Q2 2022 FMC Corp Earnings Call
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[music].
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Good morning, and welcome to the second quarter 2022 earnings call for FMC Corporation.
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I would now like to turn the conference over to Mr. Zach Zackie director of Investor Relations for FMC Corporation. Please go ahead.
I couldn't agree Joe and good morning, everyone welcome to FMC Corporation's second quarter earnings call.
Joining me today are Mark Douglas, President and Chief Executive Officer, and understand if our executive Vice President and Chief Financial Officer.
Mark will review, our second quarter, and first half performance as well as provide an outlook for the second half of the year.
Andrew will provide an overview of select financial results. Following their prepared remarks, we will take questions.
Our earnings release, and today's slide presentation are available on our website and the prepared remarks from today's discussion will be made available after the call.
Remind you that today's presentation and discussion will include forward looking statements that are subject to various risks and uncertainties concerning specific factors.
Judy, 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.
This discussion and the supporting what he is willing to and 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.
Thank you Zach and good morning, everyone.
<unk> delivered another quarter of strong growth in a dynamic global environment, while offsetting high input costs with our ability to price for the value we offer to growers.
Overall first half performance was primarily driven by significant price increases and volume gains.
This growth reflects robust market demand globally, despite cost inflation and FX headwinds.
We continue to expect a strong second half of the year, driven again by price increases and volume growth and a supportive market environment.
Turning to slide three before we review details of our quarterly results and full year outlook I'd like to offer a few comments on our recently completed acquisition of bio sorrow, but Denmark based insect control company that has pioneered a bio processing technology used to manufacture pheromone crop protection products.
As you May know pheromones I'm naturally produced by insects to trigger a social response and members of the same species.
Our loans are used in a variety of ways to protect crops by disrupting the inset mating process.
Significantly lower and subsequent generations of target insect love, it which would otherwise damage crops.
There are several methods to manufacture several loans for bio faros proprietary fermentation route is a game changer.
Enabling high volume production of pheromones at significantly lower costs than other production routes.
The acquisition, which closed on July 19 significantly expands our rapidly growing biologicals portfolio with effort within Fmc's plant health business.
It provides a platform for large scale production of pheromones pheromone based crop protection products, which are expected to generate approximately $1 billion in revenue at above average EBITDA margins by 2030.
We have been expanding our plant health technology base and this acquisition is another great opportunity to continue bringing biological products to grow as around the world.
Our Q2 results are detailed on slides four five and six.
Revenue was up 21% organically EBITDA was up 3% and EPS up 7% driven by strong market demand for our innovative portfolio and <unk>.
Average price increase of 7%.
Adjusted earnings were $1 93 per diluted share in the quarter eight cents above the midpoint of our guidance range.
The year over year EPS increase was primarily driven by an increase in EBITDA and lower share count.
GAAP results reflect the impact of our exit from Russia in April this year.
We had double digit growth across several product categories with insecticides, showing the greatest increase at over 20% year over year.
Our herbicide portfolio also had a strong quarter with 15% growth led by North America and EMEA.
Sales from products launched in the past five years grew more than 35% compared to the same period last year.
These products made up 10% of our total sales in the quarter.
The global plant health business grew 20% year over year.
Led by a 35% growth in all biologicals portfolio.
The momentum of this business reflects our customers' demand for new sustainable solutions.
We reported $1 $45 billion in second quarter sales led by price and volume growth in Latin America, and North America.
In North America sales increased 26% year over year demand for both herbicides and insecticides grew double digits.
In Canada high pest pressure support to the successful launch of courage, and Max and insecticides powered by <unk> targeting a broad spectrum of pests, such as grasshoppers and cereals and other crops.
<unk> sales were impacted in California, and Texas due to dry conditions, but this was offset by growth in the Midwest in soy and corn.
In Latin America sales increased 44% year over year led by Brazil, Mexico and Argentina.
Results were driven by the full range of our insecticides portfolio for soy corn and cotton.
Sales in EMEA grew 3% versus the prior year and were up 15% organically.
Aside from strong pricing results were driven by increased demand for herbicides.
And finally Asia was down 1% versus the second quarter last year and up 4% organically.
Pricing gains were offset by FX headwinds.
Demand for <unk> grew in India for applications on fruits and vegetables.
In Australia, Overwatch herbicide continue to outperform competing products in cereals.
Overall, adjusted EBITDA was $360 million, an increase of 3% compared to the prior year period and $10 million above the midpoint of our guidance range.
Volume gains and price increases more than offset cost inflation and FX headwinds.
Average price increases of 7% contributed $84 million in the quarter.
As we expected cost headwinds more than doubled from the first quarter as inflation continued to challenge our supply chains.
FX was a $23 million headwind in the quarter due to the weakening of European and Asian currencies against the U S dollar.
Before we review Fmc's full year 2022, and second half earnings outlook, Let me update you on our views regarding the overall market conditions.
We now expect the global crop protection market will be up mid to high single digits on a us dollar basis versus our earlier expectation of low to mid single digit growth.
Latin America is now expected to be up double digits.
Primarily driven by pricing of non selective herbicides.
We still expect North America to be up mid single digits, while Asia is now expected to grow low single digits.
EMEA is still expected to be down low single digits, including the impact of FX excluding.
Excluding currency impact EMEA is expected to grow low single digits.
While commodity prices have come down somewhat from their highs earlier in the year they remain elevated versus historical averages.
This bodes well for the demand of our crop protection products through the end of this year and well into 2023.
Moving to slide seven we have seen pronounced shifts in demand and costs between individual quarters. This year. Therefore looking at the business in hubs gives a better understanding of the underlying performance.
For the first half performance was very strong as a result of price increases and volume growth, which contributed $178 million and $132 million to EBITDA respectively.
These drivers more than offset significant cost and FX headwinds of almost $250 million.
Resulting in 9% EBITDA growth over the prior year period.
In the context of our full year guidance first half EBITDA growth represents more than three quarters of the increase required to achieve the midpoint of our full year guidance.
When we consider the drivers for the second half of the year prices again expected to contribute more to EBITDA than volume.
Cost increases are expected to have the biggest impact in the third quarter.
With continued but lower cost inflation forecast in the fourth quarter.
There are two primary reasons for the expected cost increases the <unk>.
First reason is the cost inflation related to sourcing from secondary and tertiary suppliers due to lack of availability from our preferred suppliers.
The second reason is the lag of six months between procuring high cost material and its impact on our P&L since FMC typically turns inventory twice a year.
Latin America, and North America are our biggest drivers of revenue in the second half.
And we have already captured roughly 70% of the old as needed in Brazil to deliver our second half guidance for reference. This is normally around 50% at this time of the year the.
The increase in orders is due to the higher than average tester demand driven by favorable commodity prices.
In the U S Q4 order discussions are taking place as we speak which is much earlier than in previous years, making us confident in our forecast.
Overall, we expect the second half of the year to contribute 2% and EBITDA growth. Following a very strong second half of 2021.
Turning to slide eight and a review of Fmc's full year 2022 earnings outlook.
After a strong first half of the year, we are raising full year 2022 revenue to a range of $5 5 billion to $5 7 billion.
Representing an increase of 11% at the midpoint versus 2021.
Sales growth will be driven by volume and price growth in all regions, partially offset by foreign currency impact in EMEA and Asia.
We are narrowing the full year adjusted EBITDA range to $1 36 billion to $1 4 billion, representing a 6% year over year growth at the midpoint.
The range for 2022 adjusted earnings per share is narrowed as well and is now expected to be in the $7 to $7.70 per diluted share representing an increase of 6% year over year at the midpoint.
Consistent with past practice, we do not factor in any benefit from potential future share repurchases in our EPS guidance.
Q3, and Q4 outlook as provided on slide nine.
Midpoint of our third quarter guidance implies year over year sales growth of 13%.
Q3, EBITDA and EPS growth are expected to be limited by the highest cost increases of the year. Despite the targeted mid to high single digit price increases.
FX volatility and the absence of sales in Russia will also be headwinds to earnings in the quarter.
Guidance for Q4 implies year over year sales growth of 2% at the midpoint compared to the exceptionally strong growth in the prior year period.
Cost increases are forecasted to be lower in Q4 compared to Q3, while price increases are expected to continue.
This is anticipated to result in an EBITDA growth of 17% at the midpoint with EPS up 13% at the midpoint year over year.
Moving now to the updated drivers of 2022 EBITDAR outcomes on slide 10.
While the market growth assumptions of improved cost remained elevated though we are beginning to see the signs of cost inflation flattening.
Price in the mid to high single digit and strong volume growth are expected to offset cost and FX headwinds keeping the midpoint of our guidance unchanged.
While we expect the highest cost increases of the year in Q3, we do not expect material benefit from easing inflation to be realized until 2023.
With that I'll now turn the call over to Andrew.
Thanks, Mark I'll start this morning, with a review of some key income statement items.
FX was a headwind to revenue growth in the second quarter as expected driven by weakness in European and Asian currencies, particularly the euro Indian rupee and Turkish lira.
The Brazilian Reais was a modest tailwind in the quarter.
We continue to anticipate FX headwinds for the remainder of 2022, driven by Asian and European currencies.
Interest expense.
For the second quarter was $35 3 million up $2 $7 million versus the prior year period, primarily due to higher short term interest rates and higher debt balances.
Partially offset by benefits of the refinancing activity completed in fourth quarter of 2021.
With rapidly rising interest rates, especially in the United States. We now expect interest expense for the full year 2022 to be in the range of $135 million to $155 million, an increase of $10 million at the midpoint compared to our prior guidance.
Our effective tax rate on adjusted earnings for the second 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.
Gross debt at quarter end was $3 9 billion up.
Roughly $715 million from year end 2021.
Gross debt to trailing 12 month EBITDA was two eight times at the end of the second quarter, while net debt to EBITDA was two four times.
Net debt was in line with our targeted leverage levels, while gross debt was slightly above targeted leverage due to the timing of return of cash from foreign subsidiaries.
Moving on to cash flow on slide 11.
Second quarter year to date free cash flow was negative $498 million.
Year to date adjusted cash from operations was negative $401 million down substantially as compared to the prior year period, driven by higher working capital.
Strong sales growth, including the impact of aggressive price increases on receivables was the key driver of increased cash consumption for working capital.
Capital additions in other investing activities of $65 million were essentially in line with the prior year period.
Legacy and transformation spending was down primarily due to the absence of spending on our SAP program, which was completed in the prior year period.
We are narrowing the range of our free cash flow guidance for full year 2022 to $565 million to $685 million.
Unchanged at the midpoint of $625 million and reflecting the more narrow EBITDA guidance range.
Adjusted cash from operations is now expected to be in the range of $790 million to $870 million.
Unchanged at the midpoint.
Working capital growth is expected to result in a year on year reduction of $80 million in cash from operations at the midpoint.
Our guidance for capital additions and legacy and transformation remain unchanged.
With this guidance, we anticipate free cash flow conversion of 67% at the midpoint with conversion limited this year by inflation impact on working capital.
Guidance also results in rolling three year free cash conversion of 71% in line with our long term targets.
Through the first half of 2022, we have deployed $334 million of cash.
$200 million for the <unk> acquisition and $134 million in dividends.
Given the <unk> acquisition and the seasonality of our free cash flow, we did not purchase any FMC shares in the first half.
For the remainder of 2022, we expect to return up to $334 million to investors through continued dividends and up to $200 million in share repurchases.
The reduced outlook for share repurchases reflects two key changes since we last gave guidance.
First as I mentioned, just a moment ago, we deployed $200 million of cash to acquire Biopharma.
Second we are limiting the amount of incremental debt that we add in 2022 to mitigate in part the earnings impact of faster than expected interest rate increases.
We continue to expect to utilize more than 100% of our free cash flow to invest in growth and reward shareholders.
And with that I'll hand, the call back to Mark.
Thank you Andrew FMC delivered solid financial performance in the second quarter, despite a challenging macro environment.
Rice increases across all regions and strong volume growth continued to deliver strong EBITDA growth and an inflationary period at.
At the same time, the broader agricultural market remains positive, which we expect to continue throughout 2023.
FMC remains well positioned to outperform the industry in this environment with a focus on Crawford.
Protection chemicals biological products working to our advantage.
The year is turning out largely as we expected with a strong first half followed by a second half that is constrained by costs, especially in Q3, delivering an overall strong 2022.
I'll now turn the call back to the operator for questions.
Absolutely.
We'll now begin the question and answer session.
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The first question comes from the line of Christopher Parkinson with Boston.
Christine.
Great Good morning.
Mark I want to ask whatever what's on everybody's mind.
Can you just give as much color as humanly possible on the divergence between the third and the fourth quarter. Obviously you hit on this a little.
I imagine there are things in Brazil, North America, and India that are considerations.
But if you could also hit on the cost aspect on a sequential basis <unk> versus <unk> and your confidence that <unk> would be peak.
And anything else that you believe the street should be paying attention to thank you so much.
Yes, Thanks, Chris.
<unk> question to start the ball rolling.
Look when you look at Q3 and Q4 I think we've been pretty clear on the slides and in the script that Q3 is driven really by the cost that we see flowing through the P&L.
And Q4 is driven by a lack of that same increasing costs you look at the topline we have strong growth in Q3 roundabout, 13% at the midpoint, yes, we have 2% topline growth in Q4, what does that tell you. It tells you that our Q4 is not necessarily driven by the <unk>.
<unk> environment that EBITDA growth is all controlled from inside the company and the reason we see this cadence in the second half is very simply when we buy raw materials, we have about a six months lag before the cost of those raw materials flow through our P&L sulfur.
So for instance, the costs that we're seeing in Q3, our costs that we knew were coming back in Q1.
So for us it's not a surprise, it's a large amount, but we've continued to see that increases we've done over the last 18 months.
Now from a confidence perspective think of the following.
<unk> said in the script that in Latin America in particular in Brazil, we have more orders on hand than we would normally have by a considerable degree.
Why is that well at the end of the day the market saw robust commodity prices are still high.
Zale is getting ready for what will be a robust season, and we will continue to see.
Acreage increase in Brazil, and other parts of Latin America, we're seeing the same thing in the U S and Canada markets, where customers are now talking to us already about Q4 demand that doesn't normally happen at this stage of the cycle, it's usually a month or so later than this.
So we know already that we have a high degree of confidence not only from the topline perspective in Q4, but also from a cost perspective.
Why because we've already incurred a lot of those costs in Q2 that will hit in Q4. So we know to the vast majority of what the cost structure will be in Q4, I would like to the fact that for the first time I think it probably about three years I can tell you, we're not actually managing any prices out of China things.
All are flowing very well for us.
Our manufacturing units are operating our suppliers are generally operating well.
And we already see that flowing through so we feel very confident about supply.
The other element is price you can see that we've raised our prices significantly as we move from mid year last year, a lot of those prices are already embedded into our cost structure and pricing structure for the third and fourth quarters doesn't.
It doesn't mean to say that we're not still moving price, we all and there'll be more price increases coming but the fact is we have a very high degree of confidence on Q4, just a further comment on Q3, you can see the change is predominantly driven by the impact of costs that we've seen flowing through our P&L, but there is another factor.
The biggest impacts of our Russian exit is in Q3 and remember we've kept our midpoint guidance of $1 4 billion, despite absorbing $25 million of lack of EBITDA from Russia.
So I think that kind of gets lost in the noise here, but we all covering Russia and we haven't moved our guidance downwards. So I think thats, a very positive aspect of how we're managing the P&L. So I hope that gives you a little more insight into how we feel about Q4 Q3 with very confident of Q4. We're also very confident of our topline in Q3.
That's very helpful color and just as a as a secondary note on slide 10, which is very helpful.
You do have a few more checks in the.
The top end of the box at the one for four.
Perhaps dive in a little bit more in terms of what youre purchasing right right here right now in terms of the cost inflation, perhaps it doesn't give you the material benefit that we all want in 2022, but what is your confidence as we head into 2023, and what does that actual dynamic look like on a sequential basis and if you just want to stop that is.
What youre confident in in terms of entering the year that would still be very helpful. Thank you.
Yes.
We do believe that we're at this.
What we call the highest level of inflation, we are starting to see it taper off obviously I've just commented that Q4, we will expect to see that continue as we go into 2023 <unk>.
If that continues in our normal cadence of flow through the P&L because it would be in the second half of the year that you would start to see some significant benefit from that I doubt, whether you would see it in the first half because although I'm talking about a lower inflation cost is still high and make no mistake.
So I think it's the second half of next year that we would start to see that real acceleration of lower costs.
Thank you for the color.
Thanks, Chris.
Thank you.
The next question comes from the line of Joe Johnson with BMO capital markets. You May proceed.
Maybe I'll follow up on that line of question Christian is right. It is the most important topic among investors right now.
You said it was helpful that you might see that.
<unk> really come off second half of 'twenty, three if things continue.
If we.
Entering 2023 would your margins be kind of where they've been through the first half of the year in the last couple of years.
Mid to high Twenty's mid twenties like what is kind of because now the 18% in Q3, 30% in Q4. These are really diverge in numbers.
Caf, one what would be getting a 23 look like.
26% in 2000, I don't we don't give guidance early 'twenty looks like.
Alright, I'm glad you're not asking for guidance Joel It is.
Early this month.
Early early 'twenty three.
Yeah listen I think I think from a margin perspective, what you've seen in Q3 and Q4 are pretty extremes around the midpoint. Obviously, we've got a lot of cost in Q3, and then we have the advantages of a lot of price Allied to a good P&L I do think.
Youll see more normalized margins for us as we go into the first half of next year. So if you look at our margins over the last I would say 12 months and that sort of 25% plus range I think thats, what we would expect so I wouldn't go I wouldn't go any further than that at this point, because frankly I don't have the numbers going into early next year with <unk>.
Right in the middle of our budget process now.
So kind of expect average margins as we go into the first half of next year.
No. That's extremely helpful. And then obviously, it's complicated and then the second question I have is.
As you are with <unk> you know it is going to increase your R&D expense do you have some sense now what R&D expense inflation might be in 'twenty versus 22 solely based on <unk> and if you can't give that yet could you give maybe some color around I don't know a number of physicians number of people some sort of let us figure out what the R&D.
Increase might be run rate might be in 'twenty three.
Yes, I think.
When you look at Biopharma, we're acquiring about 30 people with the acquisition all of those people already essentially an hour a day there were one or two that are in manufacturing and supply chain.
I do think that the expense for that if you. If you took a base level something around $10 million additive to where FMC is today.
R&D expense is not a bad number.
At this point, but that's what I would be thinking Joel.
Okay. That's helpful. So kind of small thanks a lot.
Thanks.
Thank you.
Your next question comes from the line of Laurence Alexander with Jefferies. You May proceed.
Good morning, two questions can you give a bit more detail on inventory levels regionally.
That youre seeing heading into the back half of the year and then as you think about sort of the Latin American growth rate sort of what we will be lapping going into next year.
Given the very strong growth you've seen this year or sort of how tough will it be to laptop.
Yes, I'll start with the inventories as Lawrence.
With very okay with inventory levels pretty much everywhere in the world right now I would say the only spot and I've commented on this at the last earnings call is there has been a significant reduction in rice acres in <unk>.
And we're working through inventory in India that will be done as we go through the second half of the year everywhere else frankly speaking is very good from our perspective.
On inventory so we're not worried about that going into the end of the year with regards to Latin America growth.
We are on a growth trajectory because we're building out our market share in pretty much every country from Mexico, Argentina and Brazil.
Little known we've talked about it a little bit in Brazil, as our market access we're investing in and more sales resources to reach further into distribution and retail and especially with the major co ops in the south so the growth, we're seeing is actually market share growth, especially in corn and soy.
With insecticides and herbicides, so I know the numbers look big in Latin America.
But we really are we really are growing very quickly and each new growth for us its not necessarily <unk>.
Repeat growth in the sense of selling to the same people, which we obviously do we're expanding that market access.
Can you give a sense for how long do you think this period of.
Sure.
Establishing a new equilibrium.
We will take or how long you can have this well be growing well above trend before you get to sort of more stable market share.
Oh, Yes, I think we got quite a ways to go I mean, when you look at the size of our company and you look at the market given where it is today, we have roughly 9% market share of the crop protection chemical market.
The most robust pipeline and new product introductions that are now.
This year alone.
The products that have launched over the last five years or $600 million of a business that will do with those new products I expect that algorithm to continue for a considerable amount of time, we know our insecticide portfolio is very strong and we know that we're taking share from older Chemistries that are getting.
Registration losses that we can take advantage of so I don't see that algorithm is slowing down for quite a long time Laurence.
Thank you.
Thank you.
The next question comes from the line of Levine.
With BNP Paris, you May proceed.
Hey, good morning.
I've got a question sorry, again on the cost side and here I want to dig into the comments you made around adding two sold from secondary or tertiary suppliers. I was wondering if you could give us some kind of idea of how big that was in the first half Winston.
In the in the first half is very difficult to say as a percentage of the raw materials that we acquire only I can give you an anecdote.
Laura on that is basically when I talk to my procurement groups and supply chain groups. When it was second half of last year in the first half of this year the conversations we're all about.
Where are we getting materials, where we're short on that was quite a long list in today's reviews that we have the list is extremely short and we very rarely talk about secondary sources at this point. So it has changed in a meaningful way over the last six months, that's about as good as I could give you from our perspective.
Thank you and then.
My second one is on.
How do you find pricing and what you're factoring in especially as we started to see clients within prices coming down so its both I guess for.
<unk> signed and also the silica side of signed business do you think that prices.
Are you factoring in pricing normalizing through the end of this year and into next year.
No.
Absolutely the opposite I mean, I think I think a lot of the non selective or in a world of their own in terms of pricing is so closely linked to the raw material costs that you do see rapid increases, which we've seen over the last 18 months, you'll likely to see some decreases as those pressures alleviate we're in a very different ball game.
We've been raising prices on the back of the value that we bring.
We're raising prices as we speak in many parts of the world and we'll continue to do so so we do not see.
A deceleration of pricing as we go over the next six to nine months to 12 months, we're increasing price right now.
Okay. Thank you.
Yeah.
Thank you.
Thank you.
The next question comes from the line of Adam brought up.
Olson with Goldman Sachs you May Christian.
Yes, Thank you and good morning, everyone.
Good morning.
Good morning, I guess I was hoping may.
Can you just dig in on the growth side I'm looking by region certainly the growth in North and South America, where we're very strong constant currency growth.
In Asia.
A little bit less robust you alluded to managing inventories and decline in rice acres in India.
Mark I was hoping to get some broader color on the region is it just rice in India.
Nearly any mention of China, and North Asia, and just how you see competitive dynamics in that region.
Market outlook there.
Yes sure.
There is the main factor for us as I said that are working.
Looking through that channel inventory due to rice I.
I would say the ASEAN countries continuing to grow for us, especially on rice on fruit and vegetables are two big segments for us in those countries, Australia on cereals with the launch of the new herbicide last year's students very very well.
We don't mentioned, China, because it's not one of our biggest countries set.
Suddenly its efforts a sourcing point for us, but from a revenue perspective, it's north of $100 million, it's a highly competitive market.
It's not a market that.
We consider one of our top strategic markets will grow that will introduce technologies, but it's not something that is driving the region. The region is really being driven by.
And all of the countries in ASEAN, India, Pakistan and.
And Australia those are the key drivers now interestingly enough from a plant health perspective on a biological perspective.
South Korea, and Japan are very important markets, especially south Korea as they have quite a flourishing biologicals industry.
And a lot of very high quality fruit and vegetables, which can use the biologicals.
Asia is becoming very interesting from that plant health perspective for us.
Okay. That's helpful and if I could just have a squeeze another one in on cost and really thinking about the movements youre seeing in natural gas and power in Europe , and you've got some some important operations in Denmark.
But broadly is how you how how do we how do we think about your comments about inflation abating in what you've assumed on the energy power side.
Essentially in Europe .
Our thoughts and risks around some of the intermediates that you might have to source that.
Comments on direction of travel from Europe .
Yeah, So from an energy perspective, I'll use of energy in our manufacturing facilities.
All of our manufacturing facilities, and especially our major wanting Roseland, we can use flex fuel to run the facility. So at Roseland, we traditionally run on natural gas, obviously thats being curtailed given Russian activities. We can also run on diesel fuel and run London have been doing for some time the raw cost inflation elements. There that are built into our own.
<unk> cost structure.
We have a pretty good view of what we think costs will be going forward longer term for for those facilities.
From a raw material perspective, I think we procure something like $200 million of raw materials out of our $2 7 billion dollar purchases come from Germany, and we have dual sources for all of those materials into the parts of the world. So from a supply perspective, we.
That one pretty secured.
Okay, Great I really appreciate that color I'll pass it opex.
Thank you.
Thank you.
The next question comes from the line of Christian.
Andrews with Morgan Stanley You May proceed.
Thank you and good morning, just market you mentioned in the fourth quarter, you'll have some new launches and obviously that'll have a positive impact to revenue maybe you just want to talk a little bit about those and then I'm also within that wondering whether <unk> was also incurring some launch costs associated with those new products that youre not going to obviously see the revenue for.
Until until for kit.
Yes.
The launches that are coming are mainly herbicides in Europe , which kind of stop now, but really pick up steam in Q4, we've got insecticides in Canada that have started now we're seeing that growth. Obviously that will continue and then we have quite a number of smaller products and in Asia to get launched.
Don't think at this point that we're seeing any lumpiness in terms of launch expense, it's pretty much built into our SA at our SG&A expense as we go through each quarter.
Have a very good view of our launch schedule. So we know what's coming we pretty much spend money on launches.
Two and a half years before the actual launch itself. So it's not all of a sudden the step up it's rather a gradual spending increase as we go over the numbers of quarters or so.
In Q3, it really is not necessarily to do with any launch expense. Although there is launch expense within that SG&A number.
Okay. Thank you and Andrew maybe on the cash flow from operations and I'm sure it'll look a lot clearer once we see the.
Q, but could you just talk a little bit about sort of how the working capital played out in the first half versus how its going to trend in the second half to get you to that 67% conversion that you're still targeting.
Yes, Sir tour events, and I think certainly the big story in the first half and working.
And cash flows working capital and it's very very substantial growth in receivables, particularly both from high volume growth, but not the least from the impact of price increases.
So those price increases directly inflate our receivables so in the end.
First half of 'twenty two the big story in the big difference versus the prior year really is the growth in working capital now that said given the positive market backdrop, we have good farmer economics around the world pretty uniformly there are spots here and there is all of it but we are we're in pretty good shape, we've actually seen good collections performance.
So the absolute dollars of receivables or going out of the days receivable has actually improved pretty meaningfully versus the prior year.
With people, having concern about security supply and with a very strong and very healthy grower balance sheets at the moment. We are we are collecting and collecting aggressively so we will see the seasonal swing.
A very pronounced seasonal distribution with working capital ample.
Amplified a bit more by the size of prepayments and the North America business.
It's really as a use of cash in the first half of the year. So in the second half with very high collections.
From selling mode to collecting mode in many parts of the world.
That that will drive a big reversal in very very strong.
Cash from operations for the second half.
Thank you very much.
Thanks, Thank you.
The next question comes from the line of Steve Byrne with Bank of America. You May proceed.
Mark you mentioned that 70% of your Latam orders for the second half for already in place.
Do you have visibility on when that revenue will be recognized.
You normally have.
Fourth quarter in Latam than you do in the third.
Do you do you have view on how that's going to play out this year could there actually be a bit of a shift more into the fourth quarter that could be an additional contributing factor to you know.
Somewhat slow third quarter expectations.
No not really.
We kind of plan for what we call a normal season that means in Brazil planting sort of mid September to the end of September .
That can shift around given weather patterns. So Q4 is obviously a big quarter for us in Latin America, not just Brazil, but Argentina.
We've kind of factored that into how we look at Q3 Q4, I don't think there's anything meaningful that obviously it will depend on how the weather plays out but I think we have most of that factored into into Q4 as we normally do.
And wanted to drill in a little bit more on the Diamide franchise.
What what fraction of that revenue stream.
It is from direct sales from FMC.
Versus from your licensees that you you have supply agreements with and how does that split between those those two buckets.
Changed in the last year.
As you've been growing the supply agreements and.
What does how does that affect price is that a mix shift down in price and more importantly, how does that affect EBITDA.
Yeah. So when you look at where we are today.
We're in that we're in the range of about <unk>.
It's kind of like 60, 40, 60% FMC branded products into the marketplace about 40% through all of that on the partners.
That has obviously been growing as we've added more partners I think it's fair to say, though we pegged our growth rate for the diamide in sort of the high single digits.
In Q2, we grew sort of mid teens, and it's pretty evenly split between both sources of income.
On the price side, you know, we don't talk about the specifics of the individual contracts that we have obviously, but generally speaking the EBIT dollar impact for us on a percent basis as neutral. So we manage it that way so the growth for us is equally as valuable from an EBITDA perspective from either FMC all from Ella.
Our partners. So I would expect to see that 60 40 I would.
The policy to continue to grow because we've got more partners on board now they are obviously now gearing up and selling into the marketplace. I think the most important takeaway that you should take away from this conversation is the 40% as it grows does not detract from the 60% as we grow it's an expansion of the Mark.
Pool for the dialogues are as I alluded to earlier on one of the other questions. We see the dialogues taking share from a number of older chemistries whether they need.
Anita noise some of the pyrethroid and certainly some of the carbonates around the world.
Thank you.
Thank you.
Yes.
Thank you.
The next question comes from the line of less money yeah.
<unk> with Keybanc capital markets you May proceed.
Thanks.
Morning, everyone.
You were talking about cost for fourth quarter than you were six months.
A lag do you have any visibility on the first quarter do you expect costs to decline further from Q4 level in the first quarter of 2023.
Yes, I'll, let I'll, let Andrew pick that one up Andrew Hey, Yeah, like I say I think as Mark described.
Since we turn inventory about twice a year things that we buy today start flowing through our P&L two quarters out so the things that we're starting to buy now certainly we're getting a little bit of visibility into Q1 of 'twenty three but it's not a complete picture yet we've not gotten through that far the buying in that yes. Some of that by is it tilted in different parts of the quarter.
Do you want to be very careful with the phrasing of the question in.
Our expectation is that cost do continue to increase particularly in the first half of 'twenty three they just do so at a much lower level and what we're seeing from Q4 Q4 is the largest cost they actually into Q3 of 22 this quarter coming quarter is the largest cost increase we've seen in the large.
Just cost increases we expect for the year, we expect the rate of cost increase to drop down in Q4, but there still is year on year.
Inflation in Q4.
So at this point, what we're what we're seeing is a flattening off in the inflation, but not necessarily yet a absolute drop off in costs. So.
Yeah, I think for Q1, we will continuously on purchasing goes through the rest of this quarter to see you.
You know what the outlook for Q1 is but I think at this point, we would still anticipate some cost headwinds in Q1 and likely into Q2, and then with the opportunities that we start seeing the swing in the second half of 'twenty three.
Thanks, Andrew and as a follow up Mark in the first half volume gains were roughly low teens, 11% or so.
How are you optimizing for volume or market share versus profitability.
On the other hand.
Frequently do prioritize if demand is strong.
Is it more is to raise prices more at a higher profit level.
Gained last share loss volume or or maybe it's not optimal.
Yes.
Clearly you can look at our price increases were targeting that high single digit price increase and we're moving in that direction for a company like FMC. Those are on ahead of price increases.
Normally we price kind of in the in the very low single digits to offset inflation.
On a general basis, I think when we're looking at the marketplace.
We sell products and some of the categories that are extremely high margin products.
You all know the success of the Diamonds for instance, taking volume from older Chemistries with the newer chemistries.
Tremendous value to the bottom line, whether you increased price on not with those products, sometimes we do sometimes we don't it's a mix of decisions that are made at the local level with the overall mantra that price increases will offset cost and that's how we've been working this year so for us it's a.
It's somewhat of a complicated discussion inside the company, except I would say over the last year or so its change to be much more aggressive on price, we have driven pricing every region of the world more so than we ever have before.
Thanks, a lot.
Thank you.
The next question comes from a line of Michael Sison with Wells Fargo. You May proceed.
Hey, good morning nice quarter.
So just.
When you think about your volume growth in the second quarter was pretty impressive up 14%.
EBITDA growth was three.
3% and I understand why in terms of the cost that you had on slide six but just curious someday.
$48 million of costs that you incurred in <unk> and maybe in the past.
Is any of this cost more structural than just sort of just inflation you've had to change the way you process. Some some of your materials logistics or getting more so I'm just curious how much of this cost is maybe more structural than just might.
Might go away over time.
Yeah, Mike.
Thanks for the comment on the quarter.
Listen I do think that most of that cost is variable in the sense of its raw materials. It's packaging, it's logistics that will obviously ebb and flow and we expect them to so obviously decrease overtime I would say the only structural costs thats been embedded is as we're investing in.
SG&A resources and R&D projects that are more longer term those are driven around the growth of the company the market access that I talked about in places like Brazil, Argentina, India.
Lots of the ASEAN region and in the.
U S as well those are structural structural cost because their head count their investments.
The other investments around precision agriculture, as we're growing out our precision I gaps such as intelligence those are structural cost, but the vast majority is.
Is what I would call more transient.
Got it and.
And then when you think about the fourth quarter it tends to be or.
Accordingly, with has a wide range for the outcomes for EBITDA and revenue. So just curious what do you think sort of drives the upper end and mill ran to that those ranges.
Well I think from a revenue perspective, obviously.
That would be what is the pest pressure looked like in some parts of the world. We just talked about.
The success, we had in our North American business.
That's pressuring Canada was much higher than we normally forecast that drives demand that gets used immediately. So if you have those a series of events around the world that can drive you to the upper end of the range.
So as we look to expand our market access and the success and the speed of that success that can drive us to the upper end in terms of market share new products being sold to new customers that would drive you the same way.
Got it thank you.
Thanks, Mike.
Thank you.
The next question comes from the line of Josh Beck.
<unk> you May proceed.
Yeah, Hey, guys. Thanks for taking my question I guess just to follow up on the second quarter and the volume outperformance I guess optically the volumes did a lot better the drop through was essentially pretty minimal given the cost side I'm not really sure how much of that is higher.
Higher spend on the incremental volumes or the higher cost for the base, but I'd be curious if you were to have a repeat into three Q4 Q volumes a lot better shall we expect a similar result in terms of the drop through should we expect that to be different and much better or worse any thoughts appreciate it. Thanks.
Thanks, Josh I'll, let Andrew give you the details, but generally speaking the drop through in Q2 was not far off our average and we have a wide range of drop through because it can be affected through different reasons. Andrew do you want to comment on that yeah. Josh I think look there can be a big variation in that the drop through you know the contribution too.
EBITDA from volume relative to the contribution to rep from <unk> to revenue growth from volume on a trailing.
Four quarters basis that was about 58% in Q2.
The quarter itself was about 57%. So it's right in line with what we expect our long term average is about 60%, which reflects the high value mixed component of our volume growth.
Reminder, to everyone that in our bridges mix is in volume.
You can see significant swings in that because there is lumpiness in cost increase it's not it's not perfect. It's not a perfect indicator, but I think you should continue to expect that on a rolling basis.
That volume drop through to EBITDA should be in that 55% to 60% range for the next several quarters and beyond.
Thanks, I mean, I guess asked another way if the volume drop through was normal on that bar, but is offset by the costs var. So if volumes were 5%, 10% greater and had visibility of what you bought six months ago would you expect volume bar to offset the cost bar if you saw.
Upside in your forecast is there any reason why that wouldn't happen or be different.
Yeah, Josh I think certainly that.
Longer volume growths going to have that pretty healthy drop through.
And that will help to offset further cost increases.
What we've been trying to do is paste the price increases that were price increases cover as much as possible increase in Cogs.
And then we make up any and investments in SG&A and R&D as well as FX headwinds with volume.
But certainly when you when you look at.
The second half together, where we're looking at very substantial volume growth there will be a piece of that that will help bridge. The difference between the cost headwinds are and what we're able to cover on price.
Okay. Thank you.
Thank you.
The next question.
Comes from the line of PJ <unk> with Citi. You May proceed.
Yes, hi, good morning.
Topline growth was organic growth was 21% in Q, but EBITDA was up only 3% and you know you talked about you.
Your your cost inflation and raw material costs and all that I was wondering if you can just break down your raw material costs.
Three bucket, what's sort of the <unk>.
Inflation from <unk>, what are the logistical cost than what maybe other costs like packaging or labor can you just kind of breakdown between those three buckets. Thank you.
Yes, PJ. Thanks for the question, we don't normally break down those types of costs, but I would tell you that the vast majority is the active ingredients intermediates that we buy.
Followed by logistics and packaging, but by far the biggest chunk is the whole raw materials spectrum that we buy do you want to say anything Andrew Yes, PJ I think.
And as Mark said that biggest chunk is raw materials raw materials intermediates and active ingredients we buy.
I don't think there's been a there's not a as an overall category that I would point to are those three big categories raw materials.
Marketing and logistics, we've had substantial inflation in all of them we've had substantial.
Impact from disruption and the need to use secondary and tertiary suppliers and all of those so I wouldn't point to one of those categories being disproportionately growing versus the other.
Okay. Thank you and my second question is on your planned 10 biologicals.
Wired by a federal.
What are the areas of biologic because if you believe that.
You know you have some hold sort of you would like to make some acquisitions and what are the multiples.
These biologicals are being bought at these days. Thank you.
Thanks P J, yes, listen we're building out the technology portfolio all biologicals today.
Are really based around microbe technology.
Obviously with the extended into into pheromone technology. Now we also have through FMC ventures investments in peptides, which was a whole new area of potential pesticides.
<unk>, we have a relationship with novozymes developing enzymes as pesticides. So we feel we have quite a good floor of what we call basic structure around technology.
That will continue we'll continue to look for M&A opportunities probably as much on the geographic side of biologicals as on the technology side because market access. He it is important and from a micro perspective, there's many countries in the world, where you can't import microbes that are not indigenous to that country. So therefore, you need.
R&D and you need development in those countries, one easy way to get that is to acquire it. So it's something we're looking at from a multiple perspective I haven't seen any deals go through in the near term that are.
That are indicative, but Andrew you may have a better view of that than I do yes, PJ just a few thoughts on multiples a lot of the kinds of acquisition targets. We were looking at in the biological space are more early stage and a buy.
<unk> for example, where you know.
Small amounts of commercial revenue, but not large scale sales yet it's a multiple is really not meaningful and considering.
The value of the acquisition and it really is a case, where NPV and IRR really come into play.
Yeah, certainly as we looked at the acquisition economics via Farah.
The IRR on that transaction with multiples of our cost of capital. So you know even on a risk adjusted basis very very attractive. So when we think about the types of targets that are out there they tend to be smaller companies more early stage. So traditional EV EBITDA multiples are less relevant in terms of thinking about valuation.
Alright, thank you for the color.
Yeah, absolutely. Thank you.
Thank you.
Your final question comes from the line of Tony Jones Redburn You May proceed.
Yeah. Good morning, everybody. Thank you for the trumps the ask a question and with all the supply chain dislocation and we've seen this pause to local supply or local or more local production.
From your perspective have you found over the past year any sort of channel capacity.
Capacity mismatch and does that have any implications for capex over the medium term. Thank you.
Thanks, Tony.
No real what I would call.
Mismatches.
Though we are and we have said that we will have a much more balanced supply chain and operation structure as we go forward when.
When you look at our investments for the molecules that are coming in putting steel in the ground. We're active in India. We're active in Europe , we're looking at potential toll manufactures in multiple manufacturers in the Americas. So overall I wouldn't say we have a mismatch.
But certainly as the industry grows the need for formulating capacity is something that we're investing in quite heavily especially in the U S to feed our U S business. So I think that that notion of getting youll formulating capacity.
Very local as you kind of as close to the customer base. As you can is something thats driving our strategic thinking around manufacturing and operations.
John do you want to thanks, that's really helpful.
Tony I would just add to that when you think I think the second part of your question there on the Capex.
The capex piece related to this in our capital plan. It had the envision building out a supply chain that was more geographically diverse.
Very much a part of our thinking in terms of having multiple source points in balancing out point to supply.
So that has been factored into the way we've been thinking about the capex stepping over the past staffing up over the past couple of years, including our Capex guidance for this year I would just also comment when we start talking about formulation plants at those tend to be very low capital.
This is not heavy equipment and this is not chemical synthesis.
Not trivial, but theyre not significant capital investments is compare it to a new AI platform.
That's great. Thanks, guys.
Thanks, very much alright.
All the time that we have for the call today. Thank you and have a good day.
This concludes the FMC Corporation conference call. Thank you for that Sandy you May now disconnect you may now.