easy to change to generic for a very minimum financial benefit. Then there is the -- what you do to defend your strategy on Rynaxypyr. I think our first strategic thrust is through technology. I can give you today, we have 3 new products. In those products are -- 2 are being sold in 2025. One is going to be launched at the end of the year. High load product tablets for rice and a blend of Rynaxypyr and bifenthrin, which are expanding the spectrum of Rynaxypyr. Those are technical products, which are bringing very significant benefit to the grower. To give you a sense how improved Rynaxypyr technology can grow into a market. We sell today $800 million of Rynaxypyr around the world; $200 million of Rynaxypyr are sold to a partners, contract partners; $600 million are what we call branded product, what we sell to retailers and growers. So $600 million is our 2025 sales. We believe that by the end of the year those 3 products I talked about, new products will be representing $200 million to $250 million. So 1/3 of our sales would have already moved in this high-end market, which is the market where we play, will have moved to this new technology. And the last point is for us to look at, we believe that right now, we are within shooting distance of the manufacturing cost of the generics. We believe we're going to be very close, if not there, by the end of '25, early into '26. The question we have not completely resolved, I would be totally honest, is how do you use that to expand into a broader market, use your position and go toward -- beyond the people who are technology buyer, to people who are a bit more price sensitive. We need to be very prudent. We need to do that well. We know that it's a part of the market where we're going to be facing generics, but it's certainly a place where our manufacturing price will allow us to participate. So if I look today between the natural -- the protection around this market, between the new products we have launched. And by the way, we're going to have 3 new registrations next year for 3 new Rynaxypyr, between the ability with low cost to go into other markets, we have pretty strong confidence that 2026 will go back to growth for this market.

So these 3 new products, they are different formulations of Rynaxypyr?

Correct.

You said one was bifenthrin.

So one is -- I'll talk to you about one and the other one because the other one is kind of fun. The one which is less fun, but which is good, is Rynaxypyr with bifenthrin. Rynaxypyr is very good with caterpillars. When you blend that with bifenthrin, if you have a stable formulation then you can additionally be very efficient against stink bugs. So what you're doing is you're expanding the number of bugs, of insect the formulation can tackle and decrease the number of spray the grower is going to be doing. So that's a kind of a place where your product goes into a broader range of application in terms of treating insect. I'll give you another one. I like it because I think it's a fantastic product. It's a new formulation. It's making a tablet with Rynaxypyr. A very large part of FMC sales go to -- what range can I give? 20% to 30%? Is that an acceptable range?

Yes.

CFO always control what I say. So 20% to 30% of Rynaxypyr sales are going into rice. I don't know if you know how you put insecticide in rice because it's wet field. You formulate that in bags, you put that in your back and by hand, you spray the product. It makes it not very good in terms of the quality of the spray. From a safety standpoint for the people, it is not the best. What we have invented is an effervescent tablet which we shoot in the field. So people will have cartridge, will have the product, will have the tablet and will be able to disperse that around the field without having to carry. The fact that it goes down to the bottom is effervescent increase the efficiency of the product dramatically, plus bring a lot of safety to rice growers instead of [ methodology ], it's a highly, highly differential product. It's not easy to make. We hope to launch it fourth quarter?

Yes, we'll have a limited launch at the end of the fourth quarter.

So fourth quarter, I think it's going to be the big test. We have strong belief this product is a go, and that's going to be a highly differentiated product in rice. Just to say, innovation in Rynaxypyr is very far from being over. And we have 3 products, there is today resistance on Rynaxypyr. That molecule has been on the market for 20 years. There is multiple places in Brazil where there is resistance. Next year, we'll have 3 new mixture, which will be addressing resistance and increasing the spectrum of the product. So there is multiple ways to look at this -- to look at this product.

What about a combination with Cyazypyr? And what's your outlook for that diamide? It's -- you had it over in your high-growth bucket.

We -- when we look at the spectrum of the 2 products, because Cyazypyr has already a pretty strong efficacy with caterpillars. You would be combining 2 products, which have strong efficiency on caterpillars and Cyazypyr, strong efficiency on the other bugs. So we do not believe this is going to take us beyond the spectrum of product we can treat individually with each of those products. But Cyazypyr is an excellent product because of its spectrum to be combined with other molecules to look at expanding beyond the product -- diamides treat in general. So you are correct, Cyazypyr is also a very good blend partner, most likely not a blend partner for Rynaxypyr.

Then what has been driving the pressure on pricing if your view, it's Argentina, it's India, China, what led to the lower pricing with your supply agreements with your partners?

So what's -- we do have -- and that since we bought the business from Japan, we do have very long-term contracts with partners, who, by the way, are not always using those products to produce crop protection chemicals. They use it for other applications, could be for seeds or other things. Those contracts with those partners are the price at which we sell the product to these partners is indexed on our manufacturing cost. Those partners financially participate into the cost reduction, which is being put in place to lower cost, not like we're doing all of the job, having all of the expenses and then they benefit. They participate into the process. But I made the decision to put Rynaxypyr in the best possible situation in 2026 to accelerate our cost reduction process. By doing this, when you fair well that it would decrease at our selling price to our diamide partners in 2025. If you look...

So they get the benefit before you do.

They get the benefit -- they don't get the benefit until they have sold the product. They will get the lower cost, but then they have to formulate this product to whatever application they do with it, and then they will get the benefit when they sell it. And same way for us, we'll get the benefit when we sell it. The -- we knew by accelerating this process, which I absolutely wanted to do because I did not believe it was right not to be at the best possible manufacturing costs for all of the diamide to not do it even if it implied a price impact in 2025. And if you look, we've announced 3% price decrease for 2025. Of those 3%, 2% come from the change in the price to diamide partners. So that's the -- that's where the price decrease is coming. The price decrease is not coming because of sales in China where we don't participate. We don't -- it's not a big market for us, or sales in Argentina. The price decrease of Rynaxypyr in 2025 is mostly driven -- same for Cyazypyr by the way, is mostly driven by sales to our manufacturing partners with whom we have contracts.

Maybe one more diamide question for you, and that is out of that $600 million that you referred to, that's your branded sales, what fraction of that would be -- and that's just Rynaxypyr?

Just Rynaxypyr.

Is that -- that's not any of these complex formulations where you have different additives or different active ingredients?

Good question. So today, and it's going to evolve very fast next year. But today, I would say, $800 million, $200 million are sales to partners of the active. As I said before, $200 million to $250 million are the novel formulations and mixture, and pretty much all of the rest, Andrew, is the full...

The solo formulation.

The solo formulation. So that gives you a sense of the 60% of the -- sorry, of the $600 million of branded diamide, Rynaxypyr, we have moved 30% to the new product this year, and we have 2/3, which are still the solo molecule, which we're going to keep on moving toward the advanced mixtures plus the 3 new products we're going to have next year.

Okay. Putting the diamides aside, how would you assess the growth outlook in the rest of your platform? You highlighted Asia is still -- has channel inventory issues. But for the rest of your platform, what does the year look like?

If I look at -- well, first of all, you know the forecast we have for the year is pretty much flattish on sales, flattish on earnings. We are doing 2025 as a year to reset, reposition Rynaxypyr, get that inventory to the right level. So it's going to translate in a flat year versus 2024. So we're not expecting a lot of growth. Now despite the price pressure on Rynaxypyr due to the contract, despite the inventory decrease, we're going to have, hence, the reduced sales in the first quarter, we are still capable of maintaining flat sales for the year. The way we are doing it, it's very much driven by the growth part of the portfolio. The growth part of the portfolio is Cyazypyr, which is protected until '28 or '29 depending where in the world; the 4 new active ingredients, which are growing very fast, we are forecasting them to be $600 million by '27. And the only limitation right now to the growth of those new products is the speed at which we get the registration. The products are in high demand. They could grow faster, but they are new active, so we need to get the registration. And finally, our plant health product, which is growing 20%, 25% -- grew 33% in the fourth quarter. This one is interesting because it's a couple of hundred million business, growing 2025. At the end of this year, we're going to have a market test of pheromones. If this is as good as we think it could be, that is a large potential growth. It could be $1 billion sales. The problem is we are not putting that in any business plan right now because until we've tested the product at the end of the year on the field in Brazil. We will not know if it is as good as we think. Now that being said, it's a product we are differentiating ourselves. We are producing it through fermentation. And it's sprayable product. That would be the first sprayable pheromones you can sell on the market. So if it works, that's going to change the game, but we have to wait a few quarters before we know it.

So you won't need these like canisters that trap the males.

No. That's the point. We don't need the canisters. We don't need the trap. It's going to be as sprayable product.

And you can spray that much because your cost of goods is lower.

And plus the manufacturing process allows, the nature -- the way it's built, to do it.

Okay. And what else is in that? Biologicals or growth platform that is driving that robust growth?

Well, it's an old series of biological product. Now the way we look at biological, there are going to be cases where biologicals are going to be used by themselves. But I would say the way we think about biological is most of the time in combination with chemical products. If you think about chemical product bring the predictability, bringing the instant efficacy, where the biological bring the stability of the crops, avoid the outburst and fight the resistance. So we have the strong belief that today, it's early stage, but little by little at the commercial level, we're going to have more and more biological being sold together with chemical products as formulated products.

How about your outlook on the financial end, Andrew, anything that you're particularly concerned about?

Look, I'm always...

The CFO is concerned...

As Pierre described, my job is to worry. Look, I think as Pierre described, 2025 is a very important reset for the business to really position us for accelerating growth going into '26 and '27. Some of the pain we're taking upfront in the first half of this year to get inventories in the right place as we're preparing to introduce new products that don't have channel inventory sitting there and to prepare the growth portfolio to accelerate in '26 and '27. I think from a balance sheet perspective, we are not happy where our leverage is. I think we do want to see improvement in leverage metrics. We expect in this year to be basically flat year-on-year at year-end in leverage metrics, but we anticipate improving those rapidly as we accelerate growth of EBITDA in '26 and '27. I think it speaks to the confidence we have and the -- particularly the contribution of the growth portfolio and the ability of Rynaxypyr business to continue to drive growth and be an important part of our business following the reset that we're dealing with this year to be able to see that EBITDA growth, see the cash flow growth that comes along with it. That will help us get leverage metrics back into a healthier place and help us pay down a little debt along the way as well but get metrics back into place more in line with the targeted BBB rating and be able to continue to operate in the way that we find to be very efficient. So despite having lots and lots to worry about, I share Pierre's confidence in the outlook for Q1 and full year '25. And very, very excited about where this business can go in '26 and '27. And I think that's the path to getting the balance sheet back to where it needs to be.

Anybody else want to jump in here with a question? Front table here.

On the topic of leverage, ultimately, given, I guess, the seasonality in your working capital and the cash needs and the big commercial paper program you have, how important is maintaining the investment-grade credit rating? And is it something that you would consider sacrificing the dividend for it?

I think we believe that we have a business and a portfolio that operates best with an investment-grade rating balance sheet and with the access to working capital financing that comes more efficiently at lower cost with that. We are taking actions to defend the rating. We reduced debt by $600 million in 2024, and we've continued to use all discretionary free cash flow to reduce debt. We'll continue to do that this year. I think at this point, we have very strong liquidity, we just extended our revolving credit agreement through June -- July of 2028. We have some maturities that we'll be addressing next year that with both -- with the existing lines of credit that we have through the revolving agreement. Even if we needed to do that, we could use the revolver to cover those redemptions. We don't plan to. We think there's other things that we can do that would be potentially credit metric friendly as we retire those maturing debt obligations next year. So at this point, I think we have continued to hold our dividend. I think we're going to -- our belief is, we've got the confidence in what the performance of this business should be over the '25, '26, '27 horizon. And as I was talking about with the leverage metrics, I think we believe we will both fix the leverage metrics and the payout ratio by growing the EBITDA in '26 and '27. And the conversations we've had with our lenders and with ratings agencies and with advisers, I think everyone sees that importance, that confidence that we have as being how this gets to the right place. So we're under -- currently under covenant amendment that it goes through 2027 to allow us to get our metrics back to the right place. But I think with the confidence we have in that long-term outlook, we can get both credit metric, levered metrics as well as payout ratios back into a more normal place without having to do any other changes in capital allocation. And just to be very, very clear, capital allocation is all discretionary cash flow goes to debt reduction. So we pay the dividend and anything above that will go to debt reduction.

I wanted to drill in a little bit on what are you exactly doing to lower your cost structure in Rynaxypyr so significantly. Is this the partnership that you have with UPL, is that driving it? Or is there another pathway?

No, there is another pathway, which is actually fairly simple. It's very difficult when you produce agricultural production chemical. It's very difficult to change the process to reduce your cost because that's the way you get your registration. But it's quite simple, and that's why we could accelerate this process. It was all based on moving as much as we could, the manufacturing of actives into 2 plants we have, which are maybe the best in terms of being state-of-the-art plants and cost in China and India. Get us out of contract manufacturing we had in a very expensive part of Europe and eliminate all of the production from there and load those 2 plants, we do have in India and China, which are more modern, newer, cheaper, state-of-the-art. And just by doing the move of the actives there, we dramatically reduced our overall manufacturing costs. We had 2 things. We had expensive manufacturing place, and we had too many too many places which were not fully utilized. So that's what allowed us in a few months to be able to lower our manufacturing costs and to re-concentrate our manufacturing into 2 locations.

And I would be remiss not to mention that the restructuring footnote in the Q3 10-Q gives you a lot of detail on what actions we took. There were certainly some cash costs involved here in terms of exiting some long-term supply arrangements. It's a cash flow positive from day 1 change, but not insignificant. So it was something that we did not take lightly in terms of thinking about making the decision, but it does make a step change in the manufacturing cost for particularly Rynaxypyr.

I know you lead the question, but would you authorize me to say something without you asking the question?

Of course.

I would like to take this opportunity to have the group here to clarify something where I think we have not been clear at all as a company in terms of what we are doing in terms of route to market in Brazil. I think there has been a lot of confusion, and there is something which is certain is when everybody is confused, the blame comes to the people telling the story. So it's him. He's the guy I'm blaming. He writes the scripts. Seriously, we've been asked many, many times, why are you taking the risk to change your route to market in Brazil and go straight to the customers. It's the largest ag economy in the world. Why would you do that? I want to be very clear, we are not changing at all our a route to market in Brazil. Brazil has 4 large market segments. The first one is the co-ops. The second one is the distributors. The third one is what we call the mega farm. Those are the people who are doing sugarcane, cotton and corn as a secondary crop. And the fourth market segment is the large -- the large farm, 10,000 to 100,000 hectares, who are doing solely soybean and corn. We serve co-ops directly, and we've always done that. We are not changing that. We serve the distribution network, and we are not changing that. For decade, we have served the mega farm making soybean and cotton. They represent 40% of our sales in Brazil, and we are not changing that. The big change is we were never allowed to serve the market of the 10,000 to 100,000 hectares corn and soybean farm because those guys are big enough to buy directly [ from ] the producer, but not so big that they can have 6, 7 or 8 suppliers. They are much more selective. We never qualified because we never had a portfolio which was good enough. With the new molecules we are bringing to the market, and especially the new fluindapyr, the new fungicide, those growers are very, very interested in including us as a supplier to them. And it was their request, and we had multiple meetings, and we have decided consequently to structure a sales -- an additional sales organization in the company to go and serve this fourth market segment. It's hundreds of millions of sales of potential growth for FMC in Brazil. So it is not that we are changing anything to what we do in Brazil. We're going to keep on doing exactly what we have always done on the 3 key market segments we have always historically served. We are adding a growth opportunity, which we are finally allowed to participate into. We've been wanting to do that for a long time, we never had the portfolio, we finally have it. And that's a segment we're going to be serving.

And roughly how large of a sales force is that going to take?

It's going to be pretty significant, I would say, it could be multi tens of people. I think it's going to be -- that sales force is going to have a cost of over $10 million a year.

And what fraction of the Brazilian market is that fourth bucket?

The fourth bucket in terms of the -- I think they could be almost as big as what we call the mega farm. So it's a very significant market. I mean for us it could easily be 30% of our sales today.

And would you see synergy by cross-selling other products?

We will. It's a condition for us to serve them. We told them that we cannot serve a customer like that, which requires agronomists, technical support, account manager, if we only sell 1 product. So we already had agreements that if we come to serve them because of fluindapyr, they agreed to buy a broad range of products we are producing, which makes also sense for them because the way the rebate systems works. It's more beneficial to sell more product. So we are in clear agreement on that.

Glad you brought it up. Thank you. We are out of time. Please join me in thanking the FMC team here.

Thank you.

And this is the last session for today. Come up and meet these fellows and also go up to the sixth floor for the cocktail period, 5 to 7, see you there.