FMC Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2021

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Third Quarter 2021 Earnings Call for FMC Corporation. This event is being recorded and all participants are in listen only mode. After today's prepared remarks, there will be an opportunity to ask questions. I would now like to turn the conference over to Mr. Zack Zaki, Director of Investor Relations for FMC Corporation.

Operator

Please go ahead.

Speaker 1

Thank you, Chad, and good morning, everyone. Welcome to FMC Corporation's 3rd quarter earnings call. Joining me today are Mark Douglas, President and Chief Executive Officer and Andrew Sandipur, Executive Vice President and Chief Financial Officer. Mark Following the prepared remarks, we will take questions. Our earnings release and today's slide presentation are available on our website and the prepared remarks from today's discussion Let me remind you that today's presentation and discussion will include forward looking statements that and in our filings with the Securities and Exchange Commission.

Speaker 1

Information presented represents our best judgment based on today's understanding. Actual results may vary based upon these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, Adjusted EBITDA, adjusted cash from operations, free cash flow and organic revenue growth, all of which are non GAAP financial measures. Please note that as used in today's discussion, earnings means adjusted earnings and EBITDA means adjusted EBITDA. A reconciliation and definition of these terms as well as other non GAAP financial terms to which we may refer during today's conference call are provided on our website.

Speaker 1

With that, I will now turn the call over

Speaker 2

to Mark. Thank you, Zach, and good morning, everyone. FMC delivered record 3rd quarter results. We grew our revenue by 10%, EBITDA by 12%, EPS by 17% and importantly, expanded our EBITDA margins Despite continuing cost pressures, performance in the quarter was driven by broad based volume growth and price increases. New products introduced in the last 12 months continue to gain momentum, and we are now forecasting sales from these products to account for more than onethree of our revenue growth this year.

Speaker 2

In addition, FMC's Plant Health business had an excellent quarter with 40% year over year growth led by biologicals. Looking ahead, we continue to expect a Strong finish to the year, driven by high margin volume gains and accelerated pricing actions as well as a robust global market backdrop. I'd like to take a moment to acknowledge our operations and procurement teams for their contribution to our Q3 performance. The supply chain and logistics Challenges highlighted in our last earnings call continue to disrupt AgChem and other industries around the world. FMC was able to meet the strong Grow our demand for our products in a timely manner, thanks to the work of these teams.

Speaker 2

Let me also briefly comment on COVID-nineteen's impact on FMC. All our manufacturing facilities and distribution warehouses remain operational and properly staffed. Our research laboratories and greenhouses Continues to be fully active and we have resumed in office operations in many parts of the world. FMC continues to follow all guidance given by local authorities. Turning to our Q3 results on Slide 3.

Speaker 2

We reported $1,200,000,000 in 3rd quarter revenue, which reflects on a reported basis and a 9% increase organically. Growth was broad based with 11 of our top 20 countries posting double digit growth in the quarter. We had strong growth in all product categories, led by greater than 20 percent growth in herbicides. This was partially offset by registration losses in EMEA and Latin America. Adjusted EBITDA was $293,000,000 an increase of 12% compared to the prior year period and $18,000,000 above the midpoint of our guidance range.

Speaker 2

EBITDA margins were 24.6%, an increase of 40 basis points compared to the prior year, driven by mix improvement as well as operational discipline and price increases in all regions. Adjusted earnings were $1.43 per diluted share in the quarter, an increase of 17% versus Q3 2020. The year over year increase was primarily driven by an increase in EBITDA, with the benefit of share repurchases and lower interest Largely offset by other factors. Relative to our Q3 guidance, the $0.12 beat was driven almost entirely by EBITDA. Moving now to Slide 4.

Speaker 2

Sales in Asia increased 20% year over year and 19% organically, driven by strong diamide sales across the region as well as pricing actions. In Australia, we had a successful launch of VantaCore Insect Which is the new higher concentration formulation of rinaxipir active. Vantacor is applied to specialty crops such as chickpeas. The Australia market also benefited from positive grower sentiment, favorable weather conditions and strong insect pressure. India had another growth quarter despite an erratic monsoon, which resulted in dry spells in parts of the country.

Speaker 2

India's growth was driven by diamide sales in rice as well as continued expansion of the rest of our portfolio, leveraging our strong market presence. In Latin America, sales increased 11% year over year and 9% organically, driven by double digit growth of insecticides in Brazil and Argentina as well as pricing actions across the region. Corn, soy and cotton were the key crops driving growth in the quarter. This is a direct result of our strategy to improve market access and increase penetration of our technologies, particularly in the Brazilian soybean market. Chile is another good example of this as sales nearly doubled compared to this time last year as we leveraged our enhanced market presence.

Speaker 2

Plant Health products grew approximately 50% in the region, led by biologicals and seed treatment. Latin America was impacted partially by registration cancellation And rationalizations of products in the quarter. EMEA grew revenue 12% 10% organically, driven by strong demand for our herbicides and diamides across the whole region, despite headwinds from registration Among others, Russia, France, Germany and the U. K. Grew double digits in the quarter.

Speaker 2

Demand was especially strong for herbicide applications in cereals and oilseed rape. South Africa doubled its sales in the period compared to the previous year, driven by the continued penetration of This is a great demonstration of the untapped potential in new markets for our diamides. Our U. S. And Canada branded business grew greater than 20%, driven by strong demand for our diamides and fall herbicide applications as well as pricing actions.

Speaker 2

VantaCore had a successful introduction in the U. S, where it is used to target worm pests in a range of crops, including soybean, corn And cotton. The BantaCore launch was timely and welcomed by growers who were battling extended fall armyworm pressure from the southern markets up through the middle of the country. Overall, North America sales decreased 6% year over year and 6% organically due to Continued shift of diamide global partner sales in the quarter from North America to other regions, as we have described in previous calls. Moving to Slide 5.

Speaker 2

Despite continuing supply issues across the industry, FMC's 3rd quarter revenue increased by 10% versus prior year, driven by a 9% contribution from volume. Gross prices increased 1% in the quarter as our most recent pricing actions went into effect. EBITDA in the Q3 was up 12% year over year, primarily due to broad based volume gains. We also had a $12,000,000 contribution in the quarter from price The benefit of our pricing action was masked in the quarter by some favorable rebate and other adjustments in the prior year period that did not repeat this quarter. Costs continue to be a headwind.

Speaker 2

However, the total amount incurred in the 3rd quarter was less pronounced than previously projected, Mainly due to timing, we still expect second half costs to be consistent with previous guidance. And FX was a $10,000,000 tailwind in the quarter. Turning to Slide 6. Before I review FMC's full year 2021 and Q4 earnings outlook, let me share our view of the overall market conditions. We continue to expect the global crop protection market will be up mid single digits this year on a U.

Speaker 2

S. Dollar basis. Breaking this down by region, we continue to anticipate high single digit growth in the Latin American market, mid single digit growth in the EMEA market, LowtomidsingledigitgrowthintheasianmarketandlowsingledigitgrowthintheNorthAmericanmarket. We are raising FMC's full year 2021 earnings guidance to the range of $6.59 to $6.99 per diluted share, a year over year increase of 10% at the midpoint, reflecting the impact of share repurchases completed year to date. Our 2021 revenue forecast remains in the range of $4,900,000,000 to $5,100,000,000 an increase of 8% at the midpoint versus 2020.

Speaker 2

EBITDA remains in the range of $1,290,000,000 to 1,350,000,000 representing 6% year over year growth at the midpoint. Guidance for Q4 implies year over year revenue growth of 19% at the midpoint on We forecast EBITDA growth of 29% at the midpoint versus Q4 2020, And EPS is forecasted to be up 41% year over year. Approximately 3 quarters of the EBITDA growth is driven by the return of business missed in Q4 2020 due to supply chain disruptions in North America and weather impact in Latin America. Turning to Slide 7 and full year EBITDA and revenue drivers. Revenue is expected to benefit from 6% volume growth, a 1% price Contribution from higher prices and a 1% benefit from FX.

Speaker 2

We anticipate continued strong volume growth led by Latin America, North America and Asia. We have increased our forecast again for revenue from products launched in 2021. These sales are now expected to contribute $140,000,000 in year over year growth, up from our last forecast of $130,000,000 and our initial view of $100,000,000 Pricing actions in Q3 will continue to accelerate in Q4. We will continue to raise prices across all regions Going into next year. Despite the shift of costs from Q3 to Q4, estimates for full year cost headwinds have not changed Our detailed comments in the last call.

Speaker 2

This is why our full year outlook remains unchanged. Moving to Slide 8 and our 4th quarter drivers. Revenue is expected to benefit from strong volume gains. In Brazil, the strength of soft commodity prices, projected increases in planted areas as well as good weather conditions are all leading to a good cadence of incoming orders and give us confidence in our expectations for a strong 4th quarter. In the U.

Speaker 2

S, channel inventories are normal for this time of year. Our new product launches are gaining significant traction and market sentiment supports our expectations for a robust 4th quarter. As I noted earlier, we've also moved on price increases with higher prices already in effect in the Brazilian and U. S. Markets.

Speaker 2

Similar actions are underway in other countries across the globe, Such as Australia, Russia, France, Mexico and Argentina. And you should expect us to continue raising prices through the year end and well into next year. Cost increases are consistent with our guidance for the second half. We continue to pursue cost improvement opportunities and remain vigilant with our cost controls, all without impacting our R and D pipeline or growth trajectory. I'll now turn the call over to Andrew.

Speaker 3

Thanks, Mark. Let me start this morning with a few highlights from the income statement. FX was a modest tailwind to revenue growth in the quarter as expected, with the U. S. Dollar weaker against many key currencies, most significantly in Latin America with the strengthening of the Brazilian real and the Mexican peso.

Speaker 3

Interest expense for the quarter was $33,100,000 down $2,400,000 from the prior year period, driven by the benefit of lower debt balances and lower LIBOR rates. We continue to expect interest expense to be between 130 and $135,000,000 for the full year. Our effective tax rate on adjusted earnings for the 3rd quarter was Moving next to the balance sheet and liquidity. Gross debt at quarter end was $3,400,000,000 down roughly $400,000,000 the prior quarter. Gross debt to trailing 12 month EBITDA was 2.7 times at the end of the 3rd quarter, while net debt to EBITDA was 2.5 times.

Speaker 3

Both metrics improved sequentially. Though still slightly above our targeted full year average leverage levels, We expect to be at target leverage levels at year end. Moving on to Slide 9 and cash flow and cash deployment. Free cash flow for the Q3 was $300,000,000 Adjusted cash from operations was lower than the prior year period, largely due to our decision to build inventory to help manage continued supply chain volatility and to be prepared to fulfill strong demand in the 4th quarter and in early 2022. Capital additions were somewhat higher as we continue to ramp up spending following the deferral projects last year due to COVID.

Speaker 3

Nearly 50% of this year's capital additions support capacity expansion. Legacy and transformation spending was down substantially with the benefit of the completion of our SAP program and lower legacy spending. We are maintaining our expectation for free cash flow in a range of 480 to $570,000,000 with continued expectations for seasonally strong cash flow in the 4th quarter. We returned $262,000,000 to shareholders in the quarter via $62,000,000 in dividends and $200,000,000 of share buying back 2,100,000 shares in the quarter at an average price of $95.26 per share. We have now repurchased just over 3,000,000 shares this year, reducing our share count by nearly 2.5% since the beginning of the year.

Speaker 3

Year to date, we've returned $486,000,000 to shareholders through dividends and repurchases. For the full year, we continue to anticipate paying dividends of roughly $250,000,000 and to repurchase $350,000,000 to $450,000,000 of FMC shares. And with that, I'll turn the call back over to Mark.

Speaker 2

Turning to Slide 10. I want to provide an early look at the key dynamics underpinning our We view 2022 as another year with a good macro environment. Obviously, notwithstanding the impact weather can have on any single quarter, We expect that soft commodity pricing momentum will carry into next year with global demand for crops remaining healthy. As a result, we are assuming the overall crop protection market will grow in the low to mid single digit range next year on a U. S.

Speaker 2

Dollar basis. FMC's growth will be driven by broad based volume gains across our portfolio. Pricing actions reflective of cost increases, Continued expansion of diamide volumes in existing and new markets and further penetration of new products and expansion of our market access in underserved geographies. We expect cost pressures this year will persist well into 2022 as the industry grapples with global supply demand imbalances, Structural changes in China's industrial policy and energy supply, tight ocean freight capacity and labor cost inflation. Taking all this into consideration, our current early thinking would suggest year over year revenue growth of 5% to 7%, EBITDA growth of 7% to 9% and EPS growth at over 10%, in line with our long range plan.

Speaker 2

We will share more detailed guidance for 2022 in our February call. To conclude our prepared remarks, the The second half of the year is playing out as we forecasted. We executed very well in the quarter, not only from an external perspective in driving demand and pricing across all regions, but also importantly, internally by fulfilling that demand with product in a timely manner under challenging supply chain conditions. The only change in the second half is the timing shift of costs and hence we're not changing our full year guidance. The overall crop protection market fundamentals are positive We remain confident in our ability to deliver our 4th quarter forecast.

Speaker 2

I'll now turn the call back to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. Please limit yourself to one question only. If you have additional questions, you can jump back in the queue. And the first question will be from Christopher Parkinson from Mizuho.

Operator

Please go ahead.

Speaker 4

Great. Thank you. So given all the challenges FMC and everybody else in the industry is facing on both raw material supply chains and transportation logistics. Here today where we stand, can you just give us an update on the market as the market adds into 22 regional price initiatives and how you're ultimately poised to combat these challenges? Thank you.

Speaker 5

Yes. Thanks, Chris.

Speaker 2

A lot to unpack there. Sorry. It's okay. When we look at the market today and some of the dynamics that we've outlined in, certainly as we look forward to 2022, why don't I take a look at the cost element 1st and just what are we seeing. I think on a raw material perspective, raw materials are still staying high.

Speaker 2

But more importantly, It's not just the cost here, it's the supply side that is causing, I would say, the most sleepless nights as we go through the end of the year. I think we're starting to see some of the very large commodities come back a little bit such as propylene and ethylene, which we believe will help the pricing in Packaging because we've seen tremendous accelerations in packaging costs. I don't think that's necessarily going to help with the supply side in terms of How long it takes to get packaging, that has been a big problem for us and many other people this year. I think the specialty chemicals continue to be disrupted. We are obviously seeing much higher prices in that area, but we're also seeing continued disruptions out of China.

Speaker 2

I mean, A lot of people hear the latest news around the energy controls that we're seeing in many of the major producing provinces. We don't see that going away particularly quickly. There are now diesel constraints in China related to the amount of fuel they have. So that's potentially going to constrict movement of goods within China. That can cause us problems as we go into next year.

Speaker 2

And then I think the last one really is freight. We continue to see Tightness in ocean freight. I noticed a couple of the big ocean freight companies have released earnings and said don't expect that to change as we go through midyear next Into the second half of year, next year, we would agree with that. We think ocean freight is going to remain tight and availability will be somewhat So I think the environment is pretty much what we expected with the exception of the potential for Further disruption in China in Q1 as we go through Chinese New Year, as we go through the Winter Olympic shutdowns. We are planning for all of that, obviously.

Speaker 2

We've known about that for some time, but that doesn't mean to say there won't be disruptions. I think my view has changed from our August call where we talked about the potential Softening of raw material prices and availability in the second half of the year. I'm somewhat less confident of that now given how we're seeing things develop. So I'm taking a little more of a conservative view on raw materials and cost and availability as we go through our planning process. What does that mean for us from a demand perspective?

Speaker 2

Well, as I said in the script, demand is good. I mean, no mistake, ag is pretty robust around the world. Our growth was very consistent across all regions. I think we'll see that continue next year. Soft commodity prices are robust.

Speaker 2

We see good demand for fruit and vegetables, Specialty crops around the world, which frankly is the vast majority of our portfolio. On the pricing front, we have been much more aggressive Moving prices in the second half of the year, they're starting to bear fruit now. I think you've got to remember that the agricultural industry is chemical industry in general, and we certainly we sell on value. This is not selling propylene or ethylene where prices move quickly. Now there are parts of the industry like the non selective herbicides that do move quickly.

Speaker 2

They are tend to be more formulary, more generic. We don't participate in those markets. However, having said that, we have put mid single digit price increases into many countries in the world. They have been Accepted and the orders are flowing at the new levels. We will take a look in Q1 at pricing again, see where raw materials are, and we will continue to move price In tandem to regain the cost impacts that we've seen over the last 12 months.

Speaker 2

And that's a rather a long answer What was a long question, but hopefully, you get the flavor of how we're thinking.

Speaker 4

I apologize, but I appreciate the color. Thank you very much.

Operator

And the next question comes from Joel Jackson from BMO Capital Markets. Please go ahead.

Speaker 6

Hi, good morning. I was going to sneak in 2. I just want first clarification, Mark. I think I heard you say you expect 10% EPS growth in 2022 right now. EPS for you guys usually doesn't include share buybacks.

Speaker 6

So is that using $6.79 midpoint for this year, Excluding buybacks you did in the second half of this year and buybacks next year to get to 10%. And the other question I wanted to ask was following up on Chris' question. If you look into the first half of the year or even Q1, so you had where you had a bit of margin expansion in the Q3 and you're guiding to a little bit of margin expansion in the Q4. So would we expect do you expect to have margin And also in Q1 in the first half of the year?

Speaker 2

Yes. Joel, let me take the first one the second piece first and then Andrew can answer The share count question. Yes, listen, when you look at our margins, you're right, in the second half of the year, we have started to We've been on that track for the last 3 years. We do know that we're going to see higher raw material in the first half of next year. However, pricing is kicking in.

Speaker 2

And then don't forget, you've got the impact of the new products that we're bringing to market. We are on a track to sell about $140,000,000 of new product launches this year from products launched this year. They tend to be at higher margins. So that takes to that starts to improve your margin. Q1 last this year was a low quarter for us.

Speaker 2

So Yes, I would expect Q1 margins to look a little better than they did in Q1 2020 and then continue that normal trajectory that

Speaker 7

we have of improving margins as we go through the

Speaker 2

rest of the year. On that we have of improving margins as we go through the rest of the year. Obviously, I'll caveat that with saying whatever happens to raw materials and the pricing balance as we go through the year. Andrew, do you want to comment on the share count and the EPS?

Speaker 3

Yes. I think, Joel, absolutely right. When we give indications Of EPS growth, that does not include any benefit from share repurchases we haven't completed. So we're assuming Yes, and look forward for next year of 10% EPS growth, that that's just reflecting the growth of EBITDA, change in items between EBITDA and net income And the benefit of the share repurchases that we are doing in 2021, right. We've done $300,000,000 to date, not all of which do you get that benefit in share count in the year Do it.

Speaker 3

That feathers in over time in the weighted average share count calculation. So again, that 10% EPS outlook for next year, Look, we're still working the budget. It's not firm, but we certainly know nothing is built into that assuming benefit of any additional share repurchases in

Operator

The next question will be from Steve Byrne with Bank of America Securities. Please go ahead.

Speaker 8

Yes. Thank you. Mark, can you talk through how you distribute your products in the distribution channels in Brazil? I ask because We understand there have been some changes in that channel. We have the formation of some big farmer buying groups, Congenital selling through their own stores and some consolidation at the independents.

Speaker 8

So is any of that Making it more challenging to get price. And or is that comment you've made a quarter ago about Going after volume over price, has that changed now?

Speaker 2

Yes, Steve, let me talk about Brazil and Maybe I can tackle your very last comment there. What I actually said, and I think there was some confusion here, I said there were opportunities for us to take volume around the world with our high profitability products, which we were doing. We were increasing prices then, And we're not foregoing price for volumes. I just want to be perfectly clear. You can see that in Q3.

Speaker 2

You can certainly see it in Q4, and you'll see it next year. Price is a very important mechanism of how we move against cost and FX. We continue to utilize that, but volume is also very important to us. In Brazil, taking the second piece on Brazil, there are 3 main channels to market in Brazil. First of all, there are other co ops, which are very dominant in the South, very large farmer owned co ops that service the marketplace.

Speaker 2

In the north and the mid, you do have some co ops, but you also have distribution and retail. So you have large distribution And some locally owned retail. And then 3rd is direct to growers. That occurs really where you have very large mega growers, Mainly in the Mato Grosso area in Bahia, especially formulated around soy, corn and cotton. So those 3 those are 3 pretty big defined channels.

Speaker 2

I think you're right in your assumption and your statement that there are changes occurring In the Brazilian distribution market, there's nothing that we would say would change the way we view the market. We actually sell through all three different routes, Direct to grower, distributionretail and through the co ops. We don't see that changing in certainly in the midterm, Given that the market is so large and there is so much fragmentation, especially through the distribution and retail channels, That we don't see some of the changes out there impacting our ability either A, to grow the portfolio with the new products we're introducing or B, to get price in Brazil.

Speaker 1

Thank you.

Operator

The next question will come from John Roberts from UBS. Please go ahead.

Speaker 8

Thanks. Nice quarter. It looks like you're expecting 4% price in the 4th quarter in prices accelerating upward, I think. So how do I square that with the 5% to 7% 2022 revenue growth? Will Revenue growth be primarily price in 2022?

Speaker 2

No, it will be a mixture, John. You see where we are in terms of the mid sort of the mid single digits. We do continue to see volume expansion as we go through next year. I think the 5% to 7% is a rough number today, as we said. Once we get through all our analysis of where the volume flows out, we'll see where that sits.

Speaker 2

And then we'll see where price ends up at the end of the 4th quarter and how that plays out for either a, future price increases in Q1 and Q2 as we go through the year. But it's too early to make that delineation between what's exactly price, what's exactly volume and exactly how much The top line is going to grow 5% to 7%.

Speaker 8

The

Operator

next question comes from Adam Samuelson from Goldman Sachs. Please go ahead.

Speaker 9

Yes. Thanks. Good morning, everyone. Mark, I was hoping that I'd come back to I think you came up in Steve's Question, from the comments on the Q2 call about maybe leaning into the volume growth On your higher margin products, I think the comments were directed more around some emerging markets in Asia And India specifically. And I guess just can you give any thoughts or update on how you think you're doing or is it success of that in terms of gaining or trying to get some new market share for some of those active ingredients.

Speaker 9

And I guess in that context, you listed A whole bunch of countries where you're putting in price actions in the Q4 or they're already in place and Maybe it was purposeful, maybe it wasn't, but I didn't hear India on that list. And so just any kind of clarification or comments there?

Speaker 2

No, I think, listen, I mean, when you have a 9% to 10% top line growth, you're obviously doing something right in the marketplace, whether it's moving your price And or gaining market share in certain parts of the world. I think both of those pieces play out. India has Had a good quarter for us. We grew in India despite the fact, and I think I've put this in the script, the monsoon was very spotty in India. There were some markets, particularly the soy market was

Speaker 7

impacted by very dry weather. We are

Speaker 2

moving prices all across the We are moving prices all across Asia, including India. The specialty markets in India are very good for us. The diamide portfolio continues to grow well, taking share from some of the older chemistries out there that we talked about on the last call. And I would say Southeast Asia is also very strong in terms of how we're growing. And then last but not least in Asia is Australia.

Speaker 2

Australia has been a very good market for us with the launch of our new ISOFLEX herbicide, but also the VantaCore insecticide, The first launch was there in Australia as well. So price is pretty much across I only gave a couple of examples of countries, but We've moved price and are moving price pretty much in every country in the world as we move through the end of Q3 into Q4. So you should certainly see that benefit starting to play out as we move into early next year.

Speaker 3

All right. I appreciate the color. Thank you.

Operator

And the next question will be from Kevin McCarthy from Vertical Research Partners. Please go ahead.

Speaker 3

Yes. Good morning.

Speaker 10

Mark, I was wondering if you could speak To the cost shift from the Q3 to the Q4, if I look at Slide 5, it appears as though costs came And $23,000,000 lower than you had previously anticipated and you left the back half unchanged. So $81,000,000 is the expectation apparently for 4Q. Maybe you could just kind of help us understand what is going On there and is the $81,000,000 perhaps conservative given the experience in the Q3?

Speaker 2

Yes. Thanks, Kevin. It's a pretty Simple move actually in terms of what we saw in cost. There's 2 main elements, and I'll talk about them both high level. And Andrew, if you want to talk about one of the pieces.

Speaker 2

You can split it fifty-fifty essentially. We had some SG and A and R and D expense that we thought would fall in Q3 When we originally forecasted the second half of the year, and it didn't it's going to fall in Q4. So we're seeing about half that change really due to Some R and D project work as well as some SG and A expense that we thought would hit Q3. And then the second half is really just how some costs have flown through Our income statement. And Andrew, do you want

Speaker 3

to talk about that from a just a pure procurement perspective? Sure. Look, I think as Mark said, It's an equal driver between SG and A R and D spending timing, as well as COGS increases. And it really is it's essentially A cost mix issue, in terms of what sold and what came out of inventory this quarter versus what we had initially modeled So that cost we are seeing in our inventory and certainly in the step up of inventory you see year on year and sequentially on our balance sheet, You can see evidence of that higher cost is sitting in our inventory. It just flowed through the P and L a little more slowly than we had anticipated when we gave guidance.

Speaker 3

That $80,000,000 headwind, dollars 81,000,000 headwind for the second half still feels like the right number for us. The things that are being spent R and D are around a lot of field trial investments, other things that are part of supporting our long term development pipeline. SG and A spending will be a part of supporting the sales growth. And then the COGS again, it's sitting in inventory. It just hasn't flowed through yet through the P and So with the strong volume growth in Q4, you'll see that.

Speaker 10

Perfect. Thanks very much.

Operator

And the next question will be from Vincent Andrews from Morgan Stanley. Please go ahead.

Speaker 11

Thank you. Good morning, everyone. Maybe Mark, you could just discuss or compare and contrast the South American Operating environment looks a lot healthier this year versus last year, just given a much better start to the planting season, which generally pretends to Good news for the second crop and so forth. So, we also have higher coffee and sugar prices. So, Are you seeing better demand than maybe anticipated a few months ago when we didn't know how that was going to play out?

Speaker 11

And are you more optimistic about 1Q or sorry, 4Q, 1Q as a result?

Speaker 2

Yes. Thanks, Vincent. Listen, Latin America, you're right. I mean, the planting season is underway. It's much better than it was last year.

Speaker 2

The rains came at the right time. Last year, we had very dry drought weather, Which impacted the industry. This year, we're not seeing any of that. I think on the back of, as you just said, very good commodity prices. And a lot of people concentrate on soy and Corn, but you highlighted sugar is very high.

Speaker 2

Dollars 0.19 is a good number for sugar. Coffee is high. More importantly for us, cotton is high as well. And if you remember earlier in the year, we talked about how we were thinking about the cotton business. As we said earlier in the year, so the 'twenty two, 'twenty one season will be very robust, price is high, demand coming back after COVID.

Speaker 2

So all of that is very positive. I would say don't focus just on Brazil. Argentina is also a very important market For us now, it is well in excess of $200,000,000 I think it's our 4th largest country now in the world. We have a good portfolio on Soy and cereals in Argentina, their market is also moving in the right direction better than it did last year. And then the rest of the region, not to be missed for us is Mexico.

Speaker 2

Mexico is a very important country for our specialty products We do a lot of business on corn, on fruit and vegetables. There is tremendous business for us On avocados, those types of high value commodities, Mexico is growing well. Season is going well there. The weather conditions have been good. So yes, I would say overall, Latin America feels much more robust than it did this time last year, and that's how we felt it would Play out and so far so good.

Operator

And the next question will come from Mike Sison from Wells Fargo. Please go ahead.

Speaker 12

Hey, good morning guys. Can you maybe talk about the diamide setting into 'twenty two? Any what type

Speaker 2

of growth do you see?

Speaker 12

You got some new products there? And Maybe how much of that growth could come from

Speaker 3

the new license the licensing agreements that you've had set up over the last couple of years?

Speaker 2

Yes. Thanks, Mike. Yes, Diamond. So we've talked in the past about our growth algorithm and how we're in the 9 Sort of high single digits, low double digits range year in, year out. I would expect that type of number next year as well.

Speaker 2

We are seeing traction with all the agreements that we put in place. We're not going to split out on a regular basis the what we sell into The partners versus what we sell ourselves, but periodically, we'll give an update on how that's playing out, but the growth is good. I think you highlighted one area, which is the new formulations. The VantaCore launch that we put in place, this is a very, very novel formulation. It is much Higher concentration.

Speaker 2

Therefore, it's easier to use. It's very easy to disperse in other mixes as growers use it. We've already seen tremendous traction in the 2 countries we've launched. There'll be more countries launched next year on Bantacor. We expect that new formulation To cannibalize and grow the market for us.

Speaker 2

So some of the old Rynaxypyr formulations will disappear, And Banticle will continue to take that business, but also grow the overall market share. And then there are some other things we have planned next year for product launches. So diamides continue to be successful. I think a lot of people who think about the diamides focus on rynaxypyr. We're also seeing a lot of growth on cyazypyr.

Speaker 2

It was launched slightly behind Renaxypyr. It has a slightly different mode of action. It covers a different crop spectrum, and we're now starting to see that product really move on the specialty crops. We're seeing a growth We're seeing significant growth in Europe, parts of Asia, really the 2 markets we're focused on. So we like the prospects for, cyazapyr.

Speaker 2

It's not to say that rinaxipura doesn't continue to grow. It does and it will do. But I think cyazapura over the next couple of years will come into its own.

Speaker 12

Got it. Thank you.

Operator

And the next question will come from Mike Harrison from Seaport Global Securities. Please go ahead.

Speaker 7

Hi, good morning. You noted that the North American business would have been up around 20% or more if we adjusted for the diamide partner sales. Can you talk about some of the underlying drivers In that North American business for the second half, is there some inventory restocking going on, some share gains or are we really just Lapping some of the disruption that we saw in the prior year. It seems like there are a lot of moving pieces and I was hoping you could help us parse those out. Thank you.

Speaker 2

Yes, certainly, Mike. You won't really lap until we get through Q4. We did not have a good Q4 in North America last year. So So really, you'll see that lapping occurring in Q4. No, I think that listen, the real energy in our North American business is how we're changing the portfolio.

Speaker 2

You've heard us talk in the past a lot about our pre emergent herbicides, the authority brands, which really were a bedrock of how we grow our North Overall, our pre emergent business, while still growing, is shrinking in terms of parts of the portfolio. Our business is actually accelerating because of the new products we're introducing. We introduced Lucentor last year, which is a more specialty fungicide. We launched Ziwei, another fungicide for us, a new area. It's a in ground fungicide for corn applications Well, we've never participated before.

Speaker 2

So that's a market that is a very large market. We have some very unique technology with Xiway. And in its 1st year, It far exceeded our expectations, and we have big growth plans for the 2022 season. And then you have the insecticide launches, Ellevest and VantaCore in the U. S, Which are targeted more towards the specialty crops.

Speaker 2

So the growth you're seeing in North America is nothing to do with Restocking, etcetera. It is all to do with how the portfolio is shifting and new products are accelerating our growth. So we do feel very good about what we expect next year in North America. The market itself is robust. So as you're launching products into a robust market, You should get that good growth and we're seeing that now.

Operator

Thank you. And the next question will be from Chris Kapsch from Loop Capital Markets. Please go ahead.

Speaker 13

Yes, good morning. Thank you. Just peeling back the onion a More here and no pun intended, but on the challenges in and around the raw material and packaging sourcing, Despite all the focus on these challenges across the broader industrial sector, and while you are certainly incurring higher costs, you guys were able to deliver pretty good Organic growth in 3Q and the implied organic growth for 4Q remains intact. So in other words, your volumes don't seem to be have been Constrained all that much despite the disruptions. So just wondering, is that a fair characterization?

Speaker 13

And also just looking for more color here, Do you think you're simply doing better than the rest of the industry? Or does this reflect maybe a more your more balanced geographic Brent, whereas the challenges may have been more acute in North America, but just some more color on that. And then I had a follow-up.

Speaker 2

Yes. Listen, I don't want to make it sound like it's easy because it is not. And every company in this space is going through the same things. We face similar disruptions. It may be in different parts of the portfolio for different people, but I think we all have inherently the same fundamental issues that we're dealing with.

Speaker 2

Now we do have a pretty good network around the world. Our reliance on China has dropped dramatically over the last 5 to 7 years. I think today, we're at about 45% reliant on all intermediate fine chemicals and active ingredients. That's way, way lower than it used to be for the traditional FMC Ag business when I joined way back in 2012. So I think that's one We have lost sales over the last 6 months in terms of looking at the portfolio and where we couldn't deliver.

Speaker 2

But I think with a strong portfolio, we did correct our inventories as we went through this year. We have built inventories, And Andrew can talk about the impact on working capital there. But I think we've tended to weather it rather well. But make no mistake, I think we've Revenue out there that somebody else has probably picked up, it's not significant. It's in the tens of 1,000,000 of dollars, but it's still Business that we could have had that we've missed.

Speaker 2

So we're not immune to this by any means. And I expect that to continue as we go into next year. You want to talk about the same thing, Jack? Yes. Sorry?

Speaker 13

Yes. Now the follow-up and you touched upon this a little bit in mentioning your Dependence on China being down to 45%, seems like you've maybe gotten a head start on this maybe relative to the broader industry Based on some rolling blackouts years ago and then an active ingredient plant in China Being adjacent to that explosion maybe a couple of few years ago now. So just wondering on just your thinking on strategy Going forward, should we expect you'll continue to diversify further? Just what is Thinking in that regard with respect to juxtapose against your strategic growth imperatives? Thanks.

Speaker 2

Yes. Listen, we've been on a strategy for the last at least 5 years, almost 6 years since we bought the Caminova Back in 2015 of really diversifying our supply chain and manufacturing footprint, that continues. For the new molecules that we're adding capacity right now, we're adding capacity in Denmark and in India, And we will continue to expand that active ingredient footwork through our own footprint, through our own operations. We have active ingredient In the U. S, in Puerto Rico, in Denmark, in India, 6 years ago, we never had Pretty much any of that.

Speaker 2

So we really have changed our strategy to be more diverse, to have more points of manufacture. We make sure that from a registration basis, which frankly is it is the long pole in the tent here is getting your registrations. We do when we register when we manufacture new products. We make sure we have 2 or sometimes 3 different sources of manufacturing point So that we have that ability to move our manufacturing around the world based upon our registrations. I'm not so sure we're any different to Some of the other people out there, there are some people who are more dependent on China, some people who are less.

Speaker 2

I feel good about where we are today. I don't think you're ever going to get out of China. It's impossible. Just the size of the Chinese chemical industry and the specialty chemicals that come out You will always be dependent on an intermediate or a fine chemical. The real issue for you strategically and especially for us is how do you derisk that to a point where you're more comfortable with it.

Speaker 2

We're getting close to that. We're not quite there yet. The next couple of years, we'll move it even further. But I think we're on the right track and certainly it's been paying dividends for us.

Speaker 13

Thanks for the color.

Operator

The next question will come from Arun Viswanathan from RBC Capital Markets. Please go ahead.

Speaker 5

Great. Thanks for taking my question. Congrats on a nice quarter there. I guess First question is just on COVID. Last year, you had some impact in North American logistics in Q4.

Speaker 5

I would imagine that potentially there had been some impact as well in Asia more recently. Could you verify if that's the case? And then Also maybe in Latin America, what you're experiencing as it relates to COVID down there? Thanks.

Speaker 2

Yes. Thanks, Aaron. I mean, listen, there are Real impacts, 1 is your ability to supply and then 2 is what's happening on the demand side. On the supply side, look, I think we've got used to Working in an emergency mode over the last 3 or 4 years, we've had as somebody just said earlier, we had explosions in China that we've had to deal with, Environmental policy changes in China, then we've got COVID and all the freight issues and manufacturing issues related to that. I don't think there's been anything in the last 6 month period since we had our last call where anything's fundamentally changed from a supply perspective.

Speaker 2

It's not that there are not issues out there, there are. The energy power issue in China is certainly causing disruption, And we'll see how that plays out once we get into the wintertime. From a demand perspective, we don't often talk about this, but I would say, Certainly in the Q3, maybe late in Q2, I would say the only part of the world where we saw demand issues was Southeast Asia. There was more lockdowns in Vietnam, parts of Indonesia, the Philippines, Malaysia, Thailand than any other part of the world. So we did see We did struggle getting into the marketplaces and we saw some demand destruction, not significant.

Speaker 2

Brazil, not an issue. Many of the growers are well prepared for this growing season. They have a lot of personnel on-site. Vaccination rates are actually Pretty high in Brazil and growing constantly. So we feel better about Brazil from a COVID perspective Going into the 'twenty two season than we did going into the 'twenty one season.

Speaker 2

So yes, disruption is there. It's not Significant at this point. I would say it's at the level where we've been dealing with it and we'll continue to deal with it.

Speaker 5

Okay. And as a follow-up, Maybe I can just ask about cash flow. So as you move into 'twenty two, what are some of the buckets that you would envision That could push that $525,000,000 or so midpoint for free cash flow a little bit higher. Is working capital a potential leverages given the cost inflation that you've experienced this year? Thanks.

Speaker 3

Thanks, Erin. It's Andrew. Look, I think Yes, you're hitting on some of the conversations we're having right now as we're going through the budgeting process. But some big strokes for you. Certainly for free cash flow growth 'twenty two versus 'twenty one, and 1st and foremost is driven by growing the profitability of the business.

Speaker 3

So EBITDA growth will be a big contributor. Working capital, yes, our long term vision is to drive better working capital efficiency. For 2022, we're going to have to balance that a bit with Having a bit more safety stock in the system because of the level of volatility that we have in the supply chain right now. And you certainly see that Yes, on our balance sheet where we ended up at September 30 this quarter with a big increase year on year on inventory, which is both as you noted cost inflation, But also some conscious choices to hold a little extra inventory in certain product lines where we've had some volatility in the supply chain. So I would say at this point, we haven't worked through all the implications for 2022 of working capital yet.

Speaker 3

But I think our long term trajectory is, yes, to continue driving Improvements in working capital that contribute to free cash flow growth. And if you look at the other two lines, the other 2 big buckets below that, On capital additions, I think we continue to have an expectation of somewhere in that $150,000,000 to $200,000,000 a year being the right kind of pace, Particularly with a significant portion of that going to capacity expansion to support new products, as Mark described with our strategy to First, our production base and have active ingredient manufacturer, in particular, the new ingredients outside of China. And then finally on the legacy and transformation, the transformation piece, we're basically done. We finished our SAP implementation at the beginning of the at the end of last year, final Clean up the beginning of this year. There's no big transformation spending on the horizon and there's no fundamental driver of growth in legacy Certainly a year to year volatility and just timing and lumpiness about some of that spend, but not fundamental growth.

Speaker 3

Those are the key elements. I think it's premature to give to any more extensive color on where free cash flow could be other than absolutely Looking to continue to push growth of free cash flow and free cash conversion as

Speaker 2

we move forward with the business.

Speaker 3

Thanks.

Operator

And the final question today will come from Michael Piken from Cleveland Research. Please go ahead.

Speaker 6

Yes, good morning. Just a question in terms of the buying behavior of your customers. Are you seeing a change in their attitudes Towards wanting to procure more inventory and being a little bit less price sensitive in this type of environment? And then secondarily, if you do have customers that are Looking to make purchases, are you willing to extend more credit for them to get inventory in place or how are you sort of handling

Speaker 3

Yes, if there are any sort of timing shifts. Thanks.

Speaker 2

Yes. Listen, I don't think we're seeing a fundamental shift of How distribution retail or direct growers buy. I think there is an acknowledgment out there in the marketplace that In some cases, for products that are absolutely needed, it's not just the price, it's availability. So There's certainly a desire for people to make sure that as they enter their season that they have material available. Doesn't mean to say that we, FMC, we're not seeing a tremendous amount of what I would say forward buying.

Speaker 2

In Q3, All the growth was related to products that went on the ground in that quarter. So think about fall herbicide applications in Europe on Cereals, same thing in North America, insect pressure in North America early in the quarter was strong. So those types of things What are driving the growth? It will be interesting to see how the market evolves for the U. S.

Speaker 2

As we go into the buying season, which is Effectively now getting ready for the season. I do think that recognition is strong that some materials are not going to be available in the quantities And some people are going to miss out on that. So price in certain areas is always important. But in others, where it's High value and you absolutely need to protect those crops, then yes, I do see people buying to make sure that they've got products in their channel, in their warehouse when they need it. We'll see how that develops through the Q4 into the Q1.

Speaker 2

We may see similar behavior as we go into the European season, which really kicks off in Q1.

Speaker 1

All right. Thank you. Thank you for that, Mark. That is all the time that we have for the call today. Thank you and have a good day.

Operator

And thank you. This concludes the FMC Corporation conference call. Thank you for attending. You may now disconnect your lines.

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Earnings Conference Call
FMC Q3 2021
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