Q2 2020 FMC Corp Earnings Call
Good morning, welcome to second quarter 2020 earnings calls for FMC Corporation Mr. event is being recorded an all participants are in it wasn't.
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Now, let's turn the conference over to Mr., Michael <unk> Director of Investor Relations for FMC Corporation. Please go ahead.
Thank you and good morning, everyone welcomed FMC Corporation second quarter earnings call. Joining me today are Mark Douglass price.
Second of officer, and Andrew Sand Executive Vice President and Chief Financial Officer.
Mark will review, our second quarter performance any outlook for the rest of the year, Andrew will provide an overview of select financial results and discuss the sustainability of Bakken sees tax structure.
Following the prepared remarks, we'll take questions.
Our earnings release in today's slide presentation are available on our website and the prepared remarks from today's discussion will be made available after the call.
Let me remind you that today's presentation 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 Exchange Commission.
Information presented represents our best judgment based on today's understanding actual results may vary based on these risks and uncertainties.
Today's discussion in the sporting materials will include references to adjusted EPS adjusted EBITDA adjusted cash from operations free cash flow or inorganic 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 I mean to adjusted EBITDA.
A reconciliation and definition or these terms as well as other non-GAAP financial terms, which we may refer during today's conference call are provided on our website with that I'll now turn the call over to Mark.
Thank you Michael good morning, everyone.
I know last earnings call, we focused in Q2 would be a challenging quarter.
Despite this outlook, we delivered solid financial performance and navigated the challenges posed by cobot 19 severe headwinds from foreign currency very dry weather in Europe, and an industry, leading comparison from Q2 2019.
Oh, a proactive cost control actions, along with price and volume increases.
Diluted earnings growth in the quota.
Our confidence in the outlook for the second half of the it has increased which is why we are raising the midpoint of our EBITDA and EPS guidance and tightening those ranges.
Underlying demand for our products remains healthy and we expect double digit organic revenue growth in the second half the yet.
And by volume.
While could access expansion and the full effect about pricing actions.
We also continue to invest in innovation to support an enhanced the long term sustainable growth model, we have built at FMC.
In the past few months, we announced the launch of our Arc farm intelligence platform and the related agreement with nutrient to increase the adoption of this technology.
We launched FMC benches within initial investment interest genomics, we announced a partnership with cyclical that will enhance our R&D discovery engine.
Let me now turn to the impact of the Cobot 19 pandemic on our business.
As we said last quarter, we have avoided significant plant closures on all our manufacturing facilities remain operational.
Well being of our employees is FMC is top priority.
Although most FMC employees around the world have been working from home. During these last few months, we'll slowly bringing employees back to offices in the bar trees in locations, where health officials of deemed to be safe.
In addition, we have thousands of employees, who continue operating on manufacturing sites and distribution warehouses.
It all out of facilities, we are using a variety of best practices to address covert 19 risks.
Following the protocols and procedures recommended by leading health authorities.
In Q2 sourcing of raw materials in intermediates was not a significant issue.
Although we continue to see some logistics challenges related higher costs.
We are seeing some pockets of reduced demand as expected due to food chain dislocations and labor availability.
As we commented in May.
We implemented cost saving measures across the company and price increases to offset the impact of covert 19, and the related FX headwind caused by strong the U.S. dollar.
Turning to our results on slide three.
FMC strong financial performance to past several quarters continued in the second quarter. Despite a robust prior period performance.
Last year I'll business grew 9% organically in Q2.
This year, we reported approximately $1.16 billion in second quarter revenue, which reflects a 4% decrease on a reported basis, but 3% growth organically.
After removing the FX impact our business saw double digit growth in Argentina, Brazil, Australia, Pakistan and Canada.
Adjusted EBITDA was $341 million, an increase of 1% compared to the prior year period.
EBITDA margins were 29.5% an increase of 150 basis points compared to the prior year.
Driven by significant cost containment measures and pricing actions.
Adjusted EPS was $1.72 cents in the quarter, an increase of 4% versus Q2 2019.
This year over year performance was driven equally by the increases in EBITDA reduced share count and the benefit of a lower tax rate.
Relative to our Q2 guidance. However, the six cents beat was driven almost entirely by our 9 million dollar EBITDAR outperformance versus the midpoint.
Moving now to slide for.
Q2 revenue declined by 4% versus prior year as a 7% FX headwind more than offset go growth contributions of 2% from volume and 1% from price.
We overcame a 3% volume impact from products that would discontinued either because of registration cancellations. All rationalizations that we had planful unforecasted earlier this year.
We should note the twentytwenty has a higher than normal level of product discontinuations.
Latin America sales grew 2% year over year and 24% excluding FX.
Pricing actions across the region offset some of the currency headwind.
While the underlying volume gains were very strong in Argentina and Brazil.
Sales grew fastest in Argentina, driven by herbicide sales for wheat, and soybean applications, including finesse herbicide.
In Brazil sales grew double digits organically led by continued robust demand for our products on sugarcane, including Baral Heavyside, an ultra color insecticide.
Our channel inventories in Brazil continue to be at normal levels as we head into the new season.
Mexico sales grew organically, but where impact, but somewhat but I covered 19 related pressures on the grow as the next bolt fruit and vegetables.
In Asia revenue increased 2% year over year, an 8% excluding FX.
Volume growth in India, Australia in Pakistan, as well as modest price increases across the region were mostly offset by FX headwinds and some covered 19 related impacts in India.
Herbicide sales, including for the newly launched authority NXT were robust for soybeans in India.
We also continue to see a strong market recovery in Australia with the improved weather and record demand for Hannah an affinity falls herbicides due to strong broadacre season.
In North America sales decreased 6% year over year, driven by our continued focus on drawing down channel inventories of our pre emergent herbicides following the wet spring last year.
Coming out at this summer, we focused our channel inventories will be in a much better position in this region, we should lead to a good restocking at the end of the year.
We also saw robust sales of Lucentis fungicides in our second U.S. season.
Sales in Canada with strong driven by herbicide blends from our precision pack systems.
For use on cereals, and insecticides to control early season pests.
Sales in EMEA contracted 13% year over year, and 10%, excluding FX due to hot dry conditions across northern and eastern Europe and Ukraine.
As well as the expected registration cancellations and product rationalizations.
This was partially offset by insecticide growth in southern Europe for specialty crops.
Turning now to the second quarter EBITDA bridge on slide five.
We had strong operational performance offsetting a $62 million FX headwind with a 46 million dollar contribution from lower costs, a $16 million benefit from higher pricing.
And modest volume growth.
Moving now to slide six well, we think included first half results to highlight the over performance we have delivered in a very challenging market.
We posted organic revenue growth of 6%.
On the EBITDA bridge balance contributions from volume growth price increases and cost reductions more than offset the FX headwind.
Ill now turn the call over 200.
Thanks Mark.
Let me start this morning with a few highlights from the income statement.
FX was a larger than anticipated headwind to revenue growth in Q2.
At 7% versus our expectations of a 5% impact.
The per day, Andrea I was more than half of this total followed by the Indian rupee, Pakistan Rupee Australian dollar Euro and a broad set of other European currencies.
While we did take pricing actions in the quarter, we were intentionally less aggressive, particularly in countries hit hard by coated.
We continue to expect FX headwinds to remain at an elevated level throughout 2020 with pricing trailing FX impacts for the full year.
What prices increasing ahead of FX during the second half the year.
Interest expense for the second quarter was $40.7 million up slightly from the prior year period, primarily due to the impacts of our third quarter 2019 debt offering and higher foreign debt balances, partially offset by lower term loan and commercial paper balances.
With that Derek decrease in interest rates since last quarter. We now anticipate interest expense between 150 in $160 million to the full year somewhat better than our prior guidance.
Our effective tax rate on adjusted earnings for the second quarter was 13.5% consistent with our expected full year tax rate of 12.5% to 14.5%.
Before leaving the topic of taxes think it's important to spend a few minutes. This morning on the long term sustainability of SNC tax rate, particularly given tax rate impact on our stock valuation on a price to earnings basis as opposed to an enterprise value to EBITDA basis.
As many of you have noted FMC currently trades at a premium to our peers on an EBITDA basis, but at a discount on a p/e basis.
When we completed the depart crop protection transaction in 2017, we align the legal entity structure of FMC in such a way that in conjunction with our broad geographic dispersion of sales.
Led to the advantage tax rate, which we now benefit from.
We believe this will prove to be durable.
FMC operates our business through regional hubs in which we have established principal operating companies or plc.
Our BPO seed own operate and protect business critical assets, particularly intellectual property trade Cedents secrets and other intangible assets.
As a result of this PRC structure and our geographic mix of sales approximately 40% of FMC to overall profit stream flows through jurisdictions, where we pay the statutory tax rate on corporate earnings such as the United States.
The remaining roughly 60% of FMC is profit stream flow through jurisdictions, where we have made significant investments in commitments and as such pan effective tax rate that is below the statutory tax rate.
These arrangements or formalized or what is commonly referred to as a tax ruling which sets the specific rate FMC pays over define period of time based on the commitments and investments SNC is made in the relevant jurisdiction.
We believe with our existing and planned investments, we can maintain or improve upon our current tax ruling at least through the year 23 with further opportunities to extend beyond that time horizon.
Such we're highly confident and maintaining a very competitive tax rate, particularly as compared to peers with very different entities structures and larger and earning streams and statutory rate jurisdictions, such as the United States.
Over the 2030 horizon, we expect our tax rate to stay in the range of 13% to 16%.
Based on our expectations for geographic sales mix and the durability of our tax rules.
Despite our competitive global effective tax rate, let me be clear FMC pay substantial taxes in the United States, particularly due to the guilty or global minimum tax provisions of the 2018 tax though.
Moving next to the balance sheet and liquidity.
Gross debt at quarter end was $3.5 billion down by approximately $300 million from the prior quarter.
Strong free cash flow led to lower short term financing needs. We also reduced the amount of excess liquidity, we maintained due to the heightened uncertainty caused by the covet pandemic.
We fully repaid the revolver draw made late in the first quarter at the height of the Pandemics impact on short term financing markets.
We ended the quarter with over $200 million of supper surplus cash on the balance sheet.
Considering the surplus cash gross debt to trailing 12 month EBITDA was 2.7 times at the ended the second quarter still somewhat above our targeted 2.5 times annual average leverage reflecting the seasonality of working capital and Keith can cash flow.
We continue to expect leverage to be at or below 2.5 times at year end.
Moving on to slide seven and specifically free cash flow and cash deployment.
Free cash flow for the second quarter was $205 million up significantly from the prior year period with very strong collections in the quarter and improve payables.
We are maintaining our full year free cash flow guidance range of $425 million to $525 million.
With improving confidence in our outlook, we expect to revisit share purchases at the end of third quarter and present at at present anticipate restarting share repurchases during the fourth quarter.
Okay.
Moving next to slide eight FMC is making good progress in both improving our free cash flow conversion from earnings as well as growing the absolute amount of free cash flow.
As you can see on the left hand side of this slide at the midpoint of our guidance range, we expect to improve cash conversion by 18 percentage points compared to last year, while growing cash flow by nearly $175 million.
We continue to believe we have substantial headroom to improve further on both free cash conversion and the apps live free cash flow, we generate particularly as we complete our asset implementation later this year and ended the period of high cash spending on transformation efforts.
On the right hand side of this page you can also see the breakdown of free cash flow generation by semester for last year and this year.
Note that the seasonality is very similar in both years with negative free cash flow in the first half the year and strongly positive free cash flow in the second half, but with improvement in both the masters in 2020 versus 2019.
Finally, a quick update on progress and implementing our new Ssds for Hot ERP system.
This was the second quarter enclosed that we've completed with 60% of the company on the new system and the close again went very smoothly.
We continue to push forward to complete implementation of the new Sep system across the remainder of FMC by year end, which will give us a thoroughly modern system across the entire company and will enable further efficiencies in our back office processes.
The most recent implementation phase has gone so well that we are accelerating some synergies planned for 2021 into 2020.
We continue to expect total synergies of $60 million to $80 million from implementing the new system, but we now forecast $40 million of synergies in 2020.
$20 million from our prior forecast.
Capture most of the remaining $20 million to $40 million in 2021.
With that I'll turn the call back over to Mark.
Thank you Andrew.
Turning to the market outlook for Twentytwenty, we now expect the overall global crop protection market will be flat to down slightly on a U.S. dollar basis, which is slightly worse than our previous outlook.
The changes driven by reduced outlook for Europe, where we believe the market will be flat year over year. Thus is up low single digits prior forecast.
Our views on the other regions have not changed we expect the north American market to be up low single digits, the Asian market to be down slightly on the market in Latin America to contract by low to mid single digits.
All these focus of for the markets not FMC and are in us dollars as such the Latin American market is seeing the largest headwind from FX.
Moving to slide nine in the review of FMC is full year, Twentytwenty and Q3 Q4 earnings outlook.
As I said earlier, we are expecting double digit organic revenue growth in the second half of the year driven by both volume and the full effect of our pricing actions.
We expect continued headwinds from FX and to a lesser extent from impacts related to the pandemic.
At the onset of the pandemic there were numerous contingencies to consider but after several months of navigating in this environment, we're more confident in our ability to deliver on our twentytwenty focused.
FMC full year Twentytwenty earnings and now expected to be in the range of $6.28 to $6.62 per diluted share a year over year increase of 6% at the midpoint and 7% above seven cents above prior guidance.
EPS estimates do not include the benefit of any share repurchases in twentytwenty.
Twentytwenty revenue is forecasted to be in the range of $4.68 billion to $4.82 billion, an increase of 3% at the midpoint versus 2019, a 9% organic growth.
We believe the strength of our portfolio will allow us to deliver high single digit organic growth continuing a multiyear trend of above market performance.
EBITDA is now expected to be in the range of 1.265 to $1.3 billion to $5 billion, which represents 6% year over year growth at the midpoint.
Well the third quarter, we expect earnings to be in the range of one dollar and three cents to one dollar and 17 cents per diluted share a year over year increase of 17% at the midpoint versus Q3 29 team.
We forecast Q3 revenue to grow 6% year over year at the midpoint.
Excluding the significant FX headwinds revenue is expected to increased 12% organically driven primarily by robust growth in Asia. Following a good monsoon season, as well as improved market conditions in EMEA and a normal start to the Latin American season.
EBIT dollar is forecasted to be in the range of $233 million to $257 million, representing a 12% increase at the midpoint versus the prior year period.
The third quarter is seasonally the smallest quarter for FMC, which is inline with the quarterly patent from the past two years as Q3 is not a high season in any of our regions.
Guidance for Q4 implies a strong quarter with sales growth of 6% at the midpoint on reported basis, and 11% organically as compared with Q4 2019.
We all focus in EBITDA growth of 10% year over year at the midpoint.
EPS growth is forecasted to be 3% limited by the large tax adjustment in Q4 29 team.
Turning to slide 10, and fully EBITDAR and revenue drivers.
Revenue is expected to benefit from a 5% volume growth with the largest growth in Asia and Latin America.
[music] products are driving about 1% in total revenue growth with the largest contribution coming from EMEA.
FX is now forecasted to be a 6% topline headwind.
5% in prior forecast.
However, we expect to offset much of this with price increases totaling 4%.
Regarding EBITDA, we will deliver significant cost savings this year to offset covert related impacts to supply chain costs.
Hits of lower demand caused by food chain dislocations and labor village availability as well as a portion of the FX headwind.
This includes the realization of some S&P synergies that Andrew referenced.
Foreign exchange remains a critical factor in our outlook.
We now foresee an impact to $230 million for the full year versus 170 million in out prior full cost.
We increased our full year pricing actions to $177 million to cover over 75% of the full year FX impact, but in the second half of the we expect to cover the full impact pricing will come from all regions led by Latin America.
Moving to slide 11, where you see the Q3 in Q4 drivers.
On the revenue line volume and price are expected to drive the topline strength in both quarters.
We expect the second half volume growth to be driven primarily by Asia and EMEA.
In addition to the overall strength guidelines business.
Regarding EBITDA drive us pricing is certainly the largest positive factor on volume contributions are also meaningfully higher than in the first half.
As my first quarter CEO. This was certainly an interesting time to start.
You too as a quota to focus on execution cost management, the health of our employees protecting the balance sheet as well as setting the stage for strong second tough.
It was not the time to trace volumes or significant price increases.
We are looking forward to the rest of the it as we continue to launch new products expand our market access and stay aligned with our customers as we collectively managed through these difficult times.
Before closing out prepared remarks, I'd like to announce that we will host an investor day call on November 17th to provide an update on our R&D pipeline.
We will cover some of the topics we plan to discussed at our Investor Technology day that was cancelled early this summer due to the pending.
More details will be available in the coming weeks.
I'll now turn the call, but the operator for questions.
We will now begin the question to answer session to be placed into please press. The star Key then one on your touched on top.
If you are using a speakerphone please pick up your handset before pricing.
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If you have additional questions you can jump back in the Q2, a trough in the queue. Please press Star then too.
And the first question today will come from Mark Connelly with Stephens. Please go ahead.
Thank you.
Mark conventional wisdom has been that India is going to get its GSP status back for the elections.
So two questions.
How much has losing that status affected you and is your sourcing strategy going to change materially if it's not backed by the election.
Yes, thanks Mark.
No the GST Didnt fundamentally impact is when it came in I think at the time.
When it happened a couple of years ago, we did see issues with collections given just the dislocation between the old methodology, which was running across many different provinces and more of a standardized system.
So no we don't see any change to our demand in terms of how we look at the market.
I would say from a manufacturing perspective, you know we've taken a very broad look as rebalancing the supply chain over the last four to five years.
Consequently that has meant that we have moved results is out of China into the rest of the world a one of those destinations has been India now at this point, India is very important for us and we'll continue to grow as we put.
More manufacturing assets into our own facilities, mainly in Panola and sadly, but also into.
Toll manufacturing partnerships that we've been growing over the last few years very similar to what we do in.
In China, So I don't see that strategy changing when you look at the overall economics of moving products out of China. There is obviously a cost impact however over the years that cost impact has declined as not only China cost of increase but a lot of our partners around the world have got used to making the products that we.
Make and we've improved the processes so for us it's not so much a question of cost. It is very much a question of surety of supply and quality. So bottom line feel question, we don't see a lot changing for as with our investments in India.
Thank you.
The next question will come from Steve Byrne with Bank of America. Please go ahead.
Yes. Thank you.
Have you seen your south American customers during the second quarter.
Yes more orders.
For this next crop.
Their crop inputs than normal when they when when farmers sold their grain in recent months and and yes that is the case do you recognize those orders.
In the second quarter is is that there's just a booking that you hedge and gives you the confidence lets you can.
You can.
Indicate what you think the currency impacts going to be in the second half.
Guidance is very specific on or you can offset the currency drag with pricing and you've got to estimate of the EBITDA drag is that does that just imply that a lot of the second second half has already been book.
Yes, there's a lot in that question, Steve I think what I'll do is let me talk about where we see ourselves in Latin America right now and then I'm going let Andrew jump in and talk a little bit about our established hedging process that we use for.
Latin American business in particular in Brazil.
Let me talk over the last couple of years that we've seen an uptake in early ordering for the forthcoming seasons in Brazil. So I talked about a number of round about 70% of orders in hand in sort of the early July timeframe over the last couple of years should be noted that that was.
Really in times of somewhat more stable currency than we have today.
Indeed, what we've had in the past a more normal rate for early July for us and into July is about 50% of the oldest remaining for the year are taken at that point. So we already have them in head.
I would say today, we're in the 55% to 60% of the old is needed for the rest of the year slightly behind the last two years, but well ahead of the average for the last five or six years I would say.
What's driving that well, obviously FX has changed a lot over this year and basically it's got nothing to do with the season being delayed we see the weather patterns as being good for a normal start to the season, which would mean planting and in the late September early October timeframe, It's mall, pharmas and grow as and distribution looking at the exchange rate.
Pushing out the decision of one to just simply placed the order.
Now, obviously that asset that FX has an impact on us and we've highlighted very clearly what we think that impact is.
Your second part of the question about receiving an all debt when do we book it we booked at when we receive it now let me talk about when Andrew can go through the FX hedging process under what are you talk through what we do when we get that OTA sure. So I think that the process in Brazil, we had similar hedging strategy for several years now.
As we go through the earlier parts of the calendar year into this time of year, where there is having negotiation.
In terms of orders in pricing et cetera with customers.
As we get those open orders confirmed we will hedge a significant portion of those open orders from the time, we confirm the order where the customer until we actually ship the product and then recognize the revenue Rialto and.
Just to be clear when we don't recognize revenue until we actually ship and open voice product, but that that exposure between the time, we come to commercial terms or the customer.
To the time, we actually ship it yeah, we hedged the majority of that exposure during that time period.
Once we invoiced to customers ship, the product and envoy said.
We had 100% of the receivable at out it's heading of course is not free but thats built into our margin structure and Brazil, and it's been an important part of limiting the impact of FX volatility our business. So I'd say the bottom line message for us with with Brazil around FX. It is a more volatile situation than we've seen the path.
Several years.
Pricing continues to be the first lever that we have to offset those moves and FX, but we continue to follow the same disciplined hedging strategy that we've had for several years now that to limit the impact of FX and certainly to increase the ability of the company to deliver on its guidance.
Thank you.
The next question will come from Chris Parkinson with Credit Suisse. Please go ahead.
Great. Thank you very much.
Despite coke your organic pathway still looks pretty solid.
Heading into the Orange Twentys here, but can you just offer some additional framework.
In terms of the volume contribution from the diet minds versus the past few years.
Does appear as site beers further kicking into gear in key geographies and also how should we think about the volume contributions from new registrations and products as we head into the 2021.
Great Durbin changing assumption.
Since our analyst day. Thank you.
Yes, Thanks, Chris listen, yes, we do have strong organic growth as we go into the second half of the year.
I sort of touched on it in the script.
Asia, and Latin America, or two of the drivers and then following up behind that is our expectation for healthy Twentytwenty one season in the in the us in Canada.
From a from a diamonds perspective growth rates are still in the high single digits low double digits organically.
A little lower than they were last year, but that's not surprising when you consider that.
In 18, I think we grew something like 25% than we grew mid teens in 19 now we're growing high single digits low low double digits this year to be expected.
Those compounded numbers are very large indeed.
From a registration perspective.
This year, we talked in the past about having round about 285.
Registrations and submissions going out through Twentytwenty six for the diet minds.
That was when we put the original plan together back in the early part of 2018.
Today, we're at about 350 submissions and registration. So that number is continue to decline as we've learned more about that the types of products that we've got a hands on this year with pretty much on track to to where we thought we'd be we've added about 90 different registrations and label expansions this year, which keeps that growth rate moving forward.
In the in that very high well above market type of number.
Thank you.
The next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.
Hi, yes. Thank you good morning, everyone.
So I guess.
My question is twofold first just in the in the quarter.
And year to date R&D has been down and I'm. Just wondering if you could give any just comment in color around maybe kobin impacts to how you could can spend.
The R&D.
And.
The just.
Got it impacting your research pipeline.
In any way.
And then maybe maybe following on Christmas.
Around registrations this year as Kobe cause any issues in terms of your ability to get at all the documentation and trials done for new product registrations to launch into 21.2.
Yes, Thanks, Adam first of all on R&D.
When we sell what was happening with Covance and we knew we were going to face headwinds both from a from a cost and potential market disruption, we decided to take a broad looked at the cost structure of the company and we put in place.
Roughly $60 million of activities that we knew would reduce cost part of that was R&D now we were very specific with our R&D organization. When we looked at our cost structure, we did not want to slow down any of the mid to long term projects well, we're investing significant dollars in the development phase and that.
Actually where we spend a lot about our time and effort.
So it's safe to say that the changes that we've made in R&D, they're more timing than the or anything else. There are not cancellation of projects that are not cancellation of development activities. It's mall looking at your project timelines and pushing out of the first half of the year as far as possible.
Costs now we will obviously take a look at that in the second half of the year as well we've been very clear that we think we have a good view of out demand situation if for any reason.
That was to change we would be able to once again go back to our cost structure could not just in R&D, but in SGN, a and look at other leave us to pull outside of R&D.
We look to cross the whole company every single item of spend whether it was related to our human results group sell illegal groups finance I'd say.
The commercial activities global marketing everywhere, we look to costs, we looked at what was absolutely mission critical for the first three quarters of this year and what could we again push out rather than.
Domestically cancel.
So we've done a good job would that yet we still have leave us to pull if we should see any situations that get worse than where we are today.
The second part of your question is slowdown in registrations you know it's interesting.
Many governments around the world of being very adept at keeping their organizations running even though.
You would expect things to slow down they actually have no we've been getting registrations on time and in fact.
We launched a new products this year in the US called elevate test, which is one of our first formulations for.
Right access to plus another insecticide, we actually got that registration earlier than we thought so which allowed us to launch this year rather than next year. So to answer your question. Adam we have not seen any slowdown in registrations that would impact the future growth of the business.
Alright, Thanks Thats helpful color. Thank you.
The next question will come from Joel Jackson with BMO capital markets. Please go ahead.
Hi, good morning.
Wanted to talk about to peer merged demand commentary you gave.
You asked for herbicide can you talk about how much of this why justice Destocking issue were channel inventories were high and we have heard stories a couple months ago that perhaps this year farmers in us.
But to apply left pre emerge because last year they didn't apply as much because the wet weather yield ends up being okay. Yes sure. The spring was really the spin was good the weather was good maybe they tried to get away with lower pre emerge just like last year can comment on that please.
Yeah Joe.
Easy answer is no that's not what we saw we did not see grow as.
Applying less pre emergent herbicide this year, what we did see is very much swing towards the much higher performing newer products in the portfolio.
Weed resistance continues to build in the U.S. and some of the ways of getting very very difficult to knock down so we've introduced.
Authority edge authorities, who premature very high potency formulations for lifecycle resistant weeds.
That into the portfolio has done very very well and continues to drive growth than we would expect over the next few years that the portfolio shifts to the higher performing products. The reason we commented on our volumes is very simple we did not like coming out of last year with higher inventories. So the revenue reductions that you've seen from as in the U.S.
Our solely around us taking out.
Putting back sorry into the channel the same amount of product that is being used on the ground. So therefore, our channel inventories go down we're in a much better position as we go into next year.
Thank you very much.
The next question will come from PJ Juvekar targets.
Please go ahead.
Hey, Mark and Andrew Good morning.
A couple of questions on Latin America.
At outsized growth in dynamite in Latin America looks like in Argentina did you gained share in sugarcane. There was that the main driver and then I may have missed it but can you just break down.
24% organic growth in Latin America bargain price and volume. Thank you.
So.
Yes, CJ diamonds listened to diamonds growth is coming from a number of different areas. It's not coming from what you just referred to as sugarcane. We already are the number one player in sugarcane with a very high market share. So we don't we we don't necessarily expect to take significant market share in sugarcane, we grow.
As we introduce new technologically advanced products.
That is how we grow and should again, but we've also seen significant growth in soybeans in citrus in coffee and then colony in particular, which is a growing market for us in Brazil.
Of the 24% of the 24% growth.
It's really equal between sort of price and volume when you look at where we're going.
I don't want everybody to focus on Brazil, I know I know, it's a big market for us and we like it a lot, but I do have to say the rest of the region is performing very very well you had me talked about Argentina and the growth rates, we've seen in Argentina out structure has taken as a while to get right now we have it right. The team down there is doing a great job, we have a very good stuff.
Loan portfolio for soybeans, and we also have a very good portfolio now for more of the specialty crops in Argentina, Mexico is a little bit more of a challenge right now we've seen some some demand destruction because of covitz, especially with exports of fruit and vegetables, but overall you know that growth is pretty evenly balanced which is what we like.
Thank you.
And the next question will come from Lord Cyber and with Exane BNP. Please go ahead.
Thank you good morning.
My question is regarding the impact so, let's say, though not to say that there would be more impacting 2020. So I was wondering if you could give us a percentage impacts on volumes when sense, So 2020, and perhaps best guess on 2021, and then related to that.
With the new Green deal and the sound to fall strategy in Europe, and a 50% targeted reduction in rescheduling from pesticides I was wondering if you're seeing that DC. His mother risk for you or whether you think it's more for the.
I guess more generic pay us thank you.
Thanks, Laura.
On the on the discontinued products slas loss of registrations.
We think it's about 3% of our revenue this year, which is probably double what the averages for as it's about 1.5% a year.
We had a particularly.
Difficult year, because we made a very strategic decision at the end of last year to remove one of our oldest insecticides coal cabo fewer on from the marketplace. This is a proactive move.
Impacted.
Asia Latin America.
It's very deliberate we have more sustainable products that we can put in place. So it was it was an obvious move to make although it has the topline.
And then we had a couple of other products in Europe that were impacted I have to say Europe was probably the most impacted region from that 3% number that I just mentioned.
Your is a very good point laurel about the.
The the farm to focus on the European Green deal.
50% reduction in all pesticides use in Europe is an enormous number and you know I know ourselves and our industry colleagues are very skeptical that number can actually be realized.
In one way it sounds like a very large drag on it on a particularly large part of the market yet in another way for the technology base players that are bringing new more sustainable chemistries that a targeted I think it is an opportunity for us because there are still a lot of generics used in Europe that our older Chemistries.
Not with the same sustainable profiles the newer chemistries have so we tend to look at it in a slightly different way we tend to look at this is an opportunity to advance the new technologies into Europe to have less of an environmental footprint impact and also it really remove all the products that are clearly that both in our portfolio and in the market and.
Hello.
Okay.
The next question will come from Vincent Andrews with Morgan Stanley. Please go ahead. Thank thank you and Mark Congratulations on your first quarter as CEO.
My question is there.
You talked about I understood your comment on being thoughtful about taking price and the cobot environment. You. Obviously, we're able to take a lot of costs out at the same time. So just trying to think about as we move through the back half the year into next year.
I would assume you're going to get you're going to look to get a little bit more aggressive on pricing entered into next year. You and then also just wondering if some of those costs that came out this year, we'll need to come back. It next year and if those two things going offset each other or do you think you'll price more than the cost will come back or just how we should be thinking about that relationship in our models for 2021.
Yes, it's a great question one we're having in suddenly now as we as we start the very early part of budget process for next year.
Yes, let's not.
I do think has we raise our prices in the second half of the year. They naturally have an impact on the first half of next year.
Do you think of the Latin American season, it Doesnt stop at the end of Q4, it carries on well into the end of Q1 beginning of Q2. So whatever we do now we'll obviously have a beneficial impact as we go into next year as I said Asia also will be will will be under all looking at pricing now for the second half of the followed by Europe.
North America, So I do expect to see pricing being a tailwind as we go into next year.
On the cost front, the $60 million of costs that we've taken out of this year there will be some spring back next year for sure.
I talked about pushing back on timing on some projects and some expenditure some of that we'll we'll come back.
Obviously, you're going to have the the very real tailwind of the S&P implementation, which will lower costs. Once again, we've already talked about another 20 to 40 million next year on top of what we've done this year and we accelerated this year. So net net I would see prices a tailwind I would also.
I believe that because of the balance of SFP, plus how we will manage whatever spring back because I would expect cost to be a tailwind as well next year.
Thank you.
And the next question will come from Microsites I know with Wells Fargo. Please go ahead.
Hey, guys nice quarter.
Mark Mark just curious on.
Where you have your manufacturing facilities.
You aren't raw material.
Sourcing wasnt an issue this quarter, but you have a lot of your manufacturer in China any thoughts longer term can you shift some of that.
Around the regions given yes.
Sales of little bit more even as it just wondering how long of a process would that take if you could sort of move.
Our manufacturing around.
Yes, Thanks, Mike.
So if you go back well I don't know 710 is now.
Hi moves on.
Im see was probably 90, 95% dependent on China, we had that vary.
Very good model that we used to run call that asset light model.
We moved a long way since that I was looking at some numbers over the last of the last couple of months that I think were about 60% sourced from China today, our longer term mid term plan is to get that down to 40, 45%.
That will come through investments in India investments in Europe and investments in part of the U.S. in Mexico.
It's not easy in this industry. So just pick a products up and move them. The registration process is tied to your point of manufacture. So if you move your point of manufacturer you have to go reapply for a new registration that can take anything from two to five years, depending on the jurisdiction that youre right. So you really have to plan for.
Plan for the move so when I say, we went from 90% to 95% dependent on China to 60%.
We've done that over a four year timeframe on really since the acquisition of coming over and that upon assets really allowed us to accelerate that because we have our own manufacturing facilities in India Europe us now.
So you should expect us to see a continuous gradual spreading out of our manufacturing so that eventually we're in that 40% to 45%.
Dependency on China, the rest being spread around India, Europe and the use.
Thank you.
The next question will come from Kevin Mccarthy with vertical research partners. Please go ahead.
Yes, good morning, Mark a year ago on this call you provided.
Paul.
Discussion of your long term growth strategy in diameter, taking those molecules through the various patent expirations around the world I was wondering if you could provide an update on what's transpired over the last year in terms of.
Your discussions around manufacturing agreements actions on maybe new formulations and other aspects of that transition.
Yes, thanks, Kevin.
Ladies and that it was a year ago that we talked about that.
So the plan the plan has been a very robust plan that we've put in place for the continued growth of dime minds.
We talked about.
From an approach, which was obviously defense of our significant patent estate and then also the commercial aspects of bringing in other partners to allow them to sell the products I have to said both pieces are going very well we've had.
A number of legal successes in India related to.
Manufacturers of illegal material that we've managed to to identify and shutdown, which has been very successful and we will continue that process, both in India and in China in other parts of the world. When we see people trying to breakout patents are infringe our patents the second part related to.
The use of diamonds with with our fellow industry players has gone very very well.
We have as I said before about full global agreements in place today and an over 40.
What are called local agreements with local companies.
Some of those big ones are already up and running some of the smaller ones are starting.
A number of them require new registrations, which will take a period of time, but they are well underway in that process. So it's it's very much steady as it goes we're on plan with regards to formulations. We have a lot of work ongoing inside the company as I said earlier, we just launched a new products in the U.S., which is our first.
And see re formulation of Rynaxypyr with.
With the pie re throgs very specific to us, but we have a number of those activities underway.
I would expect those formulations to come out in the next two to three years as we gain the registrations because the on new types of technology. So overall, Kevin. It's a very good question I think we're very much on track.
We continue to grow. These these technology is very much well above market.
Thank you so much.
The next question will come from Frank Mitsch with Freemium Research. Please go ahead.
Yes, good morning, and let me add my congrats to the start of your rain Mark.
This year, you launched the arc farm intelligence platform and.
Notably have trials underway with with nutrient I was wondering if you could give us.
Some insight as to how that's progressing and what are your overall overarching thoughts for how this.
New platform can impact FMC.
Thanks Frank.
Yes. The off platform really was really was that is a first in industry. It is a predictive model for insect pressure.
We were very careful in thinking this through in how we would go to market and we are going different ways to market in different parts of the world.
Obviously, the nutrient agreement is one of those activities. It's a very specific crop breast because in California, it's not a particularly easy crop to grow and it takes a lot of time and effort and we believe using something like <unk>, which is predictive in terms of what test some when they will come which will allow the grow as to be much.
Our optimal in terms of how they think about spray.
It. It is the first of what we will consider a series of technologies that will blend into the our platform.
It is both defensive and.
Offense in terms of how we could gain market share, but equally how we defend our market share. We all the number one provider of insecticides in the world. So we have some franchises that we wish to defend off will allow us to do that from the very sustainable prospective using the right product to the right time allows you to use less product, which is good for the guy.
Hello, good for us in the sense that we defend our business, but once people get used to that they're willing to expand the portfolio of products that they buy from FMC and we're already seeing that we actually see that with another technology that we have which is called thrive three D, which is our application of.
Pesticides in Sol during planting via what is essentially a patented shaping FFO.
Use is tremendous low value.
The product and low amounts of water. The growers that are using that in the U.S. Mccall, our actually now acquiring more of fmcs portfolio as they get used to that type of technology. So we see these very targeted precision applications as being a boon to our growth and bringing more sustain.
Annabelle chemistry and technology to the marketplace.
Very helpful. Thank you thanks Frank.
And the next question will come from Michael Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning line like Mark was wondering if you can provide some examples of areas where safety is helping to enable you to run more efficiently and with the acceleration and some of these benefits are you more confident in delivering on the high end of that 60 to 80 million dollar potential synergies.
Mike Great question, I'll, let say that Andrew is running the project in FMC I'll, let him I'll, let him talk about where we see the benefits Andrew yes, great. Thanks, Thanks that Mike for the question.
As a key really is that the plumbing, we run all of the business processes of the company on to substantially platform around the back office.
We have seen tremendous efficiency improvements as we've gone live on the new system, allowing us to leverage shared service centers, rather than broadly distributed fragmented workforce.
The experienced from transitioning off the deposits USA, Ted bringing that work into our own systems.
We are able to do it substantially lower cost them, what we are paying Dupont.
And the acceleration we're seeing this year, what we're being able to do as or being able to run more efficiently and actually take head count reduction in some other attrition.
Earlier than what we didn't where we had planned with the full go lives of of the S&P.
And our rest of FMC at the end of the year.
So that that 20 million in additional benefit we've been able to capture this year, it's hard savings that will continue in rollover into 21 and thereafter.
That the additional savings of 20 to 40 million.
I think we're highly confident that range could creep up to the above midpoint of that certainly.
Yes, some of the question will be just timing.
It will take sometime during the year 2021 to implement that next wave of improvement as we get the full company on the on the full efficacy platform.
So that part of that we'll be at timing what to much run rate for the year versus what we actually get into the Pinedale next year, but we're very very confident.
That we will be able to run if you think about all of the business processes. The finance close process, how would how would you planning budgeting, how we buy things, how we plan and run our supply chain all of those things that are under an enterprise reports resource planning system.
Yes, the degree of efficiency, we can get by moving to a modern system that was designed and built for an agricultural Sciences company rather than a collection of systems that were bad design 30 years ago for a variety of different businesses.
I don't also just very briefly also makes everybody thinks as well. It's it's not just the efficiencies we get by taking some of the cost out of the back office will also get some very new and much more updated analytical capability and tools and visibility on things like working capital where that the way art systems are stitched together today.
Yes limits, our ability to drive it drive as aggressively to the kind of efficiency improvement we'd like there.
So we certainly see the new capabilities and the increased visibility by having all of the business and a common platform as being very helpful. On our efforts to continue to drive working capital efficiency as well.
All right thanks very much.
The final question say will come from room. This one with RBC capital markets. Please go ahead.
Great. Thanks.
Congrats on the quarter.
Thank God and ask the question on cash flow looks like your.
Going to be converting about 56% of your adjusted earnings to free cash and it's about 37% of your EBITDA guidance at the midpoint.
How should we think about.
If there's any discrete items that maybe could push cash flow up higher than that conversion rate higher next year.
Where do you see that going over time, I guess and.
If you do see that going higher how would that affect your cap capital allocation I mean could we see you talked about 1 billion five and.
In buybacks at your analyst day, a couple of years ago, maybe you could we see some upside to that or would you be to.
And then.
Okay. Thanks.
Hi, Andrew what are you staff.
Current that lot in that question, but let me try to hit most of the points.
Certainly, yes, we continue to guide free cash flow conversion and the mid to high 50% percentage point. This year, it's moved around a little bit as we've changed earnings guidance for the year, we've maintained free cash flow guidance throughout.
And is still expected me that midpoint around for 75, we're pretty confident at this point and that that range, obviously lot of things that can move.
There are large items in working capital then move in the fourth quarter in particular.
With that prepayments that we receive in the U.S. business for example.
But we have increasing visibility and and.
Since the confidence as we get into year in terms of that cash flow number yes, as we think about the cash flow improvement trajectory. When we laid out our strategic plan in 2008 at the end to 2018, we set a goal to take free cash flow convert enough in the 65% to 75% range. We think we can get well into that range in the next year to two years.
Yes, 70% is very much within reach.
Yes that that ahead of the plan that we laid out initially moving faster there and the big couple of movers as we go into 2021 at first we will be finishing the safety program. This this period of high level of cash spending on transforming our portfolio that we've gone through centrally comes and at 100 to 125 million dollar.
Yes, and cash spending will make this year.
Largely goes away in 2021 becomes a tailwind on free cash flow.
Theres always timing issues and fluctuation and working capital, but we think there'll be continued improvements in working capital and as we go, particularly we get as I've mentioned in previous answer after your question.
As we get better tools with the new S&P system, we have high confidence in our ability to drive further working capital efficiency as we continue growing.
And then the third piece is just simply we do have some non nontrivial legacy liabilities, there they're pretty stable.
They will shrink as a percentage of that that income over time, so they become a smaller and smaller drain on on percent free cash flow conversion.
I do want to be careful not to excessively focused on free cash flow conversion, it's an important metric for us, but that absolute amount of free cash flow to regenerate and we expect that continue growing that tier the last part of your question, Yes, Thats really what allows us to have the funds to either buy back shares increased the dividend.
Or make.
Inorganic investments in the business.
And Thats, where we'd expect to see continued solid growth in it ties to our to capital deployment policy, which have not changed has simply been pause because of co head, which is we're going to fully fund the growth plan take advantage of some opportunistic small inorganic opportunity, but anything else any other cash what's left over after our staying at our targeted leverage level goes back to share.
Holders in the form either higher dividends are.
Through share repurchases exactly what we've done and the first two years that plan.
Weve now 680000 share buybacks and almost $350 million and dividends returned to shareholders. Since we launched this this strategic plan in December 2018.
We have currently about $600 million and.
Remaining authorization on our existing share repurchase authorization and we would expect to revisit that with the board as soon as that's exhausted. So I'd say really no change in our capital deployment policy and just how we're going to continue to focus on driving more and more cash flow out of the business and maintaining discipline with how its deployed.
And that is all the time, we have for the call today. Thank you and have a good day.
This concludes the FMC Corporation conference call. Thank you for attending and you may now disconnect.
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