FMC Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 10 speakers on the call.

Operator

Ladies and gentlemen, this is the operator. Today's FMC Corporation Conference Call is scheduled to begin momentarily. Good morning, and welcome to the Q1 2022 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.

Speaker 1

I would now like to

Operator

turn the conference over to Mr. Zack Zaki, Director of Investor Relations for FMC Corporation. Please go ahead.

Speaker 2

Thank you, Seth, and good morning, everyone. Welcome to FMC Corporation's Q1 earnings call. Joining me today are Mark Douglas, President and Chief Executive Officer and Andrew Sandipur, Executive Vice President and Chief Financial Officer. Mark will review our Q1 Andrew will provide an overview of Select Financial Results. Following the prepared remarks, we will take questions.

Speaker 2

Our earnings release and today's slide presentation are available Let me remind you that today's presentation and discussion will include forward looking statements That are subject to various risks and uncertainties concerning specific factors, including, but not limited to, these factors identified in earnings release Actual results may vary based upon these risks and uncertainties. Today's discussion and the supporting materials will include references to 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. With that, I will now turn the call over to Mark.

Speaker 1

Thank you, Zach, and good morning, everyone. Before I move into details on our results, I'd like to take a moment to provide an update on FMC's position related to the war in Ukraine. In mid April, we announced the decision to discontinue our operations in Russia and exit the country completely, We could not ignore increasing reports of potential war crimes, human rights abuses Our values as a company do not allow FMC to operate and grow our business in Russia. Furthermore, as the war continued and new sanctions and counter sanctions were levied, FMC's ability to conduct business in Russia had become unsustainable. Our cross functional team continues to navigate the extraordinary logistics and supply chain challenges in Ukraine and other parts of Eastern Europe.

Speaker 1

FMC and our employees raised nearly $300,000 for charities supporting the Ukrainian people and families in need. Our hearts and thoughts remain with all Ukrainians and especially our FMC colleagues and their families. Turning to FMC's performance in Q1. We delivered strong results driven by robust volumes and solid pricing actions across all regions. We grew our revenue by 16% Organically, EBITDA by 16%, EPS by 23% and importantly, expanded our EBITDA margins by approximately 60 basis points, while conferencing a variety of supply and cost challenges as well as increasing currency headwinds.

Speaker 1

With disruptions impacting several agricultural inputs, we believe some of our Q1 sales were accelerated from Q2 as customers look to secure Given this context, our guidance for Q2 combined with Q1 actuals implies 11% revenue growth 8% EBITDA growth for the first half of the year compared to the first half of twenty twenty one, which is much more front loaded than prior years. Latin America and North America contributed greatly to our success in the quarter, supported by elevated commodity prices, acreage increases Sales from products launched in the past 5 years increased by more than 50% in the quarter compared to the same period last year, demonstrating the strength of our technology pipeline and product portfolio. The global plant health business also continued its growth trajectory with biologicals growing 15% year over year. Last year, we announced our goal to achieve net 0 greenhouse gas emissions by 2,035. We recently achieved the 1st milestone towards By submitting 2,030 emissions reduction targets to the Science Based Targets Initiative.

Speaker 1

These targets In all indirect emissions that occur in the value chain, otherwise known as Scope 3 emissions. An incredible amount of rigor went into developing these targets with our Sustainability team conducting an exhaustive review of all factors contributing to FMC's greenhouse gas emissions and quantifying those We will publish our 11th annual sustainability report in the coming weeks and we look forward to speaking more on this topic in upcoming calls. Turning to Slide 3 for our Q1 results and keeping in mind my earlier comments about shifts within the first half. We reported 1.35 $1,000,000,000 in 1st quarter revenue, which reflects a 13% increase on a reported basis and 16% organic growth. We had double digit growth in all product categories with fungicides showing the greatest growth year over year at 20%.

Speaker 1

Biologicals grew 15%, continuing the momentum of our plant health business. Regional growth was driven by strong volume gains in North America and Latin America as well as high single digit price increases in all four regions. FX was a headwind to top line growth in EMEA. Adjusted EBITDA was $355,000,000 An increase of 16% compared to the prior year period and $30,000,000 above the midpoint of our guidance range. EBITDA margins were 26 point an increase of 60 basis points compared to the prior year period.

Speaker 1

Cost inflation continued to be a challenge and at a higher rate than anticipated. So we move price more aggressively in all regions to offset these increasing headwinds. We've also been actively managing our SG and A costs, Some of which shifted from Q1 into Q2. FX was a headwind to EBITDA. Adjusted earnings 1 $0.88 per diluted share in the quarter, an increase of 23% versus Q1 2021 and $0.18 above the midpoint of our guidance The year over year increase was primarily driven by an increase in EBITDA with the benefit from lower share count and lower interest Largely offset by higher minority interest and taxes.

Speaker 1

Moving now to Slide 4. In North America, strong commodity prices supported robust demand for inputs. Sales increased 30% year over year with broad based growth across all indications and for a variety of crops such as tree fruits, nuts, In the U. S, we grew with rynaxypyr brands such as VantaCore and AltaCore in fruits and vegetables. Zaiwei, our unique in furrow fungicide, continues to gain significant momentum while providing season long protection for corn Sales of biologicals almost doubled in the U.

Speaker 1

S, led by Ethos XB for corn and soybeans. Ethos XP is a unique combination of a synthetic insecticide for seedling insect protection with biological microorganisms that have fungicidal properties. Our Canadian business had a record quarter, driven by low channel inventory of insecticides and strength in cereal herbicides. We also successfully launched Coragen Max, which is the new higher concentration formulation of Rynaxypyr Active, Moving now to Latin America. Sales increased 31% year over year, led by Brazil and Argentina, Driven by volume and price increases as well as a 6% FX tailwind driven by the Brazilian real.

Speaker 1

Colombia, Peru and Ecuador also grew double digits In Brazil, we grew our herbicide brands Aurora and Gamut on soy, corn, sugarcane and coffee. We also grow our insecticide brands Talisman, Hero and Coragen on soy, corn and cotton. FMC continues to reap the benefits of a strategy versus prior year, excluding currency headwinds. Results were driven by strong price increases across the region as well as demand for rynaxypyr based brands, Coragen Product rationalizations were largely offset by new product launches in the quarter. Over 10% of branded sales in the quarter came from products launched in the last five FX was a significant headwind in the quarter, resulting in flat year over year revenue growth.

Speaker 1

Sales in Asia were up 2% versus the Q1 last year and up 5% organically. The increase was driven by pricing Approximately 15% of branded sales in the quarter came from products launched in the last 5 years. Turning now to the Q1 EBITDA on Slide 5. EBITDA was up 16% year over year driven by pricing and volume gains, which were partially offset by cost and FX Price was up $94,000,000 in the quarter with high single digit increases implemented in all four regions. It is important to note that our pricing actions We're taking to offset the sustained cost inflation we're experiencing across our supply chain.

Speaker 1

Raw material, energy, logistics, Packaging and labor costs remained elevated and contributed to the $62,000,000 cost headwind in the quarter. FX was a $16,000,000 headwind in the quarter with weakened in European currencies. Overall, EBITDA margins expanded 60 basis points in the Before I review FMC's full year 2022 and Q2 earnings outlook, let me share our view We continue to expect the global crop protection market will be up low to mid May further reduce market growth in the EMEA region. Commodity prices for many of the major crops remain elevated and stock to use ratios are near historical lows, Creating a favorable backdrop for crop protection products. FMC is project FX is projected to be a headwind for EMEA and Asia markets on Turning to Slide 6 and the review of FMC's full year 2022 and Q2 earnings outlook.

Speaker 1

Despite the volatile supply and geopolitical environment, we remain confident in our ability to deliver solid growth in 2022. FMC's full year revenue is forecasted to be in the range of $5,250,000,000 to 5.55 Full year adjusted EBITDA is expected to be in the range of $1,320,000,000 to 1 Supply disruptions will continue to be significant headwinds to EBITDA. 2022 adjusted earnings per share Are expected to be in the range of $6.70 to $8 per diluted share, representing an increase of 6% year over year at the midpoint. Consistent with past practice, we do not factor in any benefit from future share repurchases in our EPS guidance. Discontinuing our Russia business does not change our full year earnings expectation at this time, and it will take some time for us to assess the full financial implications For reference, however, our Russian operations made up approximately 1.5% of global sales in 2021.

Speaker 1

Guidance for Q2 takes into account the shift of some sales from Q2 into Q1 as customers across many countries placed orders in advance to Given the current industry dynamics, it is possible we will see the same phenomena occur With future orders moving into Q2. Q2 guidance implies sales growth of 9% at the midpoint, EBITDA growth of 1% at the midpoint and EPS growth of 2% at the midpoint year over year. Turning to Slide 7 and the updated range of '22 EBITDAR outcomes. The market backdrop is supported with FX limiting crop protection growth to low to mid single digits. Pricing actions and strong market demand have offset quickly rising costs so far.

Speaker 1

However, volatility persists due to renewed COVID related shutdowns in China, Energy cost inflation in Europe and ongoing disruption of global supply chains and logistics. FMC continues to deliver products to our customers in a timely manner Despite these disruptions, the reliable supply is coming at an increased cost. We do not expect to see any cost relief through the remainder of 2022. EMEA and Asia have experienced FX headwinds, only partially offset by the positive currency impact in Brazil. In addition, our decision to exit the Russian market and the impact of the war in Ukraine are new considerations.

Speaker 1

Turning to Slide 8 and full year revenue and EBITDA drivers. Strong volume expansion and price increases across all regions FX volatility is expected to be a negative factor on our full year revenue outlook. In terms of crop mix, we expect roughly half our expected to come from corn, soy and cereals such as wheat. FMC's crop diversity is a long term competitive advantage since we're not over indexed to any single Our EBITDA guidance reflects strong demand for our existing portfolio of new products as well as mid single digit price increases. These benefits to EBITDA are partially offset by substantial cost headwinds as well as investments in SG and A and R and D.

Speaker 1

Moving to Slide 9 and Q2 drivers. On the revenue line, volume growth is expected to continue along with price increases in all regions, but will start to lap some of the increases taken last We are anticipating FX headwinds to continue principally from European and Asian currencies. We also expect to see impacts from our decision For EBITDA, positive drivers include volume, especially for new products and pricing actions. The The benefit from these drivers will be largely offset by elevated raw material, packaging and logistics costs as well as some SG and A costs that shifted from FX related headwinds are also expected to persist, especially in EMEA. Turning to Slide 10, With the guidance for Q2 and the full year on record, we would like to also show the implied forecast for the 2 halves.

Speaker 1

Revenue forecast for the first the first half of twenty twenty two indicates 11% growth over the first half of twenty twenty one. The implied revenue forecast for the the second half of twenty twenty two indicates 4% growth over the prior year period. This is consistent with the stronger pricing significant volume gains achieved in the second half of last year, especially in the Q4 of 2021. EBITDA forecast for the first half of twenty twenty two indicates 8% growth over prior year period driven by strong demand and pricing actions offset by cost and FX headwinds. Our guidance also implies 4% year over year EBITDA growth in the second half of the year.

Speaker 1

This results in a more front weighted outlook for EBITDA growth compared to last year. I'll I'll now turn the call over to Andrew.

Speaker 3

Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a headwind to revenue growth in the Q1, as expected, driven by weakness in European currencies, Particularly the Turkish lira and euro. The Brazilian real was a tailwind in the quarter, offsetting modest weakness in several Asian currencies. We continue to anticipate FX headwinds for the remainder of 'twenty two as the U.

Speaker 3

S. Dollar is expected to appreciate against many currencies Interest expense for the Q1 was $29,900,000 down $2,500,000 versus expense to be in the range of $125,000,000 to $145,000,000 an increase of $10,000,000 at the midpoint compared to our prior guidance, Driven by more rapid increases in U. S. Interest rates than previously anticipated. Our effective tax rate on adjusted earnings The first quarter was 14%, in line with our continued expectation for a full year tax rate in the range of 13% to 15%.

Speaker 3

Moving next to the balance sheet and liquidity. Gross debt at quarter end was $3,800,000,000 up roughly six $100,000,000 from year end, gross debt to trailing 12 month EBITDA was 2.7x at the end of the Q1, while net debt to EBITDA was 2.5x. Both metrics are slightly above our targeted full year average leverage levels as expected given the seasonal build of our working capital. We continue to expect to maintain full year average leverage and are targeted 2.4 to 2.5 times growth or 2.3 to 2.4 times net Moving on to cash flow on Slide 11. 1st quarter free cash flow of negative $664,000,000 Adjusted cash from operations was down more than $300,000,000 compared to the prior year, driven by higher working

Speaker 1

of $55,000,000

Speaker 3

were up $16,000,000 compared to the prior year as we continue to increase spending to Catch up on deferred projects and to invest in our growth. Legacy and transformation spending was down primarily due to the absence of spend on our SAP program, which was completed last year. For full year 2022, we continue to forecast free Cash flow of $515,000,000 to $735,000,000 Adjusted cash from operations is flat to the prior year at the high end of our guidance range, Capacity increases, especially to support our new products that are seeing rapid growth, will drive higher capital additions. We continue to expect legacy and transformation to be a tailwind with somewhat lower legacy spending and minimal transformation expense expected in 2022. With this guidance, we anticipate free cash flow conversion from earnings of 67% at the midpoint.

Speaker 3

Our capital allocation priorities remain, 1st, fully funding organic growth and pursuing inorganic growth through technology new market access M and A, then returning excess cash to shareholders through a growing dividend and share repurchases. We continue to anticipate strongly rewarding shareholders in 2022 with dividends of around $270,000,000 and share repurchases of $500,000,000 to $600,000,000 We paid dividends of $67,000,000 during the quarter. Given our cash flow and leverage, we did not repurchase any shares in the Q1. With that, I'll hand the call back to Mark. Thank you, Andrew.

Speaker 1

Our first quarter performance in combination with the guidance for Q2 Flex FMC's ability to mitigate cost increases through pricing actions and to fulfill robust demand under challenging supply conditions. Our new product introductions continue to gain momentum with over 30% of expected full year revenue growth coming from products introduced In the last 5 years, our global plant health business continues its impressive growth trajectory led by biologicals. 2022 is proving to be one of the most challenging years even considering all we've had to manage since 2019. Our continued success stems from our strong customer All these attributes will serve us well through the remainder of the year. I'll now turn the call back to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. If you have additional questions, you can rejoin the queue. Our first question today Please go ahead, Vincent.

Speaker 4

Thank you very much. Mark and Andrew, just The 8% pricing in the quarter in all regions was extremely strong. It was almost twice what we've been anticipating, and I think it compares versus 4% in

Speaker 5

the 4th

Speaker 4

quarter. What did you do differently in this quarter, if anything, to get That strong pricing achievement so quickly. And if you could also comment whether there's any mix in that 8% number or just What mix would be in general?

Speaker 1

Yes, mix Vincent, thank you. Mix for us resides in volume. So what you're seeing in price is all Listen, I think we've been very clear as we went through the second half of last year. We started moving price In North America actually in Q2 and then raised in other regions as we went through the year, as you could see that in our results as pricing continued to build. What we realized as we were going through Q4 was that costs were going to come in significantly higher than we had forecasted internally As we enter 2022, so we made the decision that not only would we raise prices in markets that were active at that point, But also getting ready for other markets around the world.

Speaker 1

So what you saw was really a broad based move by FMC across pretty much every country To really drive price in anticipation of costs and you could see that in the quarter, pricing was higher than cost in the quarter. It's not going to look like that in every quarter as we go forward. If you will recall, we did say that we expected price to offset COGS impact of inflation and availability throughout the year, we still maintain that. What you should see through our results though is that our pricing is much higher than we anticipated because that impact of the supply disruptions and cost If we continue to see disruptions in costs, we will continue to move price. I think that's something that's very important not only for FMC Seba for the industry in general, things are not getting better out there.

Speaker 1

When I think about what we're seeing, I don't think we've seen the full impact of COVID yet in China, all the lockdowns that we see. We're having Supply disruptions in China, probably as bad as they've been in the past. What worries me more is logistics out of China, the amount of freight that Is trapped in the major ports in China, just the amount of freight ships that are stuck outside China suggests that that wave is yet to come. So we're getting ahead of the curve. I think that's the right thing to do.

Speaker 1

Pricing is the main tool. Now that's not to say we're not managing costs internally, and We alluded to that in the call. We did move SG and A lower through actions that we took. Some of that flowed into Q2 from our Volker, but then you look at the first half, it's a very strong first half.

Speaker 6

Thank you so much.

Operator

Our next question comes from Laurent Favre from BNP Paribas. Please go ahead, Laurent.

Speaker 7

Good morning, and thanks for taking my question. Mark, it's really related to your market assessment. And I was wondering if you could talk a little bit I guess volumes including mix, so really intensity of use. Are there reasons why you would not expect a higher intensity of use more spraying? But also, can you talk maybe about the risk of down trading with farmers being so squeezed on all sorts of input costs, including fertilizers?

Speaker 7

Thank you.

Speaker 1

Yes. Thanks, Laurent. When you look at the market today, we view the market obviously as a positive back Soft commodity prices are high. Stock to use ratios are very low, almost at 10 year lows in some cases. So we know many of the regions that are entering the planting seasons now are going to plant as much as they possibly can.

Speaker 1

Allied to that is the expect that to get the most yield, you will want to use the best products. Now one thing that is often misunderstood is Pricing is not necessarily related to value. Generics sell on price. We sell on value. So the usage of our products It enables greater productivity and yield gains than you can get with other types of products.

Speaker 1

And that's proven to be true as we've gone through numerous cycles. When I think Back to 2,008 and 2,009 in this business, the Ag business performed extremely well. Why? Because people want to get Highest yields they can and they tend to use the best technologies to do that. We're seeing that with demand for our products.

Speaker 1

Think about the comments We're going to have $600,000,000 of revenue this year from products introduced in the last 5 years. That tells you that the newer products are the best ones to use to get that yield. We don't see people reducing sprays at this point. We think Applications will continue as normal. Remember, if you have insect pressure, you have a choice to make.

Speaker 1

You either remove the insects or you lose your crop. That's very important when it comes to actual usage of products. So our backdrop is positive. We believe the markets will continue like this Certainly this year and probably into next year as well. We don't see anything on the horizon that will change that.

Speaker 1

So from our perspective, it is making sure that we can get those

Speaker 7

Thank you. And as a follow-up on pricing, you mentioned that you're lapping some increases from last year in the quarter. But last During Q2, I think your pricing at group level was flat as it was in Q1 last year. So I was wondering maybe could you talk about the specific areas either Geographically or in terms of product categories where we should expect this, I guess, slowdown on pricing into Q2?

Speaker 1

Yes. I mean, in the U. S, we started to raise prices last year in Q2, so it should be a little more muted as we go through Q2 and then certainly into Q3 and Q4, Latin America is not really an impact in Q2, small amount, but you'll see that much more in Q3, certainly in Q4. So really, I would focus on North America in Q2 on price. Everywhere else, we'll be catching up as we lap ourselves in Q3 and Q4.

Speaker 6

Thank you.

Operator

Our next question comes from the line of

Speaker 3

Just wondering how you're thinking about the potential risk this time versus a couple of years ago and perhaps What's changed to maybe limit the volume impact on your side or mitigate some of the cost pressure?

Speaker 1

Yes. Thanks, Josh. So listen, the playbook is pretty similar for us. Procurement and supply chain working hand in hand Basically on a daily basis to understand the flow of goods and you have to remember, you obviously read about the major lockdown in But I believe something like 330,000,000 people are in lockdown all over the country, and that's changing day to day. So we're navigating day to day Movement of goods from one facility to another or movement of goods to ports and out of the country.

Speaker 1

That's not dissimilar to what we've been doing over the last 2 to 3 years In China, we are seeing more congestion at the ports given just the amount of lockdowns. So it's a case of not just manufacturing the products in China or getting the mediate of fine chemicals, but then getting the product out of China. That's where we're keeping a very close eye on what is happening with logistics. We're using different ports to traditional ports that we would use. We are using more effort to get product out in time.

Speaker 1

So I don't think it's anything, what I would call, different to what we've managed over the last 2 or 3 years, But the intensity is certainly higher than it has been as we've gone through Q4 and into Q1.

Operator

Our next question is from P. J. Juvekar from C.

Speaker 3

Mark, I don't want to put words in your mouth, but last quarter we talked about Slide 7, which is your upside and downside scenarios. And Would you think that you're leaning more to the upside or the downside? I think you said leading more to the upside. What I see now on the upside is To get to the upside scenario of $1,400,000,000 you need to have higher price increases than what you would have thought a few months ago. Can you maybe talk about that a little bit?

Speaker 1

Yes, sure, Joel. Listen, I mean, we're anchored on $1,400,000,000 of EBITDA for a reason. It is the highest probability we see For the results for this year, it is a range that we put in place and it's fair deliberately. The world is not simple right now, and I think everybody knows that. But certainly, when we were together on the February call, We had this view and we haven't really changed it.

Speaker 1

In fact, if anything, with the Ukraine war situation has probably got worse from that perspective, plus the COVID 19 lockdowns in China are worse than they were before. So you can see rationally why we kept the range wide. It doesn't mean to say that we're still not anchored the 1.4, we are. You're right. If things were to move to the upper end of this range, we would have to see A better mix, even more pricing than we've got today and costs perhaps mitigating themselves with less FX impact, That's a lower probability than where we are at 1.4.

Speaker 1

Also equally is a lower probability of the 1.32 at the low end of the range. I mean, you have to believe that things would get so severe that we couldn't offset that by a price or that the market And weakens because of significant weather issues in the regions. So I think the upper end is a low probability, but so is the low end. That's why we're anchored on that 1.4 And when you see what we put there around the market growth, the strong demand, they're all relevant. We are getting the mid single digit price increases.

Speaker 1

Costs are elevated. We see that, but we are mitigating that. FX is a headwind, but once again, we're mitigating that with volume, which we We've said we always would do. And then we're trying to manage those supply disruptions. The only new one there is Russia and Ukraine, and we're managing that.

Speaker 1

So You can see why we still kept the range wide, but there is a lower probability at each end of that range and a much higher probability in the middle.

Speaker 3

Okay. And then secondly here, I look at your margin guidance like, so you had a bit of margin expansion in Q1, then you're modeling then you're assuming guiding to pretty tough margin contraction in Q2, some of the lowest margin you've had in a long time, I think Q3 and Q4 for Q4 Q2, sorry. And then for Q3 and Q4, You're guiding to maybe modest margin contraction. Can you sort of help bridge that a bit, expansion in Q1 year over year, then pretty sizable contraction in Q2 some kind of modest contraction for second half of the year. Yes, Joel, it's Andrew.

Speaker 3

Let me take that one. Look, I think Mark commented earlier, we moved Price very aggressively in Q1 because we see this continuing surge of cost inflation. So we did have a stronger Comparison and a positive comparison between price and cost, overall cost, not just COGS in the Q1 that will not carry through, through the full year. I think you also have to remember that Q1 of 'twenty one was a relatively weak quarter for us. It was a down quarter in revenue, which given the fixed costs we have SG and A and R and D resulted in a weaker comparison for margin.

Speaker 3

So while we're certainly pleased to see a positive EBITDA margin To offset costs we're talking about, the mathematical dilution of margins is pretty substantial. If we are dollar for dollar offset cost increases with price increases, we're going to have a reducing percentage margin. It's just math. And you see that effect get more and more pronounced as you get into the latter part of the year, Continued very high levels of cost increase and but then offsetting that very strong price increases. Unfortunately, That net net is on a percentage margin dilutive.

Speaker 3

So the pattern you're seeing is not unexpected. We do expect to see tougher comparisons on the EBITDA margin percent in the second half. But But I do think it speaks well for the long term future here, which is eventually costs will level off. I don't believe we're in a position to As Mark highlighted, there's certainly a number of uncertainties, particularly around logistics and ocean freight coming in and out of China at the moment that I don't suggest that we've reached the bend in that curve yet, but there is a bend that it will come. And with the stickiness of pricing in our industry, that will be the opportunity To see percentage margin begin to expand and recover.

Speaker 3

But for the rest of this year, I think that the formula is clear. We priced aggressively. We moved to offset COGS inflation. We used volume mix to offset FX as well as any investment

Operator

Our next question is from Christopher Parkinson of Mizuho Securities.

Speaker 5

When investors take the time to actually parse out the growth rates for the diamides and biologicals perhaps at a lower base and then subtract just the annual registration losses. Just what's your current assessment of the remainder of the portfolio, so kind of the other core products as well as some new launch products? And what are you most excited about for 2024? And perhaps an alternative way of asking that is just how would you generally characterize Your aggregate growth contribution from more environmentally CPC formulations versus

Speaker 3

the past few years. Thank you.

Speaker 1

Yes. Thanks, Chris. Look, the diamides are growing pretty much as we've said they would grow. They're in the high single digits. We that in Q1, we'll see that through the rest of the year.

Speaker 1

When you look at our overall growth rates for the year, you can see that the rest of the portfolio is Plant Health, we talk about a lot because the biologicals investment there is going really, really well. I would say Then when I think about an average of what somewhere around 7% revenue growth, the rest of the portfolio is growing in that mid single digit And the new products that we're introducing are growing much faster than that. We had about a 1.5% drag on the portfolio just because of registration losses, it's been a little lower in the first half of this year. It might be a little lower than that full year, maybe 1% range, but it's about the right the place to be, you can see that the portfolio overall is performing very well. I talked about the $600,000,000 of Revenue from the products in the last 5 years, but I think it's the growth rate of that that's occurring.

Speaker 1

It was $400,000,000 last year. It's 600,000,000 this year, that means we got $200,000,000 of brand new growth. So that's what we should be focused on. And that is coming from not only the big products that we launched, whether it's a flounderpyr fungicide Or an IsoFlex herbicide, those are the bigger products that are in the multi $100,000,000 of range when they reach their peak size. What often gets overlooked The amount of work we do on brand new formulations that come to market every year.

Speaker 1

And last year, I think we had something like $170,000,000 $180,000,000 of products introduced within the year, it's slightly less than that this year, but it's still substantial. Don't underestimate the value that that brings. Those products are new. They are coming to market at higher margins, so you're improving the mix. So it's all three things for us.

Speaker 1

It's the core, it's the local formulations that we do in our research facilities around the world, It's the very large pipeline products that come through, but obviously the diamides continue in that high single digit range.

Speaker 5

And just a very quick follow-up. Mark, before everything that's happening with the war, the EU is actually evaluating A host of chemistries and they're 1 of 2 of them that are in terms of environmentally,

Speaker 3

we'll take friendliness

Speaker 1

And 2 of them and

Speaker 5

one in particular is a direct competitor of the Diamard portfolio. How is your team assessing the potential opportunity for the diamides based on The potential for further regulatory actions, I mean, it seems like it's already benefited has been benefiting you over the last several years and potentially will benefit you. But what are your updated thoughts on that and how that could potentially further contribute to that portfolio's growth. Thank you.

Speaker 1

Yes. Look, I mean, As we think further forward on the diamides, not only are we growing ourselves, our new partner sales are growing Lee as well roughly at the same rate that we are internally to FMC, obviously, we're taking new products into new markets with new registrations. Our partners are doing the same, but we are taking market share in insecticides with the diamide. When you look at some of the older In fact, some of our own chemistries coming under pressure. We're losing registrations of indoxacarb in Europe this year, which is a great molecule, but doesn't fit the profile for the That churn is happening in the industry and we are taking advantage of that.

Speaker 1

We expect that to continue. It is one of the growth Drivers for the diamides as we look forward for the next 10 years, that will not slow down. In fact, you could argue the replacement of all the technologies will accelerate as we go through time, especially in jurisdictions like Europe. So it is a positive for us. We see it that way and we have taking advantage of it, I will continue to do so.

Speaker 6

Great. Thanks for the color.

Operator

Our next question is from Tony Jones at Redburn. Tony, please go

Speaker 6

ahead. Thanks, everybody. Thanks for taking my question. So you talked about cost inflation Should be peaking and reversing at some point. But when we look at the industry, in the past, we've seen some companies give back price.

Speaker 6

What's your expectation from an FMC perspective? Because the portfolio today is very different to the last time we're in a period of cost deflation. So any thoughts on that would be really helpful. Thank you.

Speaker 1

Thanks, Tony. Yes, I mean, listen, you heard me comment earlier about the fact that we sell value And that's something that we have always done and will continue to do. When you look at some of the chemistries in this space, they are very commoditized You can think of some of the non selective herbicides, which move up very quickly and they move down very quickly. Our portfolio historically has never done that and you could argue that with the portfolio as it is today, it is even less likely to move quickly. So it's taken us a while to get to this point.

Speaker 1

We didn't recover all the costs last year. Our intent is when we come out of Our margins will have in fact improved because of all the efforts that we put in place with regards to SAP, etcetera. So Our plan over the long haul is to make sure that these prices are sticky by selling the value aspect of the portfolio. We don't have the non selective herbicides. We don't have a large generic portfolio.

Speaker 1

So we do not expect to have that large swing in price as we come through the other side of this.

Speaker 6

Thank you. That's really helpful. And just a really quick follow-up. Can you indicate the rough additional SG and A cost, maybe absolute terms moving from Q1 to Q2 just so we can make it accurate in the model. Thanks.

Speaker 1

Andrew, do we have that absolute number? I don't think we do, do we?

Speaker 3

We don't. Look, I would just look at I would say that I think our SG and A as a percentage of sales is probably a bit light in Q1

Operator

Our next question comes from Michael Piken from Cleveland Research. Hi, Michael. We're unable to hear you. Can you please check your line is not on mute? Unfortunately, we can't hear anything from Michael's lines.

Operator

We'll move on to the next question. The next question is from Arun Viswanathan Aaron, your line is now open for your question. Please proceed.

Speaker 4

Now, I'm here. Hello?

Operator

Yes, we can

Speaker 4

hear you.

Operator

Please go ahead.

Speaker 4

Okay, great. So it looks like you're guiding to about 6% EBITDA growth at the midpoint in 'twenty two. And understandably, there's a lot of challenges that you guys have detailed on costs and so on and uncertainty. But when you look out into 'twenty three and 'twenty Or do you expect to get back into kind of a 7% to 9% EBITDA growth rate and potentially even at the upper end of that just given some of The replacement that has to go on for lost production out of Ukraine, how should we think about kind of the new outlook for FMC? Should it be within the range that you provided in the past back in your 2018 Investor Day?

Speaker 1

Yes. Thanks, Aaron. Next year is the last year of our 5 year plan. We're tracking well on revenue right in the middle of the range. We are slightly below on EBITDA.

Speaker 1

But as Andrew and I were discussing the other day, since 'eighteen through 'twenty one, we've had over $600,000,000 of cost and FX headwinds and we're only just slightly below the lower end of the range. So look, I'm not going to guide 23, it is way too early the guide 23, but there's no reason to believe that if the situation starts to normalize that we wouldn't be in that 7% to 9% range. We're obviously not going over the gap that we've had over the last couple of years, so we will likely end up somewhere at the low end of that range at the end of the 5 year plan. Commendable results to say the least given everything that we've had. And frankly, this year's cost and FX It's higher than we've seen at any point of the last 5 years in terms of this plan.

Speaker 1

So we're swimming against a very strong We do feel that the company has performed well since 2018 on both metrics. After 2023, we are going to be putting together a new long range plan. Whatever time line that takes, we will make that decision. We would expect to come out with a new long range plan towards the end of 2023, where we will be public with where the company is going over what time frame. But for now, we're just sticking with where we are.

Speaker 1

And obviously, that 7% to 9% EBITDA range is what we'd be aiming for, for next year.

Speaker 4

And if I could maybe a follow-up to that, is there any discrete items, whether it be the deals that you guys have signed for partnerships Or maybe some fungicide M and A or anything like that, that you could point to that would that could help us understand and frame kind of the longer term

Speaker 1

No. Listen, I think from a portfolio perspective, I think you've all the pieces of information that we've given out in terms of the pipeline growth, the diamide longer term a technology perspective, they tend to play out over the long haul. It wouldn't impact the near term, but we are looking at a number of items On the technology side of M and A, so I don't think there's anything there that we have that you don't have in terms of trying to model where the future the growth of the company is, I think obviously as we go through this planning cycle, we'll have a much better view at the end of 'twenty three around where the company will be going over the next decade.

Speaker 8

Thanks.

Operator

Our next question will come from Adam Samuelson from Goldman Sachs. Adam, Please go ahead.

Speaker 8

Yes, thanks. Good morning, everyone.

Speaker 1

Good morning, Ed.

Speaker 8

Good morning. So I guess some of this might be tricky because of where you are in the season and but I was just looking at your thoughts on channel inventories. It does seem like there was a good amount of pre buying in a lot of different regions ahead of maybe an expectation of additional price increases, concerns around Supply chain and just if you could just take a tour around the world about where you think channel inventory set as you're going into certainly the Northern Hemisphere growing season and In Brazil where you're more off season, just how you think activity levels and restocking sits there?

Speaker 1

Yes, sure. Thank you. Generally speaking, we are not concerned about channel inventories. There are a couple of pockets in the world. 1 we alluded to, which is India.

Speaker 1

In Q4, weather patterns were not great and there is a reduction in rice acres In India and you saw some of the comments about strong growth in ASEAN and Australia offset by India, we're taking the opportunity to reduce our channel inventories in India at the beginning of the year, we expect that to normalize pretty quickly as we go through the first half here. Outside of that, Northern Hemisphere, I don't think we're carrying excess inventories as we're going into the channel into the seasons. Recommendations from our group are that we expect normal tax pressures for the years going forward in Europe and in the U. S. So we're not seeing anything that we would say is concerning at all.

Speaker 1

They seem pretty normal to us. In Latin America, for us, normal. Argentina, Brazil, Mexico, We're where we should be at this point of the season. Our demand has been very good for us. Our growth rates are in line with how we're penetrating the market, you'll recall on the call here, I just talked about the fact that we've been spending a lot of time and effort improving our market access Into the soy complex in Brazil and that's where our growth is coming from, whether it be with insecticides or some of the newer herbicides that we have in place.

Speaker 1

We're not worried about where our inventory levels are at all in Brazil or Argentina.

Speaker 8

Okay. And then just a quick follow-up on the decision to cease operations or sale in Russia, Kind of implies about $75,000,000 of business there last year. Just is that something as you're modeling that Going away, it's a tail to winding down activities that doesn't just fall to 0 immediately. And I guess the corollary question would be In Ukraine, what's the size of business in Ukraine and just what's the expectation on volumes there just given a lot of the planting disruptions and logistical years of getting product into the country.

Speaker 1

Sure. I'll let Andrew comment on the actual numbers. We are working through what financial impact will be both from a P and L and a balance sheet impact. We do believe that we have opportunities to offset maybe All of that impact, but certainly the vast majority of it. So we're working through that right now.

Speaker 1

I would say the Ukraine, we're In very low planted acres, especially obviously in the East, our groups are active. Our salespeople are out. Growers are planting. It's just Very, very difficult conditions. Getting material into the country, we are doing that.

Speaker 1

It's once you're in country, it's working through distribution, etcetera. It's As you can imagine, particularly easy. So I would expect acreage to be down significantly in the Ukraine. But we will obviously do everything we can to get material into that country and make sure that they can plant every acre they can. Andrew, do you just want to comment on

Speaker 3

the rough impacts? Sure. Just some Dimensions for you on Russia and Ukraine. Between the two countries, there's about $100,000,000 in revenue in 2021, about 70% in Russia, 30% in Ukraine. The Russian business we did operate in the Q1, what was built into our budgets for the remainder remaining three quarters of the year was about $20,000,000 to $25,000,000 EBITDA contribution from the Russian business.

Speaker 3

So that's the headwind we've got to address with either redirecting the material no longer being sent to that market, other markets are finding other opportunities. So that's certainly a part of our upside downside discussion that Mark went through in his prepared comments Regarding Ukraine, as Mark mentioned, we are operating. We do not expect that to hit our initial expectations for the year, But the business is operating. We're continuing to ship, and we will continue to support Ukrainian farmers the best we can. I do think you should expect that we will take a restructuring charge in the Q2 for the exit of the Russia business.

Speaker 3

We are not in a position right now to finalize that number, given that we're still in the process of finalizing the exact pieces it in the Russian business.

Speaker 8

All right. That's really helpful. I appreciate it. Thank you.

Speaker 1

Thank you.

Operator

Our final question on the call today comes from Michael Cizon from Wells Fargo. Michael, please go ahead.

Speaker 9

Hey, guys. You sort of noted that you felt there could be growth in 2023 In terms of the ag market, any thoughts behind that and why you think the markets could maybe extend the cycle for another year or so?

Speaker 1

Yes. I mean, listen, we've gone through a period of very low growth in the ag sector over the last, I would say, last 3 to 4 years. Take a step back and look at what is happening on soft commodity prices, what would you have to believe that would drive soft commodities lower right now? Certainly, the Russia Ukraine situation is driving cereals. You've had weather impacts in Latin America last So you've got to believe that soft commodities right now are going to stay elevated.

Speaker 1

And that being the case, that's a good back generally a good backdrop For us as crop protection input providers, so we're looking at 'twenty three as it is very early, we're running in start of May, but we're looking at 'twenty three as an extension of 'twenty two. That's how we're thinking of it right now. It should be a positive backdrop. We don't see even any negatives out there that is going to fundamentally shift this, so 'twenty three should be a good year.

Speaker 9

Got it. And then I think you are looking or you're trying to reduce some of your manufacturing footprint in China and move it to other parts of the world, where are you sort of in that endeavor? And have you made any meaningful progress?

Speaker 1

Yes. Mike, when we talked about this subject before, I always allude back to the 2015 time frame when we bought KemiNova. Prior to that, we were about 95% to 90% dependent on China for pretty much all the raw materials, intermediates, fine and specialty chemicals. We've been working and we've had a program to really ensure that we have a balanced supply chain and manufacturing footprint The world, not only with the Caminova acquisition, but with the DuPont acquisitions as well. And today, we're probably in that 43%, 45% range dependent upon China.

Speaker 1

Our aim is to get that to sub-forty within the next year or so. We've done a very good job of setting up manufacturing with the assets, Whether it be in India or Europe, we've shifted some toll manufacturing into Europe and Mexico, as an an example to see Brazil, we will continue to do that. It is something that frankly is never ending. I would like to get it into the 30% range. I don't know whether my manufacturing and procurement people would agree with that, but I think if we could get China dependency on 30 plus percent would be almost ideal for us with a good balance between India and Europe and the U.

Speaker 1

S. Being the rest. I think we'll be in great shape by then.

Speaker 9

Got it. Thank you.

Operator

Thank you.

Speaker 6

Okay. Thank you very much. That is all

Speaker 2

the time that we have for the call today. Thank you, and have a good day.

Operator

This concludes the FMC Corporation conference call. Thank you for attending. You may now

Powered by Quartr
Earnings Conference Call
FMC Q1 2022
00:00 / 00:00