FMC Q3 2022 Earnings Call Transcript

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Provided by Quartr
November 2, 2022

Key Takeaways

  • FMC reported organic revenue growth of 19% in Q3 and delivered adjusted EPS of $1.23, outperforming the midpoint of guidance by $0.13 per share.
  • Average global price increases of 7% and strong new‐product momentum—up 26% YoY—drove double-digit volume gains across herbicides (23%), fungicides (19%) and insecticides (10%).
  • Q3 experienced the highest year-over-year cost inflation of 2022, which more than offset price and volume gains and resulted in an 11% decline in adjusted EBITDA and a 14% drop in EPS versus prior year.
  • Full-year 2022 guidance was raised to $5.6–$5.8 billion in revenue (+13% at midpoint), adjusted EBITDA of $1.37–$1.43 billion (+7%) and EPS of $7.10–$7.60 (+7%).
  • Free cash flow guidance was lowered to $440–$560 million due to higher working-capital consumption from rapid sales growth and inflation, with FCF conversion at 54% below the 70–80% target.
AI Generated. May Contain Errors.
Earnings Conference Call
FMC Q3 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Third Quarter 2022 Earnings Call for FMC Corporation. This event is being recorded, and all participants are in listen mode only. After today's prepared remarks, there will be an opportunity to ask questions. I I would now like to turn the conference over to Mr. Zach Zaki, Director of Investor Relations with FMC Corporation.

Operator

Please go ahead.

Speaker 1

Thank you, Jason, 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 Sandifer, Executive Vice President and Chief Financial Officer. Mark will review our Q3 performance and provide an outlook for the rest of the year as well as an early view of 2023. Andrew will provide an overview of select financial results.

Speaker 1

Following the prepared remarks, we will take questions. Our earnings release and today's slide presentation are available on our website, The prepared remarks from today's discussion will be made available after the call. 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 those factors identified in our earnings release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based upon these risks and uncertainties.

Speaker 1

Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, Adjusted cash from operations, free cash flow, net debt 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. With that, I will now turn the call over to Mark.

Speaker 2

Thank Thank you, Zach, and good morning, everyone. FMC's strong growth continued in the Q3 with a robust start to the Latin American season as well as solid pricing actions across all regions driving our results. New products gained momentum in the quarter, growing 26% year over year. As expected, Q3 saw the highest year over year cost inflation for 2022. Looking to Q4, We are seeing sequentially lower inflation across the supply chain.

Speaker 2

With this in mind, we expect a strong finish to the year and remain confident in our ability to deliver our 4th quarter and full year forecast. Our Q3 results are detailed on Slides 3, 4 and 5. Revenue was up 19% organically, EBITDA down 11% and EPS down 14%. As expected, these declines in the quarter were driven by the highest cost inflation this year, which more than offset the good start of the Latin American season And average global price increases of 7%. Adjusted earnings were $1.23 per diluted share in the quarter, $0.13 above the midpoint of our guidance range, with the vast majority of the outperformance driven by higher EBITDA.

Speaker 2

We delivered double digit year over year growth across the portfolio, including 23% growth in herbicides, 19% in fungicides and 10% in insecticides. 3rd quarter sales were $1,380,000,000 led by volume growth in Latin America and North America as well as price increases across all regions. In North America, sales increased 21% year over year. Fungicides grew rapidly in the quarter, especially on corn in the Midwest. Overall performance in the Midwest across corn, soybeans and other crops More than offset lower diamide sales in the West due to drought conditions.

Speaker 2

In Latin America, Sales increased 35% year over year, led by Brazil and Argentina. With the backdrop of strong commodity prices and increase in acres, Grower confidence in the region is high. Our results were driven by a robust start to the new season with strong selective herbicide and insecticide sales, Price increases and expanding market access. FMC has been investing in expanding market access by adding commercial resources and developing new broader relationships with large cooperatives and distributors. These investments are focused on key row crops such as soybean and corn, and we are starting to realize the results benefit from these increased sales.

Speaker 2

As an example, bifenthrin based insecticides, including those used to control stink bugs in soybeans, were the largest growth driver in the region for the quarter. We also successfully launched Onsuva, Our flounderpea based fungicide for soybeans and peanuts in Argentina and Paraguay during the quarter. This is the 2nd new molecule from FMC's pipeline following the successful introduction of IsoFlex herbicide in Australia last year. Turning to EMEA. 3rd quarter sales were down 12% versus prior year and were up 1% organically.

Speaker 2

In addition to strong pricing, Results were driven by increased demand for diamides on fruit and vegetables and herbicides on cereals and oilseed rate. FX was a significant headwind in the quarter. FMC's decision to exit the Russian market, the 1st major crop protection companies to do so earlier this year, and up 2% organically. Pricing gains were more than offset by FX headwinds. Floods in Pakistan and erratic weather in India and other countries impacted performance in the quarter.

Speaker 2

However, demand remains strong for new products based on diamides and other chemistries, and FMC continues to make significant progress in improving our market access in geographies where we are underrepresented, such as Indonesia, Vietnam and Thailand. Investments to expand market access have not been limited to Latin America and Asia. We have also invested in market expansions in the U. S, Turkey and several other countries. This is an important element of our growth strategy and includes scaling up of FMC's technical service organization, expanding our sales force, Pursuing new collaborations with distribution partners and other steps that are beginning to deliver market share gains.

Speaker 2

These initiatives become even more important as we continue to introduce novel technologies that require close engagement with growers. Overall, Adjusted EBITDA for the Q3 was $261,000,000 a decrease of 11% compared to the prior year period, at $6,000,000 above the high end of our guidance range, primarily due to somewhat lower cost inflation than we previously anticipated. As forecasted, cost and FX headwinds more than offset price increases and volume gains. Average price increases of 7 contributed $85,000,000 in the quarter. We are seeing initial signs of decelerating inflation, and we are confident that cost headwinds in 2022 at Peat in the Q3.

Speaker 2

FX was a $25,000,000 EBITDA headwind in the quarter due to weakening of several currencies around the world. Moving to Slide 6 and FMC's full year 2022 and 4th quarter earnings outlook. With continued strength in market demand and the success of pricing actions to help offset cost increases and FX headwinds, we are raising full year 2022 revenue to a range of $5,600,000,000 to $5,800,000,000 representing an increase of 13% at the midpoint versus 2021. Sales growth was driven by volume and price in all regions, partially offset by foreign currency impacts. We are narrowing the full year adjusted EBITDA range to $1,370,000,000 to $1,430,000,000 representing 7% year over year growth at the midpoint and reflecting the confidence in our order book and supply availability.

Speaker 2

The range for 2022 adjusted earnings per share is narrowed as well and is now expected to be $7.10 to $7.60 per diluted share, representing an increase of 7% year over year at the midpoint. Consistent with past practice, we do not factor in any benefit from potential share repurchases in our EPS guidance. Guidance for Q4 implies year over year sales growth of 8% at the midpoint compared to the prior year period. Pricing momentum and volume growth are expected to more than offset FX headwinds in the quarter. We have good visibility into demand for the quarter with strong order books for both the Brazilian and U.

Speaker 2

S. Markets. Cost increases are forecasted to be lower in Q4 compared to Q3. The combination of sales growth and lower cost headwinds and we anticipate it to result in EBITDA growth of 15% at the midpoint, with EPS up 9% at the midpoint year over year. Moving now To the updated drivers of 2022 EBITDA outcomes on Slide 7.

Speaker 2

Market growth is expected to remain in the mid to high single digit range, We are seeing cost inflation beginning to decelerate. We are successfully mitigating the impact of lost sales from our decision to exit Russia and have good visibility into supply to fulfill 4th quarter demand. Full year price increases of mid to high single digit and strong volume growth are expected to more than offset cost and FX headwinds, keeping the midpoint of our guidance unchanged at $1,400,000,000 I'll I'll now turn the call over to Andrew.

Speaker 3

Thanks, Mark. Let me start this morning with a quick discussion of 2 accounting changes we implemented on July 1. First, we changed our method for costing inventory in the United States from the last in first out or LIFO cost method to the first in first out or FIFO cost method, consistent with how we account for inventory across the rest of our global business. This is the primary change made and the only one that impacts prior year reported earnings and EBITDA. 2nd, we changed our method of accounting for the determination of the market related value for a class of assets within our qualified U.

Speaker 3

S. Defined benefit plan, impacting our net periodic pension costs. This change only impacts our historical GAAP results as we exclude non operating pension charges from our adjusted results. Certain prior year amounts within the earnings tables included with our earnings release today have been recasted to reflect these accounting policy changes. Impacts to our recasted income statement are not material.

Speaker 3

Further detail on both of these changes are included in our Q3 2022 Form 10 Q, which we filed later today. Additionally, we have included a table in the appendix of today's slide that shows recasted adjusted EBITDA, earnings and EPS for 2021 for easy reference. There were no impacts on reported results for Q1 or Q2 2022 from these changes. With that, let's shift to a review of some key income statement items. FX was a headwind to revenue growth in the 3rd quarter as expected, driven by weakness in European and Asian currencies, particularly the euro, Indian rupee and Turkish lira.

Speaker 3

We continue to anticipate FX headwinds for the remainder of 2022 driven by Asian and European currencies. Interest expense for the Q3 was $41,800,000 up $8,700,000 versus the prior year period, primarily due to higher short term interest rates and to a lesser degree higher debt balances, partially offset by savings from the refinancing activity and completed in the Q4 of last year. With rapidly rising interest rates, especially in the United States, We now expect interest expense for full year 2022 to be in the range of $148,000,000 to $154,000,000 an increase of $6,000,000 at the midpoint compared to our prior guidance. Our effective tax rate on adjusted earnings for the 3rd quarter was 14 in line with our continued expectation for a full year tax rate in the range of 13% to 15%. Moving next to the balance sheet and liquidity.

Speaker 3

Gross debt at quarter end was approximately $3,600,000,000 up nearly $390,000,000 from year 2021. Gross debt to trailing 12 month EBITDA was 2.6 times at the end of the 3rd quarter, while net debt to EBITDA was 2.4 times. We continue to expect full year average leverage in our targeted 2.4 to 2.5 times gross or 2.3x to 2.4x net ranges. Moving on to cash flow on Slide 8. 3rd quarter year to date free cash flow was negative $139,000,000 Adjusted cash from operations of $16,000,000 was down $290,000,000 compared to the prior year period, driven by higher working capital.

Speaker 3

Strong sales growth was the largest driver of Capital additions and other investing activities of $103,000,000 were slightly higher than the prior year period. Legacy and transformation spending was down $6,000,000 with slightly higher legacy expenses more than offset by the absence of transformation spending this year. We are lowering the range of our full year 2022 free cash flow guidance to a range of $440,000,000 to $560,000,000 A reduction of $125,000,000 at the midpoint. Adjusted cash from operations is now expected to be in the range of 650 to $710,000,000 a reduction of $150,000,000 at the midpoint compared to the prior year, reflecting higher cash consumed by working capital The vast majority of the higher expected consumption of cash by working capital is due to the higher sales not expected in the 4th quarter, none of which will be collected in the current year. The remainder of the increased cash consumption stems from maintaining year end inventory levels to support an anticipated strong start to 2023 despite the higher Q4 sales as well as from other impacts of the current inflationary environment on working capital.

Speaker 3

Our guidance for capital additions has been reduced by $25,000,000 at the midpoint, with capital additions now expected to be in the range of 125 to $145,000,000 Legacy and transformation guidance is narrowed to a range of $40,000,000 to $50,000,000 unchanged at the midpoint. With this guidance, we anticipate free cash flow conversion from adjusted earnings of 54% at the midpoint, with conversion limited this year by the impact Rapid sales growth and inflation on working capital. Rolling 3 year free cash flow conversion is now expected to be 67% for 2020 through 2022, somewhat below our targeted 70% to 80%. We anticipate reverting to the targeted cash conversion range in 2023 as the impacts of this year's rapid inflation and price increases move through our working capital. Moving on to cash deployment.

Speaker 3

No shares were repurchased in the Q3. We paid $67,000,000 in dividends. In the 1st several weeks of October, We repurchased 875,000 FMC shares at an average price of $114.22 per share for a total of $100,000,000 Year to date, we have deployed roughly $490,000,000 of cash, approximately $190,000,000 for the Bioferro acquisition, $200,000,000 in dividends and $100,000,000 in share repurchases completed in October. We paid an additional $67,000,000 in dividends on October on the call for the call and we expect to return up to an additional $100,000,000 to shareholders through share repurchases in the remainder of the 4th quarter for a total of up to approximately $470,000,000 in cash returned to shareholders and approximately $660,000,000 of total cash deployed in 2022. And with that, I'll hand the call back to Mark.

Speaker 2

Thank you, Andrew. Turning to Slides 9 and 10, I want to provide an early look The key market and cost dynamics underpinning our emerging view of next year. Soft commodity prices remain robust and stock to use ratios for key crops while they combat erratic weather and persistent drought conditions. As a result, we expect the overall crop protection It will grow in the low to mid single digit range next year on a U. S.

Speaker 2

Dollar basis. This favorable backdrop, combined with our continued pricing actions, Strong demand for our newest technologies and further market access gains will provide solid support for profitable growth in 2023. There have been significant cumulative cost and FX headwinds to EBITDA over the past couple of years, which we intend to recoup through pricing and lower costs going forward. Clearly, all the recovery will not take place within a single year, but we expect to shift to improving margins in the second half of twenty twenty three. Headwinds to the top line will come from FX volatility as well as a normal range of registration losses.

Speaker 2

Potential factors that could drive 2023 revenue higher include stronger market growth, better pricing or product mix And a reduction in FX volatility. On the supply front, we expect greater stability as we continue diversifying our raw material sources and Experience fewer disruptions. Input cost inflation is expected to decelerate and hence input costs are expected to become a year over year tailwind in the second half of the year. In fact, we are already seeing improvements in the availability and cost of logistics. Regarding internal costs, SG and A and R and D expenses will grow at or below the rate of sales growth.

Speaker 2

Investments will be focused on commercializing new products, expanding market access and developing new chemical and biological solutions. Potential factors that could drive 2023 EBITDA higher include faster than expected easing of input costs and the potential for improved SG and A leverage. Taking all of this into consideration, we expect FMC's growth momentum will continue throughout next year with margin expansion in the second half of twenty twenty three. To conclude, the second half of twenty twenty two is playing out as forecasted. We delivered solid results in the 3rd quarter despite peak cost headwinds.

Speaker 2

For full year 2022, we expect to deliver another record FMC has thrived in a year of unprecedented challenges. Our team successfully navigated logistics bottlenecks around the world. And we have made steady progress de risking our global supply base, which we will continue to do next year. We have maintained disciplined controls on discretionary spending. And at the same time, we continue to invest in the future with the acquisition of Biofero, which enhances our biologicals platform as well as increased investments in R and D.

Speaker 2

Finally, our continued investments to expand FMC's market access in key regions and countries are producing strong results and market share gains. Looking to 2023, we are optimistic based on what we see at this point. Crop protection fundamentals appear to be positive for next year, which bodes well for market demand across our existing portfolio. New product introductions based on our latest technologies As well as new biological solutions are doing extremely well, and they will drive mix improvement. We are seeing signs The raw materials, logistics and supply challenges will continue to ease next year, providing a positive tailwind to margins in the second half of twenty twenty three.

Speaker 2

Once again, when we look at the full picture for 2023, we remain upbeat on market fundamentals and the performance we expect to deliver. I'll now turn the call back to the operator for questions.

Operator

We will now begin the question and answer session. If you have additional questions, you can jump back in the queue. Our first question is from Laurent Favre with BNP. Your line is now open.

Speaker 4

Yes. Good morning, all. Thanks for taking my question. Mark, my question is regarding the cost inflation you're talking about for H1 and you're starting to have visibility on this. I was wondering if you could talk about the magnitude of this inflation, which it seems to me that it's so much that You're not confident to grow the margin for the full year.

Speaker 4

I think the choice of what is interesting, you're talking about margin expansion in H2, not for the full year. So was wondering if you could talk a little bit about this. Thank you.

Speaker 2

Yes, certainly, Laurent. Well, first of all, let me clear up that A little misunderstanding. We do expect margins to improve as we exit 2023 versus where we are today in 2022. So margins will improve next year. I think that's an important point because we have been talking about first half versus second half, but full year will be positive.

Speaker 2

Obviously, we've described quite a few times how costs flow through our P and L. The materials that we're buying in the second half of this year, give us very good insight into the cost for the first half of next year. And we are seeing costs Still higher than they were, but the rate of increase is slowing down and that's very important because that what that tells us is that as we enter the first half of next year, The materials that we will be providing and the cost of flow through the P and L in the second half of the year will be lower. So that's how we see the first half, second half. So costs go from being somewhat of a headwind in the first half to somewhat of a tailwind in the second half.

Speaker 2

Now when we talk about the full year, We don't have a budget at this point. So we are giving what we describe as an early look at next year. I think though that when you think about our 5 year plan that we put in place in 2018, our top line of 5% to 7% growth and our 7% 7% to 9% growth on the bottom line. They're very much where we're thinking we can be next year. And when you think about the slides that we put out there in terms of the cost dynamic and the market dynamics, market dynamics are pretty positive for us.

Speaker 2

So if you think about Following. If you think about price up next year in the sort of low to mid single digit range, you think of volume The same in the low to mid single digit range. You've got some registration losses and you've got a market that's growing in the low to mid single digit range. You take that you take an FX headwind probably in the low to mid single digit, it's quite easy to see us being within the middle to the upper end of that 5% to 7% range. And that's how we're sort of modeling it at the very early stages.

Speaker 2

We described in the slides things that can move us up and down. And if we're in that range, then obviously, we're going to get EBITDA leverage. And you should see EBITDA in that 7% to 9% range as well as improved margins. So the algorithm works. I'm confident in what we see in terms of our own portfolio, new product introductions coming in next year.

Speaker 2

It is a volatile world, but we are pretty confident about what we see next year, Laurent.

Speaker 4

Thanks, Mark. And as a follow-up regarding more Q4 and a wide range, I was wondering if the uncertainty there is more about How much of an early season you get into 2023 in the Northern Hemisphere? Or to what extent in the Southern Hemisphere, you've had an incredible Q3 and Inventories might be a bit high and so therefore Q4 volumes might be maybe a little bit, I guess, at risk.

Speaker 2

No, seriously, we have a range for a reason. We don't necessarily see that range is wide. There are a lot of things going on in the world right now, as we all know. I would say the season in Latin America, as we've said, has started well. We planned for that in Q3.

Speaker 2

We took advantage of that. We expect it to continue in Latin America as we go through Q4 and Q1. It is a strange time of the year because not only is the Latin American season in full swing, but things are moving in North America, Things are starting to move in Europe ahead of the season. So it's a time of volatility in demand. And as we've said before, we tend to look at the years in 2 halves.

Speaker 2

Well, that applies to Q4 and Q1. So yes, there is a range there, but we don't consider it too broad. We're confident of our ability to deliver on Q4. Looks good in Latin America, looks good in North America. Europe is gearing up well.

Speaker 2

So overall, I think the midpoint is where we said we would be for the full year. And we really haven't changed the second half at all. You've seen that in the numbers. It's going to be a good second half for us. So I think the range is appropriate for what we see in terms of what's going on in the world.

Speaker 4

Thank you, Mark.

Operator

Our next question comes from Christopher Parkinson with Mizuho. Your line is now open.

Speaker 5

Top down perspective on the growth rates for the diamides, plant health, On new products, including flandipyr and just I think you said registration losses would be more or less in line with historical averages. Just any preliminary thoughts on how we should be Thinking about that throughout the balance of 2023. Thank you very much.

Speaker 2

Yes. Chris, could you just repeat the first piece of your question? We didn't hear it.

Speaker 5

I'm sorry. No, I was just asking you to potentially parse out your preliminary thoughts on growth rates For the diamides, your plant health portfolio and new products, just broad based thinking of how you're assessing that? Thank you.

Speaker 2

Thanks, Chris. Yes, so let me take the diamides first. This year, year to date, we're up in the high mid single digits. We would expect that same growth rate next year as we go forward. We're getting new registrations, especially for cyazepyr.

Speaker 2

That market is growing rapidly in many parts of the world, which is good news. On new products, The new products are about $600,000,000 this year in terms of overall revenue. We're about 10% of revenue. We would expect that to increase next year. I don't have the exact amount, but I would expect it to move upwards in terms of overall revenue, certainly given the strength of what we've seen over the last couple of years with new product introductions.

Speaker 2

And then the plant health business is doing extremely well. It's growing north of 20% this year. Biological is growing even faster than that. I would expect that business Continue growth of north of 20% as we go into next year, driven mainly by biologicals. So overall, that whole New product mix that we have going through the business is getting stronger every year.

Speaker 2

And it's interesting when you think about it, we closed The DuPont deal 5 years ago this week, which is frankly hard to believe, but the $600,000,000 of What we call products launched in the last 5 years have all been put in the marketplace since that acquisition. So it just shows the power of that innovation engine that we have And it's certainly been accelerating as we've gone over those 5 years. So more to come from that pipeline, but hopefully that gives you sort of a flavor of how the 3 pieces fall out.

Speaker 5

That's very helpful. And just as a quick follow-up, if we aggregate the Quarterly cost headwinds, so the recent $169,000,000 in 3Q, you got plus or minus $379,000,000 year to date. A part of that's raw materials, part of that's I believe transportation logistics and part of that is also correct me if I'm wrong operating on Yes, getting procuring certain raw materials that are off contract. In addition to just, let's say, standardized The potential for RAS to roll over, how should we think about the other parts of that? So in terms of optimizing procurement from your core suppliers and then also transportation in terms of freight costs and everything else.

Speaker 5

Just if you have any other details on that, that would also be incredibly helpful. Thank you.

Speaker 2

Yes, thanks. I'll give you a high level view and then Andrew if you want to make a couple of comments. Listen, I think we've been in such a period that we've never seen before in terms of volatility and movement in supply that we're very hopeful that as we get into 2023, We're starting to enter into more of a stable environment in terms of how we operate. That has many benefits. Obviously, stress on the organization is an important one.

Speaker 2

But second is cost because it allows us to go back and get materials from what we call our primary sources where we have The best conditions, the best terms, the best pricing. We are seeing and I just said it in the script, we are seeing logistics costs freeing up. Obviously, We're all pretty much aware that the world is entering into a recessionary period. There is less goods moving around the world. What does that mean?

Speaker 2

It means container space is freed up. It means lower maritime shipments. We're seeing lower costs for road freight in different parts of the world. And where we sparingly use air freight, those costs are coming down as well. So we are seeing the whole cost complex around logistics getting better.

Speaker 2

Andrew, do you want to make any other comments?

Speaker 3

Yes. I think we've talked in the past about the makeup of our cost headwinds, the largest piece being active ingredients or the intermediate fuse to produce them. Those are very specific to FMC and to our product mix. So while certainly I think people are seeing some costs Turning in certain commodity chemical categories, for example. Given the nature that most of our cost headwind has really been around the supply demand dynamics And disruption of availability for these very specialized intermediates and active ingredients that we purchased, that decrease in disruption that Mark referenced It's starting to give that benefit of allowing us to reconcentrate purchases back on strategic suppliers.

Speaker 3

And that's where we're expecting to see the turn. Yes, that is our biggest cost bucket, these raw materials for active ingredients and the intermediates. It's also the slowest to flow through our P and L. So that's why it takes the longest time to react to changes, but we do see some good reasons to be optimistic there. Packaging is our 2nd largest much smaller, but 2nd largest cost bucket.

Speaker 3

It's still very mixed, where we've seen some reduction in input in raw material costs in certain parts of the world, but Still some disruptions in availability. There's still a mixed area for us and an area where we are optimistic to see improvement going into 2023. And then as Mark commented, certainly on logistics, which is the smallest of the 3 buckets with the one that flows through our P and L most quickly, we are seeing some signs of improvement both in ocean and air as well as in rail in terms of availability and cost.

Speaker 5

Very helpful. Thank you so much.

Speaker 2

Thanks, Chris.

Operator

Our next question comes from Vincent Andrews with Morgan Stanley. Your line is now open.

Speaker 6

Thank you. Good morning, everyone. I wanted to follow-up on the price comments for 2023. If I've got my math right, you guys have been achieving a high single digit pricing year to date, very strong. It seems like you've got a good uptake from your customers.

Speaker 6

So if you're talking about low single digits into next year, I assume that that's a new round of pricing that you're anticipating Introducing and I'm just wondering because it's only early November and you don't have your plan yet. Is that just sort of a placeholder and you haven't decided exactly how much Price to take for next year or just sort of what is the pricing philosophy for next year and does it vary by region?

Speaker 2

Yes. Thanks, Vincent. Yes, it does vary by region. And it varies in the method of how we implement prices. In certain parts of the world, such as Europe For the U.

Speaker 2

S, we have a price book that goes out before the season starts and all sales are based upon those price books. Now over the last 2 years, we have actually changed mid seasons because of just the scale of what we see. In other parts of the world like Latin America, The cost and the prices move constantly. So it's not as if you have a price, you're moving prices constantly. So the way we see next year, we are definitely moving prices.

Speaker 2

We already have in the U. S. We are in Europe as well. We're also moving in parts of Asia. So we're on the track to recoup the EBITDA that we've had the compression with over the last couple of years.

Speaker 2

And as I said, we're not going to get that all back in 1 year. So 2023, 2024 will be the years of us coming down the other side of that curve as we hold price and raise price in certain parts of the world. So yes, I think the basic answer is we continue to be aggressive on price. We've had margin compression that we don't like and we're going to get those margins back.

Speaker 6

Okay. And then just on the new market initiatives, obviously, I know this has been an important initiative And now you're starting to see the results. And I'm just wondering as you see those results, is it sort of creating new opportunities or new lines of sight on other things you can do Within those markets with other molecules, just the opportunities have broadening, I guess, is my question.

Speaker 2

Yes. Listen, I think once you start down the road of expanding where you're actually selling, Then growth rates accelerate, and that's what we've seen. I'll just give you a little factoid that we talked about growth in Latin America being very strong. 50% of our growth in Brazil in the Q3 was our new market access. So what does that basically mean?

Speaker 2

It means we're selling on to new acres that we never sold them to before. We're selling to broader distributors and co ops with deeper relationships. And we're selling a portfolio that is somewhat different to what we've sold before. For instance, I talked about the bifentrine based products for stink bugs. That is a big problem in the Brazilian soybean market, and we have the best solution there.

Speaker 2

So we're expanding our sales into new areas. U. S. Is another good example. We've added a number of salespeople and tech service people over the last 12 months.

Speaker 2

That means we're calling on more retailers, we're calling on different distribution outlets, and we're getting our portfolio into hands that have never been in there before. So when you think about FMC's price and volume growth, that volume growth is not to the same customers. The volume growth is going to new people, new markets, new acres, new crops that we've not been on before. So we see that as something very positive. And I would say we're at the beginning of a multiyear effort by FMC to really improve our market access, which will improve our market share and profitability.

Speaker 2

I'm very happy with what I see today. Obviously, we have to train new sales people. We have to train tech service. But you know what, within a 12 month period, good sales

Operator

Our next question comes from Kevin McCarthy with VRP. Your line is now open.

Speaker 7

Yes, good morning. Mark, I think you've closed on the Bioferro deal and owned it for maybe 3 or 4 months at this point. So can you provide an update on what you're seeing in that business and your level of confidence in the strategy You'll leverage the technology across major crops with an eye toward your goal of $1,000,000,000 in sales by 2,030. And more broadly, what are you seeing in the pipeline as it relates to future inorganic growth potential for your biologicals platform?

Speaker 2

Yes. Thanks, Kevin. It's hard to believe that we've owned the business for 3 or 4 months. There's been a lot of progress, first of all, on integration. Integration has gone very smoothly.

Speaker 2

The good news is that our biologicals platform and plant health platform is based in Copenhagen, which is where Biofero are based, And we're only about 4 or 5 kilometers apart from each other. So that's working really well. There's been very good dialogue there. I think the most important thing that I can tell you is We made our first commercial sales in the last 3 to 4 months. We made our first commercial batches of one product, and we've actually scaled up the second product.

Speaker 2

So the timing was very good for us. It allowed us to integrate and get the first commercial sales. That's an important step. To prove that the technology works and customers are willing to buy that technology is very important. The pipeline is pretty much as what we said it was.

Speaker 2

We have 5 products in research today and they're moving through at the rate that we would expect. I think the most Important other aspect is manufacturing strategy. This is fermentation, and it is new technology to FMC. Our manufacturing groups are hiring people right now with fermentation capabilities to augment what Bioferro have, And we're making great progress on our strategy for where are we going to manufacture. Are we going to do it ourselves?

Speaker 2

Are we doing it with 3rd parties? Is it a combination? So all of that is going very well. 2nd part of your question, Kevin, regarding the inorganic opportunities for M and A, We do have a number of targets that we're looking at today from a plant health perspective. They are based around the biologicals platform.

Speaker 2

I'm not going to say any more than that, except that this is and I've said it numerous times that this is an area of focus for FMC, not only from an M and A perspective, But from our ventures group as well, I think many of you know that we set up a ventures group about 2.5 years ago. Actually Biofero was one of the first companies that We have invested in, we do have other investments in peptides that are going very well. These are new areas for biologicals to be used as pesticides. So I expect to see more from us on that M and A front.

Speaker 7

Thank you for that. And then secondly, if I may, Are you seeing inventory levels that you would describe as outlying either in terms of being too high or too low in any of your major markets nowadays.

Speaker 2

Well, I think generally speaking overall, we would say we're happy where inventory levels In the marketplace, there are pockets of higher inventories. We talked about India before, the last few years with the way the monsoons played out And rice acreage reductions have not been great, so we're working through inventory there. I would say, in the U. S, things are fine. Europe is pretty okay for us.

Speaker 2

1 or 2 pockets in the south because of the dry weather that we had last year. I would say in Latin America, There are parts of Brazilian market where they had a drought last year that you can imagine inventories are high. Inventories are high right now in Brazil because We're in the planting season, but we're happy with where our inventories are right now.

Speaker 7

Thanks very much.

Operator

Our next question comes from Joel Jackson with BMO. Your line is now open.

Speaker 8

Hey, Mark. Andrew. Hey, Jill. You're not going to like this question, but I'm going to try. I'm going to connect the dots to what you said.

Speaker 8

So you said you're on pace To hit the 5 year target that you set in 2018 for 2023, if I take 8% off your 2018 EBITDA and CAGR that, That's about $1,600,000,000 EBITDA next year. Then I think you said, well, but you're on pace for 8% or nothing you say wouldn't take out of the range That normal 7% to 9% growth rate off of this year, that would imply a $1,500,000,000 EBITDA next year. Can you clarify your comments, please?

Speaker 2

Yes, I think maybe you misunderstood, Joel. I said that next year we would have in the range of 5% to 7%, 7% to 9%. When you look at the 5 year average, we're at about 6.5 Percent revenue growth and we're slightly below the EBITDA number for the last 4 years. I I think we're about we're at 1.4 and I think our forecast for 2022 in the long range plan was 1.45. But if you back out Russia, we're up $1,425,000,000 So we're $25,000,000 below on $1,450,000,000 That's not a lot.

Speaker 2

So when you think about the significant cost we've had and I think through the planning period, We're over $1,000,000,000 of cost and FX, Andrew.

Speaker 3

Is that correct? Right. And EBITDA, I think, Joel, just to put a couple of markers down. With our 5 year goals, At the midpoint of our guidance for this year, revenue would be 7.4% compounded, so above the high end of our 5% to 7% range that We target over that time period. EBITDA is just about 6% at the midpoint.

Speaker 3

And as Mark pointed out, that's after swallowing $25,000,000 in lost EBIT by the exit of our Russian businesses, absent that decision a little bit better. I think the comments earlier in the call and in the script are That Mark made around the 5% to 7.79%, very specifically to single year 2023. We think that relationship of top line and bottom line, Where the top line grows at a multiple of the overall market with a balance of pricing and volume and where the bottom line grows faster and we see margin expansion, Particularly in the second half as we've discussed some of those dynamics is the right way to be thinking about 2023. But I'll echo Mark's earlier comment. We don't have a budget yet.

Speaker 3

We're in the midst of that roll up process. This is from working through that process. And I think a recognition of a very strong market backdrop that we're operating in right now. I think some good signs of momentum in the right direction around costs and continued strength with volume.

Speaker 8

Okay. And then my follow-up would be, I guess, a little bit of a small two parter. So I think CapEx went down $25,000,000 this year. Would that mean we're going to have more CapEx next year? And then if you've got inflation hurting networking capital this year, it's brought down your free cash flow, Are you expecting next year to have some very positive tailwinds on net working capital and free cash flow?

Speaker 3

So let me hit both pieces. I think, yes, we did bring down the midpoint of our CapEx guidance this year by $25,000,000 That's really driven by availability of materials and labor to do the projects we had in the pipeline. We still think $150,000,000 to $175,000,000 is the right range steady state for our business. And it's also limited by our own internal capability to execute. So I don't expect some big step up in CapEx next year.

Speaker 3

But $150,000,000 to $175,000,000 is probably a more normalized range looking to $23,000,000 and beyond. In terms of the working capital impacts on cash flow, Look, we're dealing with massive cost inflation and large price increases. At the midpoint, dollars 650,000,000 in sales growth this year. Given our cash cycle, it's going to take a little while to catch back up and have that flow all the way through and be collected. With the higher sales in Q4, the dynamics of the where with the markets we sell in Q4 such that you don't collect on those sales in the same quarter.

Speaker 3

So that's the reason for the decrement down in free cash flow this year. As I commented in the script and I'll echo here, We do expect to revert back to the more normal 70% to 80% conversion range next year, as we work through Some of that and catch up on some of that inflation of working capital. We are still expecting some inflation in cost next year. We are expecting to continue Raising prices next year, but at a lower rate. So it should not be the same substantial headwind and cash that we have this year.

Speaker 3

It really is that just catching up on very, very rapid inflation and price escalation that's hitting our working capital in the short term.

Operator

Our next question comes from Adam Samuelson with Goldman Sachs. Your line is now open.

Speaker 9

Yes. Thank you. Good morning, everyone. Maybe following up on Joel's line of questioning on The growth and I'm just trying to connect this concept of price cost and FX has been a kind of multiyear headwind to the business and this idea that you do think there is potential to catch up. And I just want Just clarify because if that does actually occur, I presume that would get you to a year where you Have scope to exceed that kind of 7% to 9% EBITDA growth algorithm.

Speaker 9

And especially I'm trying to think on a year on year basis, if there's the absence of these secondary supplier sourcing, which are Incremental costs you're incurring to drive volume that are difficult to recoup, the absence of that can be Bigger tailwinds. I'm just trying to connect kind of if we can actually when can we actually think get caught up on price cost FX kind of the net of those 3, which has been pretty sizable headwind for the last couple of years.

Speaker 2

Yes. Well, I think we've been pretty explicit that I would say we started to see some of that in Q4 and we'll see more of it as we start to go through next year. But I think Where you see the real turn is the second half of the year because at that point, we will be continuing to benefit from the price increases. And at that point, if everything goes as we think it should go, then prices will actually be coming down in the second half of the year for raw materials, logistics, etcetera. So that's when we should start to see that acceleration of margin and you will see that continuing in through 2024.

Speaker 2

So it's really 6 months out from now, although we're starting to see the first signs of it now. Andrew, would you want to add anything?

Speaker 3

Yes. Adam, I would just To add, I think as you think about expectations for 2023 in particular, as Mark pointed out that shift in cost From being a headwind to a tailwind is likely second half. And then just the nature of catching up on that cumulative price cost FX Relationship, that's going to take more than a year to do. And Mark had commented that in our prepared comments. That is not something that's just going to switch back immediately.

Speaker 3

We will continue raising prices. We'll continue holding prices as costs begin to decelerate and turn the other direction. That's when we'll see the margin through catch up and then to catch up on that relationship. So could next year be better than 7% to 9% at the bottom line? Possible.

Speaker 3

Again, we don't have a budget yet. But what we do feel very confident about is that relationship between Top line growth at a multiple of the overall market driven by a balance of volume and pricing with leverage to the bottom line, particularly in the second half next year as we get to A reversal of the cost, the direction that we've had for past multiple years. That I think is something we can feel very confident about going into 2023, even in the absence of a full budget.

Speaker 9

Got it. And I appreciate you don't have a full budget, so this will be something that will get Much closer scrutiny kind of through the next few months until the year outlook in February. But on the SG

Speaker 3

and A and R and

Speaker 9

D side and looking at The way you frame the cost dynamics, you talk about labor cost inflation, which is evident, but continued investments across the whole kind of all your key kind of investment areas. Is there any Notable or sizable step up on the SG and A and R and D side that in excess of some of the broader inflation that we're seeing that we should be contemplating?

Speaker 2

No, I don't think so, Adam. We're investing in R and D at an appropriate rate right now. That will step up next year as obviously We continue we're introducing new products into our pipeline. Precision Ag is getting the appropriate funding and that is growing well for us. And then on the SG and A side, we will not slow down on the market access investments around the world.

Speaker 2

And then we have the inflationary rates that we for people costs around the world as we go into next year. But I don't think there's anything there that I would call a step up. Andrew, I don't think there's

Speaker 3

No, I think at this point, I just guided that we would expect SG and A and R and D to grow no faster than sales. That would allow plenty of room to continue Funding the investments Mark has described deal with inflation. And then on the SG and A side in particular, we're continuing to drive leverage out of our back office. We are making investments in customer facing market access areas of SG and A, But in more of the back office business process part of SG and A, we're working very hard to continue to drive efficiencies out of the business. So that kind of leverage on sort of back office SG and A should also expect to continue.

Speaker 9

All right. That's all super helpful. I'll pass it on. Thanks.

Speaker 10

Thank you. Thanks, Adam.

Operator

Our next question comes from Stefan Burn with

Speaker 3

Bank of

Operator

America, your line is now open.

Speaker 11

Andrew, just a couple of minutes ago, you made a comment about expecting further cost inflation in the first half of next year. Is that just a year over year comment or do you expect inflation sequentially from here? I raise that as we've heard about some actives being sourced from China that have already deflated significantly. So can you comment on what were your raws inflation In the Q3 year over year and are you seeing a difference between whether you're sourcing those raws and actives From China versus other parts of the world?

Speaker 3

Steve, I think great point. Let's parse that in a couple of pieces. First, when we're talking, we've been talking about inflation year on year change. So we expect there to be year on year increase in our costs in the first half of next year, principally based on what we are seeing in raw material, active ingredient intermediates that we are entering purchase orders for right now. Now I think we've tried to highlight and let me reemphasize, we can only speak to the mix of things we buy.

Speaker 3

We are aware and have seen market data on a number of more generic commodity, active ingredients are being sourced out of China where there have been some announced Price decreases. We are buying, for example, intermediates for diamides, which are highly specialized and have very few, if no other commercial uses And very limited number of suppliers, that dynamic may be FMC specific. I will say this, again, We are seeing a decelerating rate of inflation as we look into the first half, although costs will be up year on year. And as we that gives us confidence and as we continue to look at how supply disruptions are resolving and how they our ability to again to shift more Of our production back to pervert suppliers and concentrate to buy a bit relative to what we've been doing in the past several quarters, gives us Confident that we're going to see this benefit going into the second half. So again, I think cost inflation Should be lower in Q4 than it was in Q3, should be lower in the first half next year than it was in Q4, still up year on year.

Speaker 3

And as we get into the second half, We start to get to a positive year on year comparison. Does that help?

Speaker 11

It does. So what were raws Inflation year over year in Q3 and maybe more broadly, what limits you from being able to push price Not more than 7% to close that gap, Are you seeing any erosion in discipline from competitors or is it certain regions of the world or certain ag economies That really represent the challenge on pushing price more than that.

Speaker 2

No, I don't it's Mark here. I don't think so. I think we're in the high single digits. That's a lot of price when you're at our size and especially with our EBITDA margins. So for us, it's not you're never going to get all of this back in 1 or 2 quarters.

Speaker 2

The costs flow over a period of time and you work your way through back on a same sort of principle. At the end of the day, We are a fine and specialty chemical company. We're not a commodity chemical company. So it takes us a little bit to get it on one side, but on the other side, we keep it. I think that's an important facet that you have to remember.

Speaker 2

I think Andrew outlined pretty well the inflationary aspect that we're thinking through. But for me, I think the way we're growing the business, And don't forget, this year is going to be a record year for us. I think we're taking the appropriate actions on price, and we'll continue to do so. And in addition, we're gaining market share by our market access activities. So I think the 2 combined produce very strong results.

Speaker 3

And I think, Steve, just one last comment there. You have to think about maintaining that if we continue to have effective full year price increase next year In the second half where costs are declining, you get that margin you're starting to get real margin recovery. So Raising prices into that are we're basically trying to set the price to where we can hold it and hold that margin as costs Begin to decelerate and recoup the margin with decelerating costs and the stickiness of those price increases. And as Mark mentioned, that's very much the hallmark of

Operator

Our next question comes from Artem Chubarov with Redburn. Your line is now open.

Speaker 12

Hello, and thanks for taking my question. I think we've already touched on that a bit, but Getting back to your full year guidance on low to mid single digit growth, is that correct to assume that you're penciling in low single digit price Increase or is it more like the mid or high single digit growth? Would you have any comments on that please? Thank you.

Speaker 2

Yes. I think I said it earlier at the beginning, when we think about next year, pricing in that low to mid single digit range, volume in the low to Mid single digit range is appropriate for how we're thinking our early thinking for next year. So if you're specifically focused on price, I would think in that low to mid range.

Speaker 12

All right. Thanks very much. Just wanted to confirm that. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Josh Spector with UBS. Your line is now open.

Speaker 10

Yes. Hey, guys. Good morning. 2 quick ones, if I may. Just when you talked about diamides gaining momentum in Asia, is there a way to think about Penetration of those products in that market versus the rest of world and the runway there.

Speaker 10

And when you talk about increased market access in Latin America, Have those people and costs been put in place and now you're going to reap the benefit of that? Or is that something where costs are still ramping? Thanks.

Speaker 2

Thank you. Yes, most of taking the second one first. Most of the costs have already been embedded in the Latin American business, and we'll see those benefits. We've seen them already, but we'll see them accelerate as we go through next year. On the diamides in Asia, listen, there's 2 very big markets for us, rice And pretty much every country grows rice and pretty much every country grows fruit and vegetables.

Speaker 2

Diamides In Asia is our biggest market, about 50% of the diamides sold in Asia. So you could think about Pretty much every country around major markets and rice and fruit and vegetables are the key ones.

Operator

That was our last question. So I'll pass

Speaker 3

the call back over to

Operator

the management team for closing remarks.

Speaker 1

Yes. There are no more closing remarks. That is all the time that we have for the call today. Thank you and have a good day.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your

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