FMC Corporation (FMC) Earnings Call Transcript & Summary

Welcome back, everybody. As we kind of move into the afternoon, I'm pleased to be welcome welcome Pierre Brondeau CEO and President of FMC; and Andrew Sandifer, who's EVP and CFO. FMC has been a long-standing participant in the conference and obviously a very fundamentally important player to the agriculture market. So thank you for coming and joining us. There's been a lot, obviously, with the business, both fundamentally and strategically. And I guess if we kind of just go through it and kick off.

I wanted to ask you a little bit on the strategic side because the company kind of said, we're taking various paths. We are potentially for sale. We're looking at licensing agreements, asset sales. So can you help frame and structure what's currently at process as it relates to this?

Yes. Thank you. I think it's the most important question because there is some confusion around what are options, strategic options and what is in the 2026 operational plan. There is 2 paths. Plan A, Plan B. Plan A is the 2026 operational plan, for which decisions have been made and are being executed. There is multiple pillars to this Plan A. Number one, divesting assets to pay down debt for about $1 billion. Number two, reshaping manufacturing footprint to bring back to competitivities our core product. Number three, implementation of the Rynaxypyr post-patent strategy. And number four, the growth of the 4 new active ingredients. Those are the 4 pillars of our 2026 strategic plan. In the $1 billion divestiture of assets, the number one is selling our business in India. This is proceeding very well. We are expecting binding offers in the next 2 weeks as first step and fundamental step to the process. Number 2 is licensing of one of our advanced molecule with an upfront -- significant upfront payment, allowing us to payment debt. We are currently in negotiation with different parties, I would say, very close to a decision. So that part number 2, which is licensing all of the molecule with upfront payment. And the upfront payment is just not a few dollars. It's a meaningful part of the $1 billion, is very close to happening hopefully, Q1, beginning of Q2. Then there is a series of other activities which we are undertaking, how we cannot be more precise because they are less advanced, but they are in the process of due diligence for some companies which are interested in those assets. So I would say that part of the -- that pillars of the 4 pillars is progressing very well as expected, with the top 2 being very well advanced, Plan A. Plan B, when we presented Plan A to the Board, they've approved the plan. And their view was it's a very solid plan, but like any plan, there is risks. If if something goes wrong in this plan, what are the alternatives? Could you explore strategic options for the company beside this plan which could be selling the company, merging the company or any other option. Now Plan A is the priority, but we are running Plan B, fully. You do not look at Plan B by just waiting for a couple of phone calls. We are running it like a divestiture process. We've hired 2 banks, bank of America and Goldman Sachs, who are running the process. We do have a legal adviser. We have prepared the management presentation in the data, and we have actually already given management presentation to parties which are interested in the acquisition potentially of FMC. So this process is fully in motion. Despite the fact that my priority, as a CEO, is Plan A, and delivering an the operating plan. The other process is being fully run and completely in motion currently.

So is it fair to assume that a lot of the companies that are looking at Plan A are also in Plan B as it relates to licensing and some of these opportunity sets? Or do you find them to be separate considerations?

You could have companies which are on both sides.

And so if I think about a normal licensing deal, at least the way that we kind of see them historically, it's a partnership and say, for example, Fluindapyr with Corteva, right? You have the sales and incrementally, you collect the license or the value stream as the sales progress. So when you go forward with something like a lump sum upfront? Is there -- like what kind of haircut do you think you're at risk of taking by moving everything forward. Or it feels like there's more risk to the buyer conceptually, right? So how does that conversation evolve? And if I look at your 4 actives and it's $2 billion of peak sales by 2035-ish.

$2.5 billion, yes.

$2.5 billion, okay. Well, that's important for me to know. So what's like a realistic sum that you could get in a licensing agreement really today for some of this though?

So we cannot diverge of course, the prepayments. We do not take a haircut. It's -- there is a very different type of licensing agreements. When you license Fluindapyr and Fluindapyr is not the molecule we are talking about licensing today. Fluindapyr is a molecule which has been registered in most of the large markets. So usually, those license are done pretty quickly with the licensing agreement and payment by the licensee as we go. Here, we are talking about more advanced molecule, very often, which do not have registration or all of the registration. It's a longer process, which require more due diligence to understand the molecule, its capacity, the probability will be registered. All of this is behind us, has been done. But you're acquiring a molecule much earlier in the process. So you don't take a haircut, but it's a different type of licensing. Also, this type of licensing very often comes with an exclusivity on some territories and some crops, which you will not have in a simple licensing agreement for somebody to sell a molecule. So those are deeper, broader licensing agreement. Why are they beneficial to us? It's because -- and we would do this type of licensing agreement regardless of not of the situation we are in. We -- when you have a molecule of quality, you want to be able to reach the largest possible market. The ag industry is a very, very fragmented market. We are one of the largest crop chemical company in the world, and we have 7% market share. If you want to reach a broader market with this molecule, you need to find partners which have complementary crop profile and complementary geographical profile because then you reach a bigger market. Then you give to these companies a commercial license. What does it mean? You sell them -- you manufacture, we keep the manufacturing of the molecule. We sell them the molecule at a cost plus, then they pay royalty and then they create mixtures for the crop they want to treat. So that's the way it works, very different type problem. For us, the benefit is reaching a larger market, but it's also financially, if you think about it, by selling the molecule at a cost plus, plus royalty, knowing that we do not have the selling, tax service expense from a dividend margin, you might have a lower gross margin, but you might have -- you will have an equivalent EBITDA margin on the product. So net present value of a molecule, which is licensed to the right partner is higher than the same molecule you try to keep for yourself.

Would something like Dodhylex be open for this? Or is it even further out type of actions.

It will be one of the three molecule Dodhylex, Rimisoxafen or Isoflex. Obviously, when you talk about these kind of molecule, what I've said, you tend to think more Dodhylex and Rimisoxafen, which have less registration and are a bit further away from commercialization.

Because if I think about product efficacy and breadth that felt like us, Dodhylex probably has a huge -- when I look at applicable market, that's one where I feel like it could actually go really broad.

I think the 2 molecules -- if I look at the 4 molecules we are putting on the market today, the 2 molecules which have the most unique technical capabilities and market breadth, Dodhylex and Rimisoxafen. 2 molecules with a new mode of actions in each of them and Rimisoxafen with a dual mode of action.

Along the same lines and maybe a little bit different, but would you look to sell any product lines down? Like would you just sell the entire -- I'll go to Isoflex, right? Would you sell the whole Isoflex suite, AI production active ingredient production to sales and just divest that AI segment to somebody. Or Cyazypyr, could you carve out Cyazypyr, the footprint up and down the scale and say, this is yours now, if you want to buy.

Very different question about Cyazypyr. And one of the new molecules. Cyazypyr I have not even given any thought about, potentially selling Cyazypyr. Selling one of the new molecule, there would be 2 reasons for which we would do it. One would be an absolutely insane price or us being completely desperate. I don't think we're going to be facing any of those 2 situations. So today selling more of the molecule is not in the cards. We would rather sign good licensing agreement. Think about FMC, '26, difficult year, we know it. The operating plan is not a walk in the park. But if we get successfully through 2026, 2027 is looking really good. Our core business will be in great shape. And we'll have 4 molecules taking off with very fast growth, reaching $1 billion very quickly, $2.5 million in potential and very unique molecule and rebalancing our portfolio from an insecticide company to much more balanced herbicide, fungicide biological and insecticide?

No, this is all very helpful context because I think we, in the days following, we had a lot of conversations, like, well, if they're just going to sell or remove the economics of the primary growth engines like what's left? And so it sounds like that's not really on table, which I think is helpful as it relates to creating a story that's ownable and capitalizable beyond just this is what the cycle is going to do.

I hear you. You're absolutely right. I mean, for us, priority number one is Plan A which include retaining the 4 new molecules.

Yes. And so -- I think FMC, over time, has always had a successful platform in part just because of breadth of products and applications, right? It's not just you have a pretty broad spectrum of markets. But it feels like pressure at the same time is pretty uniform across this core portfolio. And maybe that's not the case. Are there specific portions that are just being hit particularly hard that you can address? Or is this -- that core business is all kind of unilaterally under pressure across all your modes of action and products?

The latter. I think what's been happening is, over the last 3 years, because of the prolonged downturn, the low demand price have been going down constantly. Generics have been very active in pushing price down. And I must admit something. I realized maybe a few quarters too late that our portfolio, our core portfolio was getting uncompetitive from a price standpoint because our cost was too high. Half of it is produced in high-cost plants, and even the one we are producing or procuring in low-cost regions could be done at lower cost. So we have redefined a process to relook at our footprint and bring back manufacturing cost in a place where with a straight molecule or with formulation, we can compete with any generics around the world. Now there is locations where those products are being more impacted. That's the place where the generics are more active. Latin America and especially Brazil being one. Asia being another one. After that, North America and last will be Europe, which is the most stable market we have. But overall, it's an issue of a manufacturing cost of core molecule that we need to fix across the board.

So you kind of touched on 2 things that I want to parlay into. First is as you look at where you're priced. Have you basically priced back on top of the market? So if I were to see, if we were to diligence in commodity crop chemical prices rise 5%, will your core portfolio also be up 5% now? Is it -- are you kind of on top of market prices and competing where the market is now?

We try to be where the market is. The problem is in the deflationary market when price is going down. If you look at our results over the last few quarters, what we have lost is volume because there were cases where price were going down to a place where it didn't make sense for us to stay with the market price. So most of the time, when you look at volume loss at FMC, it's on core products. And if you look in 2026, that is the number one driver of a lower EBITDA versus 2025, it's same thing. We're not going to be able to go after all of the business on the core because of the manufacturing cost.

But so if volumes -- because I think -- it feels like the next 2, 3 years does set up more favorably for crop protection, right? Farmer profitability may be aside, the business feels like we're putting in a bit of a floor volumetrically, I think we should grow. I had Chuck up here earlier, and I think he would articulate a similar expectation around volumes can grow from here. So then would it look like FMC reentering some of these markets as demand came back and then volume growth if we saw prices higher? Like how should I see you contribute then or play as the cycle recovers.

So we've not moved away from any markets. We just lost business at specific customers. That's more the situation where a customer will be able to get a price from a generic and we could not follow. That's why we lost volume. But we moved away from no market. The way we look at it and tend to agree with Chuck that we should see volume growth '26, '27, '28. Our view is if we put ourselves in a place where we are competitive at the bottom of the cycle, we'll be even more competitive when the market grows, and we'll be capable of taking full advantage of that growth. So the last thing we want to do is wait for the market to grow for us to be back to competitiveness. We just want to lower price to be able to be competitive, regardless of where we are in the cycle. We have not moved away from any markets. We are still with the same molecule, but we've lost business and specific customers where we couldn't follow competition.

And so you talked about operating costs associated with $1 billion in revenue being down 35%, I think, it's the target. How do you get there? So what actions are you taking? And I mean, is this like $300 million in savings? Is that kind of the rough number we're looking at?

Not exactly. It's saving 35% of the manufacturing cost, $1 billion is the selling price. So if manufacturing cost is 50%, it's 35% -- $150 million, $170 million. But there is 2 aspects of it. One of the cost reduction is going to be made by moving out of manufacturing of active ingredients in Europe and North America, and move all of this to lower cost country, India and China, either in our India and China plants or with our total manufacturing partners, very often exclusive or through contract supplies with generics, who are working with us. So that's the way we're going to do it. So we're going to limit our operations in Europe to more formulations and manufacturing of active ingredients and refocus all of the manufacturing to India and China.

Do you have to be a manufacturer of active ingredients, though? Can you just -- because it feels like the capital investment and requirement for active ingredient manufacturing might not be worth it anymore, if you can just be a formulator, right?

It's not very high. Those are not big brands. I mean our capital spending every year is $100 million. So it's not a very high capital spend. Plus, our plants could be expanded without building new plants. Plus, there is something which is fundamental for us. We have the 4 new active ingredients I've talked to you about. We have 2 new fungicides coming out of the development in research. We want to be able to manufacture those products. Those products need to be manufactured in-house. We are a manufacturing company, so we're not moving out manufacturing actives.

And how do you choose -- I mean, India and China, like under a traditional sense, obviously makes a lot of sense. How do you navigate just tariff, tariff uncertainty considering the ebb and flow of headlines, the risks around U.S.-China trade tensions. Is there just no ability to put this in somewhere like Vietnam or like what is ultimately the draw that gets you back to China and India?

On China and India, first of all, all the places where we have already facilities, where there is most of the raw materials coming from. Where there is the people, the knowledge. Second of all, I think people have to remember that for a company like FMC, the U.S. is not the world. The U.S. is only 20% of the market. Manufacturing in India and China put us in a very beneficial position for 80% of our business. So yes, we have an issue with tariffs, but it's for North America, it's for the U.S., not even North America, it's U.S. Canada is pretty big for us. It's for the U.S. And the U.S. is not even 20% of the world market. Second of all, there is such a difference in manufacturing cost than manufacturing in India or China, plus the tariff is lower than manufacturing in one of our plants in Europe or in North America.

Andrew, to bring you in on this. So the restructuring work this year is consuming cash. Next year, if we return to growth, typically, that's a working capital headwind. How do we chart -- if the company is going to grow 15% in '26 and 15% in '27. How do we chart the cash flow progress from here?

Yes. It's excellent question, Matt. I think if you look starting at '26, we've guided to a midpoint of essentially breakeven free cash flow. Now embedded in that is about $130 million of cash restructuring spend for both the manufacturing footprint changes, Pierre was just talking about as well as for some final costs in the next -- over the next couple of years from a large take-or-pay supply agreement in our Rynaxypyr that we walked away from 2 years ago. So that is one of the big headwinds on free cash flow in '26. There will be a step-down in restructuring spending from '26 to '27, but it's still pretty meaningful. It will take through the first quarter of '27 to make all the manufacturing changes we're talking about. And we still have another year of material take-or-pay payments from the older and Rynaxypyr supply contract that comes in -- that needs to be paid in 2027. So what I think you'll see is you'll start seeing pretty healthy EBITDA growth after the repositioning in '26. We've said openly mid-teens, 15% kind of range in '26, '26 into '27 and '27 into '28. As you get that higher level of EBITDA, more of that will flow down to free cash flow. By '28, certainly, there's a much less drag from restructuring expenses. There will be a pretty significant step down from '27 to '28 with the restructuring expenses. But we do have some legacy expenses and some other semi-fixed expenses. We pay about $135 million a year in cash for legacy environmental costs that are both in our mixture of discontinued ops, continuing operations, obviously, interest expense, taxes, those kinds of things. So getting that top part of the EBITDA to free cash flow, flow back to higher number, leads to a lot more drop-through. Then the last piece I'd put, Pierre pointed this point before, we spend about $100 million a year in CapEx. We're not particularly fixed asset intensive. But with growth, there is working capital growth. We are doing a lot of things to both improve efficiency on all dimensions of working capital. We're working on ways to bring that cash conversion cycle back to more historical norms. It's been stretched over the past 3 years as we've been in recovery mode coming out of the big post-COVID correction. And as we've had some pretty big shifts in mix in our business, less B2B business on shorter terms, more business and long-term markets like Brazil and Turkey. So I think you will see an improvement in working capital productivity as we go through '26, '27, '28 as well that will reduce the amount of working capital dollars growth that's needed to support that top line growth.

Okay. I appreciate that. I wanted to talk a little bit, we've been layering in the discussion on AI.