Q2 2023 FMC Corp Earnings Call
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I would now like to turn the conference over to Mr. <unk> <unk> director of Investor Relations for FMC Corporation. Please go ahead.
Thank you Glenn 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 Andrew Sandifer, Executive Vice President and Chief Financial Officer.
Mark will review, our second quarter performance as well as provide an outlook for the rest of the year.
Andrew will provide an overview of select financial results.
Following the prepared remark.
We'll 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.
Let me remind you that today's presentation and discussion will include forward looking statements that are subject to various risks and uncertainties concerning specific factors.
Including but not limited to those factors identified in our earnings release and in our filings with the Securities and Exchange Commission.
Information presented represents our best judgment based on today's understanding actual.
Actual results May vary based upon these risks and uncertainties.
Today's discussion and the supporting materials will include references to adjusted EPS.
Adjusted EBITDA adjusted cash from operations free cash flow net debt and <unk>.
<unk> revenue growth.
All of which are non-GAAP financial measures.
Please note that as used in today's discussion.
<unk> 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.
<unk> on our website.
With that I will now turn the call over to Mark.
Thank you Zach and good morning, everyone. Our second quarter results are detailed on slides three four and five.
Sales in the quarter was significantly impacted by a substantial decline in volumes across all four regions.
During our first quarter earnings calls, we already had reduced our outlook for the crop protection market until that it would decline by low single digits. This year.
We now believe this is no longer a valid assumption.
Considering the abrupt and intense destocking by growers in the distribution channel in the second quarter.
We now expect the global crop protection market to contract by high single digits to low double digits, even as on the ground consumption by growers remains at levels similar to last year.
Planted acres continue to grow in key geographies.
Channel feedback indicates the Destocking actions as a result of three factors.
Higher interest rates have increased the carrying cost of inventory.
Second there is increased confidence in product availability is the supply chain disruptions of the past few years have eased.
Third price reductions in fertilizers, and non selective herbicides have led to a wait and see approach to ordering.
As a result growers in the distribution channel or placing orders as close to application as possible.
For FMC, the reduced volume led to second quarter revenue that was 30% lower than the prior year and 28% lower excluding FX.
Despite the challenging market conditions sales of new products introduced in the last five years remained resilient and we are at <unk>.
Level similar to last year.
Which aided product mix and illustrates the value of our innovative portfolio.
Branded <unk> also outperformed the rest of the portfolio.
Price increases were broadly implemented in the quarter with an average gain of 3%.
While our newer products generally performed better on a relative basis, nearly every country reported lower volume compared to the prior year period, which illustrates the widespread nature of current channel dynamics.
Turning to the regions.
North American sales declined 25%, 24%, excluding FX versus the second quarter prior year.
Overall volumes were down however, new products introduced in the last five years grew 43% and comprised 28% of total revenue a record for the region.
Branded diamide, including courage and Max also showed strong growth primarily due to elevated insight pressure in Canada.
Sales in EMEA declined 26% year over year and were down 24% excluding FX.
Stronger pricing in the quarter was more than offset by lower volume as destocking was compounded by adverse weather across Europe .
Shifting to Latin America revenue declined 38% versus the prior year period as the region faced additional headwinds to volume from a historic drought in southern Brazil and Argentina.
In Asia sales declined, 29% and were down 23% organically and.
In India excess rain in the north and delayed monsoon season in the south added to volume challenges from continued high channel inventory.
Australia and parts of ASEAN were also impacted by adverse weather.
Overall, EBITDA was $188 million in the quarter down 48% compared to the prior year period, primarily due to the volume decline.
<unk> momentum continued in the quarter.
Cost become a year over year tailwind for the first time since 2020 as input costs continue to decline and we closely manage spending FX.
<unk> was a headwind to EBITDA in the quarter.
Moving to the outlook for the rest of the year slide six shows our expectations for the second half.
Overall, our second half EBITDA guidance is in line with the guidance provided during our first quarter earnings call as we expect the negative impacts from lower volumes to the most modestly offset by lower costs.
We expect second half revenue to be slightly below the prior year period at the midpoint and are assuming that the channel's active inventory management will continue especially in Q3.
However, we expect destocking headwinds to be partially offset by new product launches and higher volume in Latin America in the fourth quarter.
We are assuming grows we'll continue to order products closer to the planting season.
Business fundamentals remain solid as growing consumption and products applications are expected to remain steady and planted acreage is projected to increase.
We are expecting a low single digit pricing benefit in the second half with the majority of pricing actions already in place.
FX impact is forecasted to be minimal.
We are guiding EBITDA for the second half of the year to be $801 million and the midpoint, which is a 16% higher than the prior year results.
Main drivers are expected tailwind from lower input costs improved mix from new products and the modest pricing tailwind, partially offset by volume headwinds.
This is expected to result in EBITDA growth and healthy margin expansion.
Slide seven provides the quarterly guidance for the second half of the year.
Volumes are forecasted to be more heavily weighted towards the fourth quarter as the recent hand to mouth inventory management is expected to result in growers and the distribution channel, making purchases closer to the timing of applications, especially during the start of the planting season in South America.
Our third quarter revenue guidance at the midpoint is 11% lower than the prior year as Destocking is expected to continue resulting in a volume decline in the low teens percentage.
We are still projecting slight EBITDA growth at the midpoint as favorable input costs are anticipated to offset the revenue headwind from the volume decline.
Fourth quarter revenue is expected to be 6% higher at the midpoint versus the prior year driven by the timing of order shifting from the third quarter product launches and additional acreage in Latin America.
EBITDA and earnings per share are both expected to be 24% higher than the prior year at the mid points, primarily from higher volumes the positive mix impact from new products.
Slide eight provides the second half assumptions for the outcomes at each end of our guidance range.
The largest variable in the <unk> volume, which is closely tied to the duration of channel Destocking.
We are assuming a high single digit volume decline and a low single digit price benefit.
Across the guidance range, we are confident in our cost discipline, and we still expect input cost tailwind.
However, we are aggressively managing our working capital in response to the current trend of older patents, including adjusting production levels across our manufacturing lines.
All lines are currently not operating which will result in some unabsorbed fixed costs.
I will now turn it over time due to cover cash flow under the financial items.
Thanks Mark.
I'll start this morning with a review of some key income statement items.
FX was a 2% headwind to revenue growth in the second quarter with the most significant headwinds coming from the Indian rupee, the Pakistani rupee, the Canadian dollar and the Turkish lira.
Looking ahead through the rest of 2023, we see modest FX headwinds in the third quarter with diminished impact in the fourth quarter.
Third quarter headwind stemmed, primarily from Asian currencies, particularly the Indian rupee and Pakistani rupee.
EBITDA margin of 18, 5% in the quarter was down more than 600 basis points versus the prior year period.
Gross margin percent was up 200 basis points year on year due to input cost tailwind higher prices and favorable mix.
But the steep drop in revenue and moderately higher operating spend resulted in a lower EBITDA margin.
We are anticipating strong expansion of EBITDA margins in the second half with continued input cost tailwind mix improvement pricing and operating expense discipline.
EBITDA margins are expected to be up roughly 270 basis points in Q3, and 460 basis points in Q4 with full year 2023, EBITDA margin forecasted to increase by roughly 120 basis points. Despite the tough first half of the year.
Interest expense for the second quarter was $64 5 million up $29 $2 million versus the prior year period.
Abstention higher U S interest rates were the primary driver of higher interest expense in the quarter, along with higher overall debt levels, resulting from elevated working capital.
We now expect full year interest expense to be in the range of $220 million to $230 million, an increase of $15 million at the midpoint compared to our prior guidance.
This increase was driven by higher debt balances due to elevated working capital levels.
Our effective tax rate on adjusted earnings for the second quarter was 15% in line with the midpoint of our full year expectation for a tax rate of 14% to 16%.
Moving next to the balance sheet and liquidity.
On May 15th we issued $1 $5 billion in senior unsecured notes in equal tranches of three year 10 year and 30 year maturities.
Leads from this offering were used to retire the 2021 term loan and pay down commercial paper balances.
After these financing actions and reflecting the results of the company in the second quarter gross debt was $4 7 billion at June 30 up $470 million from the prior quarter.
Gross debt to trailing 12 month EBITDA was three eight times, while net debt to EBITDA was three <unk> times.
During June as the magnitude of the channel inventory reset and its implications on our business started to become apparent we entered into discussions with our bank group to amend the leverage covenant our revolving credit agreement.
We signed the final amendment on June 30th, which raises our leverage ratio covenant to four <unk> times through March 31, 2024, and 375 times thereafter.
We believe this amendment provides us ample room to navigate through the current disruptions.
Moving onto cash flow generation and deployment on slide 10.
FMC generated free cash flow of $93 million in the second quarter down $72 million versus the prior year.
Cash from operations declined $64 million at substantially lower use of cash for receivables was more than offset by negative cash flow impact on nearly every other line.
Capital additions in other investing activities spending was up while legacy spending was down.
With this result year to date free cash flow at June 30th with negative $822 million.
More than $300 million lower than the prior year period.
This reflects the year on year drop in EBITDA as well as the impacts on working capital of the current channel inventory reset.
We returned $123 million to shareholders in the quarter and a combination of $73 million in dividends and $50 million in share repurchases.
Between May 10th and May 17th we purchased approximately 457000 FMC shares at an average cost of $109 35.
With these purchases we now expect weighted average diluted shares outstanding to be approximately $125 8 million shares for the remainder of 2023.
We've reduced our free cash flow guidance to zero at the midpoint for 2023.
This is a result of the decline in EBITDA.
Our first half sales, resulting in lower cash collections and unexpected pronounced decline in accounts payable in the second half of the year as we adjust production to balance inventory with demand.
Adjusted cash from operations is now expected to be between 40 and $370 million down substantially versus the prior year.
We slightly lowered our plans for capital additions and now expect to spend $125 million to $135 million.
As we continue to invest to support new product introductions.
Legacy and transformation cash spending is expected to remain essentially flat at the midpoint after adjusting for the benefit from the disposal of an inactive site in 2022.
This guidance implies a rolling three year average free cash flow conversion of 47% well below our targeted 70 plus percent due entirely to the cash flow impacts of the channel inventory reset.
While it's too early to comment in detail, we do expect cash flow to rebound as we move past the current disruptions.
With the current year free cash flow outlook near term cash deployment priorities have changed free.
Free cash flow generated in the second half will first be used to pay the dividend with remaining cash used to reduce short term borrowings.
We do not plan any further share repurchases this year.
We will reevaluate we will evaluate restarting share repurchases in 2024 as leverage levels return to targets.
And with that I'll hand, the call back to Mark.
Thank you Andrew before we open it up to Q&A I want to remind everyone that we will be holding our investor day at our headquarters here in Philadelphia on Thursday November 16.
In addition to interacting with our executive team and leaders attendees will be updated on our new strategy going forward.
To close it is very clear that the market is performing in a fundamentally different way than we had forecasted at the beginning of the year.
We are adapting to control tightly what is critical at this time.
Namely lowering our inventories of raw materials and finished goods to match the short term demand <unk>.
Managing our internal costs, while at the same time investing in our R&D pipeline for the future.
And finally, focusing on selling our newly launched products, which had real value to our overall profitability.
As well as new products, we have coming in Q4, especially in Latin America for soil applications.
While we have not seen this magnitude of volume change across multiple regions at the same time before we have successfully managed through demand shocks in the past and have always emerged a stronger more profitable business.
I am confident this will happen again, especially as we have the benefit of good grow demand for our products around the world.
I'll now turn the call back to the operator for questions.
Thank you we will now begin the question and answer session.
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We have our first question comes from non fall Okay.
Same BNP Pappas Laurence your line is now open.
Yes, Thank you and good morning all.
I'd like to go back to what changed since <unk> <unk>.
Alex you mentioned volumes seen low single digit and now up to low double digits and yet with consumption being broadly flat.
I was wondering as you change your assessment of how much wind into the ground last year.
Do you think that channel inventories within that anomaly low this year and I guess Im asking you. There are reasons to hope for a bigger volumes reversal into 2024. Thank you.
Yes, thanks Laurel.
Well first of all you can tell by the covenants. We made as we went through the quarter, especially from the end of May onwards, we really started to see a very aggressive deceleration of orders from around the world basically so any country that was in season was really reducing.
Volumes on this came.
I think through basically starting at the grille of level, what we suspect now as that grows we're holding inventory to.
To levels that are not seen before and let's be clear it's not normal for grow is to hold inventory is not something they usually spend that cash on.
So our analysis today saves the growers will holding inventory when retail went to sell to growers ROE has basically said, we don't need anything right now and of course that starts to back up through a pretty complex supply chain until it comes to us.
We've seen this around the world we've seen it through other players in the industry with their public announcements you can tell that this is fundamentally a global reset of inventories.
What we think happened over the last couple of years is that as supply disruptions made people nervous obviously inventory was being built through all these different nodes in the supply chain and that is now being unwound now going forward. What do we expect we do see that this phenomenon will continue in Q3, as we've said and we're indicating we expect.
Our own volumes to be down in that sort of low teen range across the world. We expect that to continue through Q3, our assumption is that this will evolve as the seasons evolve so for instance.
We do expect the growers in Latin America, and South America in particular, Brazil, and Argentina, they will be placing orders, but theyre going to be much closer to the planting season.
That doesn't normally okay, we've talked about in the past.
This time of year, we have a certain percentage of orders on the hand, that's not the same this year adult we're expecting those orders to flow as we go through late Q3 and into Q4.
Now Thats in Latin America, we expect the North American season as people start to buy in Q4. The end of Q4 into the beginning of Q1, we'll start to see the same phenomena, we won't see that in Europe until Q1 and into Q2, just because of the way the season's flow Asia is a little more balanced because we have both northern and southern.
Hemispheres. So it is going to be a case of we expect inventories to start normalizing as we go into Q4 on order patents to start normalizing and that will continue as we go through the first half of next year.
I've never seen this before I've been in this industry 12 years I've seen pockets of this Brazil in 2015, which was a totally different circumstance, but still a reduction in volume this is everywhere.
We only had two or three countries in the world, where we saw increased revenue year on year everywhere else was down. So that tells you the magnitude of what we're dealing with.
Thank you and you also mentioned the price declines in <unk> and non <unk> as the reason I guess all grew as to change behavior.
What gives you confidence that you can avoid price into the second half and into next year and in particular, given the context of a valuable cost deflation.
I'm not aware of such a strong pricing discipline in the industry, but maybe especially for diamonds it might be a different story.
Yes, listen I think given the strength of the portfolio.
Just alluded to the fact that our our products launched in the last five years were very robust in the quarter and have been so far this year. That's a lot to do with the type of products. We are bringing that a differentiated with differentiation you have the ability to hold price, which is what we're talking about now.
Price in the second half of the year and in particular into Q4, we've pretty much already have in place. The prices now it is the case of managing through the disruptions in the holding prices. We go forward, which we're confident of doing.
Given the given the size of the NPI sales today to put it in perspective for you in Q2 about 14% of our revenue came from products launched in the last five years that was up from 10% in Q2 2022. So it continues to grow rapidly and when you look.
At the full year as we think about the new products rolling into Q4 that number gets up to about $720 million year on year versus about 622, the year before so almost a 20% increase that's the heart of the company today. It is the new products, we're introducing the value they bring.
Talk about new products in Q4 going forward.
Very important in Latin America, we have two brand new products that we're launching right now one is in insecticides for soybeans. The other is a brand new fungicide that is for soybeans, but will be traditionally launched on cotton for us those are expected to be very valuable and large volume players as we go into.
Q4, so it's not just price it is the portfolio. We also talked about the diamide.
Our branded sales of <unk> performed well versus the rest of the portfolio I think they declined something like high single digits versus our overall reduction of about 30%.
That can't be said the same for our partners in the <unk>, which are the people that we sell technical.
<unk>, we've talked about these partners before they add they have been doing the same thing as everybody else in the industry, which is drawing down their inventories, which impacts our sales to them that will come back next year.
No doubt about that we've talked to them, they're just managing their inventory like we are so I think you've seen a confluence of events that are playing out right now that will unwind as we go into 2024.
Thank you.
Thank you.
We have our next question comes from Christopher Parkinson from Mizuho Your.
Your line is now open.
Got it.
Thank you very much just mark just given everything thats going on and I'd say the lack of urgency.
<unk>.
A wholesaler and co op behaviors relative to the past few years, what do you think the probability is that some of your retail channels kind of overshoots to the downside in terms of inventories just given healthy end market demand I know, perhaps thats kind of the key focus right now, but just given how strong volumes are once again than what's actually being sprayed.
What are your thoughts on that on that very various side within various geographies, but I'm asking specifically on North America. Thank you.
Yes, Chris listen I think I think you're going to see pockets of people overshooting on inventory reduction.
It's such a big industry. There are many different nodes to these channels you could tell that the industry's ability to forecast what was coming as we went down this curve. It's probably the same as we come out of this so I do expect to see places where inventory has been run down too much and we will come back at a faster pace.
There are other places where inventory was high and has been drawn down to what we would call more normal levels. So it's going to be a combination of the two.
As I said, it's such a large industry and complex supply chains that it would not surprise me to see that I think youll see it in North America, just as much as Youll see it anywhere else I don't think North America is in any particularly different shape.
I would say Latin America, where we expect to see the same phenomenon in certainly in Europe as well.
We have seen public comments by major distributors in the U S about how they see their inventory levels, reducing and how they expect to see that come back as we go through the next season. So overall I think youre going to see probably both impacts some people will overshoot and some people won't.
Very helpful and just as a quick follow up.
I know, it's a little bit early but obviously it does give me a lot of focus on free cash flow generation and obviously, how a lot of investors have been thinking about your rolling three year average is 23 is a bit of a hiccup and that kind of longer term trends, perhaps either you or Andrew could just hit on the key considerations as we're exiting 'twenty three understanding there can always be a lot of movement.
Between the fourth and the first quarters, but how should investors be broadly thinking about the longer term algo as it specifically as it pertains to hopeful 24 improvements. Thank you.
Sure, It's Andrew Chris Thanks.
Look I think that based the story for free cash flow in 2023 is actually relatively simple, however, challenging and disappointing it might be in the immediate term.
We have a substantial drop in EBITDA guidance for the year that flows directly through cash flow.
The sales growth is in the second half and the balance of our sales is more second half weighted as you know well given that the regions in which those sales are made we won't collect on those sales in the year. So collections are lower but building on comments Mark made in our prepared remarks, we are adjusting production levels across our operating lines right now.
We're not buying anything.
As we're not manufacturing a lot of <unk>.
Ample inventory at the moment, so we're not manufacturing a lot of new material. So we're not buying anything so we're looking at somewhere north of a $400 million drop in accounts payable at year end I mean simply.
Simply a $180 million drop in the EBITDA guidance and a 400 million drop in accounts payable basically wipes out the free cash flow. We had guided for this year now as you pointed to free cash flow is pretty lumpy and as you cross time periods can can swing pretty rapidly. We do expect that as we move into a more normalized conditions in 'twenty.
For that we would see a rebound in free cash flow, we see a rebuilding of payables, we see a reduction in inventory and we get back to a more normal collection cycle, a more balanced between the half of the year.
So we have no we have nothing that makes us feel any different about our long term goal and expectation that we should operate this business at about a 70% plus ROA.
Rolling average free cash flow generation.
These repetitive these adjustments and this channeling inventory reset this year is just too much to overcome unfortunately in the six month period. So that's the reality of the free cash flow, but again I think we feel very confident about the cash generating capability of this business over the long term and you will see that rebound.
Situation normalizes.
Helpful color. Thank you.
Thanks.
Thank you.
With our next question comes from Charlotte Tiano from Bank of America Your.
Your line is now open.
Great. Thank you very much.
So the first thing I wanted to understand things.
You mentioned, how farmer applications seem to be flat year on year holding up.
You talk a little bit about your.
How you go in and trying to understand what farmers are doing and what confidence level in house here, because obviously what farmers.
Not only do we have the critical point in understanding how much of this volume.
Volume decline is true demand decline versus actual destocking.
Yes, sure I mean, there's different methodologies for us to be able to to have some insight into what is happening of the grower level first of all is acreage that gets planted.
Obviously, you're planting youll using crop protection products, so thats something that we look at around the world and as well recorded and many in.
Independent consultants look at that.
The second is there are other independent sources that we put information and in the rest of the industry puts information.
Then you get an aggregate.
In aggregate output, which tells you what the market is doing that is particularly strong in Brazil is particularly strong in the U S less so in Europe .
And less so in Asia. So it's a couple of things it's our understanding on the ground of what's getting planted and then what is being applied and then also third party independent sources.
Which are available to everybody.
Alright, Thank you and my follow up is a little bit on trying to understand what's happening with your timeline partners.
So firstly you were talking about Destocking. So essentially your view of your understanding the diamide demand, whether it's branded products or from your partners is holding up but your partners like <unk> are going above and beyond to lower their AI purchases, Firstly, and secondly, I think for <unk> specifically.
The U S market with fleets chassis product too.
Few months ago, what is the impact for this through your own branded business from the U S.
Well a couple of things so first of all when we talk about supply and technical grade <unk> to our partners think of as essentially a raw material supplier. So they are treating us as a raw material supply are the same as we're treating our raw material suppliers. So it's nothing more than that it is a simple case of they obviously have demands.
Their inventories that they are having to reduce and we are part of that.
We do that to our own supply is not doing it right now.
So you see that from a demand perspective.
We don't think the demand is slowing down at all neither as Atlas as we just commented on to.
The second part of your question with regards to competition in the U S. We've seen competition for some time in many parts of the world with the dialogues what we do know is that our branded products on the new introductions that we're making of new formulations are moving the needle in other words, we're not selling the same products that we were selling five years ago.
We're selling more sophisticated higher concentrations formulations to our current customers, so where generics are coming in with a certain type of product, we don't wind up selling those products anymore, we're selling something completely different so it's very much a case of our product lifecycle management that we've been going through it we've been talking about for the last five years.
It is now bearing fruit in terms of how our product mix is changing for our branded dialogues.
Thank you very much.
Thank you.
Thank you.
Our next question comes from Vincent Andrews from Morgan Stanley .
Line is now open.
Thank you and good morning, I'm wondering if we could talk a little bit just about raw material costs, obviously that was a good news story.
So let me start in the second half of this year and into next year.
Just wondering with the reduction in production.
Sure and then presumably others will have to do the same thing.
Should we be expecting more deflation, obviously, maybe not immediately but as we move into 2024.
Yeah Vincent Good question and let me just started up and then Andrew if you want to talk a little more granularity on the cost side, certainly we've been anticipating and we expected lower cost as we go through the second half of the year, we started to see that in Q2, and we've talked about on the order of magnitude difference in Q3, which we know is there.
I would say generally in the industry.
Prices have come down continue to come down.
I think we're looking at perhaps a little better scenario than we saw at the beginning of the year.
A lot depends on what China does we're seeing a lot of shutdowns in China.
After they've been selling products, what we believe has been below costs. Obviously, you cant keep that going through very long. So it will be interesting to see what happens to many of the Chinese producers that are probably in some significant financial.
Issues right now we expect that we expect some of those smaller companies that disappear.
Our view is that we will expect to see the current level of lower.
Raw materials and intermediate costs roll through into 2024, but Andrew do you want to just comment on that further yes, certainly I think Vincent I think youre spot on and that we are seeing improvement in costs.
As.
The pressures of the Destocking hit every stage in the value chain.
Despite the weak volume outlook for Q3, we still have substantial cost tailwind in the quarter. In fact, the cost tailwind there are stronger now than what we anticipated three months ago. Some of the things that move more quickly through through our inventory and enter into costs like packaging.
Materials for example have improved.
We are seeing improved cost we saw better than expected cost in Q2, we're expecting stronger than what we had initially expected in Q3 I think you see continued benefit of that in Q4.
These dynamics pushing back into the chain, having set up a very favorable cost position going into 2024.
A bit hard to look too far out to 2024, just yet but from what we can see we should start the year at a very favorable input cost situations.
Okay.
As a follow up I know with the reduced guidance when you pre announced it came with.
Some incremental cost out efforts that you are going to do and then I just would like to get a better sense of what it is that you're doing and how you're sort of balancing the desire to sort of improve your near term earnings situation through the challenge.
And then obviously look for cash flow versus.
Last year or two we've been talking about the very successful investments you've made in opening up new markets and doing things like that so how are you trying to sort of balance.
It's obviously, a very challenging period of time, right now with sort of making sure that you're continuing to do the right things to invest in the growth of the business over the medium to long term.
Yes, Vince and listen.
It's a very good point and we would run this company for the long term and the company really is built that way in terms of I think of R&D and the longevity of that R&D pipeline.
We're not cutting back on our R&D.
Thats something that is very important to us we believe the strength of that pipeline will drive the overall valuation of the company over the long haul.
So we're doing everything we can not to slow down the projects in R&D that doesn't mean to say, we can't save costs in R&D from an operating standpoint, but we're not slowing down the main projects. That's the important message on the rest of the company. We're really focused on the front end the very point at the end of the company, which is all our commercial groups in multiple groups.
Drive revenue demand.
There are many things that we look at in terms of all the line items from a sales and general and admin perspective.
Well were cut so we're cutting back in the short term on things that we know will not impact our customer intimacy won't stop us getting volume or demand thats out there so really focusing on the customers everything from the customer back we're doing everything we can to reduce that spend Andrew do you want to add anything yes, I just would emphasize that we are.
Trolling spend we are still going to be spending more dollars in R&D. This year than we did last year, we're just not growing quite as fast similar with SG&A and as Mark pointed to you know, we're not making any compromises on investing in the commercial operations of the company and that expanding market access and building that closer.
Intimacy with the customer we are being very careful and metering our spending in other areas.
And I think this is something that we've demonstrated over a number of different disruptions that have occurred in the past 15 years that we can do particularly in the last five so we will we will be spending well below what we started the year planning to spend.
But we will continue to make investments that are going to drive the long term future of the company and nothing that we're doing has any structural impact to the company's ability to grow.
Okay very good to hear thanks, guys.
Thank you.
Thank you.
We have our next question comes from Josh Spector from UBS, Josh Your line is now open.
Good morning, Lucas, Josh So I just wanted to go back to the volumes if I could sorry, instead, if I understood your comments earlier correctly.
<unk> of the volume growth over the last two years was more.
Driven by.
Customers that are ordering and it's basically going enter into inventory versus the underlying demand.
If we kind of look at it so your trends this year in the last year.
Three year period basically in line with that sort of long term low single digit kind of volume right.
I guess, Tim as we think about the setup for next year is that.
That mean that we should basically got it just a return to trend growth from this lower level.
Not really expect more of a write down or how should we kind of think about that thanks.
Yeah. Good question I think I think your thesis is pretty close to how we think about it I think going forward.
Its early August .
Almost impossible for us to think through to 2020 full right now we haven't even really started our budget process, but if I just take a step back and think about the fundamentals of the market that we're talking about what do we see we see soft commodities and grains at very good prices in the marketplace not quite at the peak they were about.
A year 18 months ago, but not far off and certainly well above.
The long term average for these products.
You look at the stocks to use ratios stock to use ratios in many of the soft commodities have been trending down why because we had yield issues around the world.
Climate change really does impact agriculture, you could see what happened as we talked about in Latin America last year unprecedented drought in south of Brazil, and Argentina, We've had flooding in the north of India. We've got a dry Midwest right now in the U S.
Heath in Europe , all of those things contribute to a higher commodity price and lower yields.
So thats a good backdrop for somebody to sell into.
So fundamentally we know there is demand we know we have to increase productivity by about 3% a year just to keep Hungary day around the world. So I think the backdrop is solid we see acreage increases anticipated, especially in Brazil, and other parts of Latin America as we go into the next season. So for me that on.
The ground.
Grow our view of the World is positive and right now it's hard to see what would change that so it's a little early to say what our growth rates would be next year, but I am expecting a positive backdrop as we roll through 2024.
Alright, Thanks, and then just on the fourth quarter, specifically could you walk us through your margin assumptions that again in Q or K dogs. So how much of that is kind of from volume catch up this is more normal trends.
How much do you expect raw materials to help turn in the fourth quarter.
Thanks, Andrew here on margins in the fourth quarter look I think it's all of the above we.
We do have positive positive volume contribution, but remember when we look at volume we include mix and volume.
Strong quarter for us for new product introduction, Mark mentioned, two specific products for Brazil, but we have very high expectations for but it's a broad portfolio of newer products that will contribute to a more positive mix, we do have cost tailwind we.
We do have incurred input cost favorability that we expect to sustain in Q4, we do have some modest continued pricing benefits now and thats not necessarily new price increases, but the year on year comparison from where we've raised prices to at this point still carrying over versus the prior year. So that's a broad based combination there and it really does.
Does allow us to deliver what will be one of the strongest margin quarters that in quite some time for FMC.
But it is a combination of all those factors in the fourth quarter at input cost it's volumes at the operating expense discipline as well. It's the continued pricing benefit of actions we've already taken all of those factors.
Alright, thank you.
Thank you.
We have our next question comes from Laurence Alexander from Jefferies.
Your line is now open.
Good morning. This is Dan Rizzo on for Laurence. Thank you for taking my question.
I remembered in 2015 2016 that channel inventory Destocking became a multi season issue I was wondering if you think of how things are different now and if that is somewhat of a risk to happen again.
Yes, 2015, you got to remember back to 2015 since a long time ago now but.
That was it.
Particularly event in Brazil.
It was both inventory currency impact.
And it was a game that scarcity of products leading into that I think this is different in the sense of it's broader.
It is happening much faster in other words the decreases we're seeing on a quarterly basis right now they are much more extreme than they were before I think the other thing.
For us in particular, although there was a lot of people impacted by the Brazilian event. There was a new seed trait that was introduced into Brazil for soybeans, which impacted insecticides within a reasonably short time frame.
That was a factor that is certainly not at play today in any way shape or form so.
I don't necessarily look back on Brazil, as a proxy for what is happening today.
Alright. Thank you that's helpful and then.
You guys.
Kind of quantify what sort of headwind unfavorable cost absorption will be given the lower production levels you talked about in the second half of the year.
Yeah, Yeah, we haven't we haven't we have not yet quantified that in part because it's a moving target we do anticipate based on what our operating levels are right now that there will be some modest.
Fixed cost absorption headwinds in Q4, that's built into our guidance, we'll be very clear.
And mitigate and offset that.
Small amount of input cost benefits, we have in Q4.
In terms of how that might bleed over into next year, it's too early to know because it's going to depend on how we operate through the rest of the year.
I think we're being very thoughtful about managing our inventory is trying to bring them down in line with current demand, but also leave ourselves in a position to be able to capitalize on the eventual recovery markets.
It is a bit of a moving target, but I think key message both our Q3 and Q4 guidance reflects our expectations for any impact of Unabsorbed fixed costs. In these periods as we look forward to the next year, it's really going to depend how the rest of the year plays out.
Thank you very much.
Yes.
Thank you.
Our next question comes from Adam Samuelson from Goldman Sachs.
Adam Your line is now open.
Yes, Thank you and good morning, everyone.
Good morning.
I was hoping maybe.
Draw a little bit closer distinction in terms of the second quarter sales decline and the trends youre seeing between.
Orders from your customers for where you are in supplier of <unk> to other crop Chem manufacturers too.
Sales into the channel and is there is there actually any distinction in terms of sales trends and the magnitude of decline.
Just to glean from those just as we think about kind of where the change in activity levels have occurred.
Demand.
And again, it's been global it's been okay. Its Maggie.
Magnitude thats really not with it not with recent precedent, but I'm just trying to distinguish where you are now a bigger supplier to other manufacturers and you are historically kind of how that has.
If there was any meaningful change in distinction between those two sales trends.
Yeah listen I think we just commented on the fact that in that.
Branded <unk> that we're selling ourselves into the marketplace did much better than the overall portfolio.
A subset of that new product introduction in other words, we're introducing new branded volume is that a very differentiated that's what the market is looking for what the market is looking for new products.
Enable them to remove S break resistance et cetera.
I think the sales to our partners.
That is used for a number of different applications, whether it's for seed treatment or whether it's for foliar applications. So they're going about their business in their own way and managing their inventory as they are there is no indication as I said earlier that the volumes to the end users are falling off it's more of an inventory management perspective, but I do want to emphasize.
The fact that our own diamide sales our own branded products are doing extremely well, especially the recently launched products.
Okay, and then if I just think about the fourth quarter and the cadence of revenue revenues for the balance of the year, where you have volumes improving in the.
<unk> can you talk about this.
Just the magnitude that.
Do you expect the contribution from some of those new products introductions.
Kind of where.
Don't really firm orders per se, but we're just help us that meeting a discrete building blocks to return to growth in <unk> versus kind of what is just an assumption of a return to more normal buying patterns from here from your channel partners, presumably in South America, most notably.
Yes, I mean the <unk>.
New products are really targeted at Latin America.
I'm going to give the numbers for that because I don't want to give away any competitive information of how well we're doing but we already have significant interest from our partners in the channel whether it's distribution co op. So large growers for these new products. So we're very we're very excited about bringing those products to market and so.
Paul.
The interest that we've generated with our growth is very very positive.
Okay I appreciate the color I'll pass it on.
Thank you.
Thank you.
With our next question comes from Arctic Sea from all from kickoff.
Your line is now open.
Good morning. This is Paul on for let's see can you walk us through some of the adverse weather conditions, you are seeing and where inventory levels stand on those regions. Thanks. So much.
Yes.
I just met a comment earlier about whether I mean, we've had in the first half of the year, obviously very difficult conditions in the south of Brazil, and Argentina through drought, we're seeing dry conditions in the Midwest of the U S. A.
Very dry conditions in.
The south of Europe , as you go through Spain, France, Italy, Greece.
Turkey, We also have seen flooding in China flooding in the north of India dryness in the South of India, China, and Australia, I mean, the list goes on and on we're dealing with more weather volatility than we ever have over.
Over the last year. So those are the types of things that.
Mother nature throws at US and of course mother nature doesn't care about the financial quarters that we have to deal with but thats something that we all have to manage as we play in the agricultural field, but it is certainly real and in some countries, it's very very impactful.
Great.
Just follow up as raw materials, and the logistics environment starts to normalize do you see the supply of more competitive products entering the market.
I guess, you mean from a generic standpoint.
From what do you mean from them.
Could you just elaborate a little bit more what youre looking for.
Yes, yes from a generic standpoint.
Listen generics play a major role in the marketplace that have been around and they are around we don't necessarily play in a lot of those markets, it's not not to say that the markets. They play in a valuable they are.
But we don't have a lot of generic pressure and a lot of our product lines, mainly because of how we differentiate through either new active ingredients on new formulations that we bring to market.
No.
I expect the generic market to get more competitive, but we don't play in that space.
Thank you.
We have our next question comes from Richard <unk> from Wells Fargo. Richard Your line is now open.
Great. Thanks.
My question just from a bigger picture you mentioned that the macro environment has changed the way that.
Your customers have been.
Managing inventory.
Is there any change in terms of what you think about in terms of what the mid cycle.
Sure.
Earnings generation of the businesses.
Should we look at $1 4 billion sort of like as a good base to move from going forward.
Yes. This is very good question I mean in November we're going to give you a view of our world going forward for the next three years and then a longer term aspiration.
But we've been we've been clicking along at a fair rate of 5% to 7% top line seven to nine Bottomline.
We just did a look back and we've outgrown the market anywhere from one five times to two five times over the last 20 years.
So we know we have a model and a portfolio that can deliver that type of growth I do think.
Thinking of this year as a reset is a good way to think about it and then how do we bring the next generation of growth to the company I don't see it as some massive rebound next year I don't think thats going to happen.
I think the channel is learning the lesson of.
Carrying the right amount of inventory. So I think we will reset this year and then we will move forward and we'll share with you in November what we think that potential new algorithm will look like in terms of topline.
EBITDA and EPS growth going forward.
Okay, great and just as a follow up.
How is the biological.
[noise] impacted at all by the change in the market environment.
Do you still see seven 8% CAGR growth next few years I know, we get an update in November but any thoughts on that right now it would be great.
Yes, I mean listen I don't think Theres, a single piece of this crop protection market that has not been impacted in the same way whether they are biologicals are micro nutrients or whatever the product you are bringing to market I think everything has been impacted by the significant reset we are seeing now having said that we still have.
Expectations that the plant health business will grow in that 20 plus percent range. The biologicals are growing even faster we will continue to see that accelerate as we invest more especially in R&D.
We see that continuing and it's not something that.
We feel has been.
Hampered long term by this recent reset if anything it teaches us that having that broader portfolio is going to help us going forward from a value perspective. So we do see plant health as it continues to be a major focus for us and the biologicals will continue to outpace the rest of the company by some degree.
Thank you.
With our last question comes from Joel Jackson from BMO, Joe Your line is now open.
Hey, good morning, everyone. This is Joseph on for Joel.
So just to help get volumes moving again.
FMC consider increase in rebate programs in the second half to help pull forward some volumes from first half of 2023.
Good question listen there is always a commercial package to be put together and.
Rebates in some parts of the world.
Meaningful way that we go to market like everybody else the U S being one of those markets, but rebates are not used all over the world. So we consider all of the tools, we have to make sure that we're delivering value to the growers and then we're getting the appropriate value to FMC. So is there a rebate changes to be made there'll be made but it will be done in the context of the value of <unk>.
Okay.
Okay, and then just coming back to Q4.
In terms of cost so they essentially all want to know and how much of Q4 volume and price expectations are at risk would you say.
Andrew do you want to add I'll chime in on at least the first part of that question I think the cost for Q4 are largely locked there are items and move more quickly through our cost structure, particularly packaging items and logistics that we can continue.
To move as we move into fourth quarter, the final mix actually does matter because.
The cost reductions, we're seeing are not uniform across every input or every product that we have so I do think we have a high confidence in the level of cost.
When we were expecting in Q4.
Vast preponderance of that is pretty much locked in but.
But not quite all of it just yet.
In terms of Mark maybe you want to speak to price and price and volume in the fourth quarter in terms of visibility there. Yes. I mean, there is some price and volume will be as we've said it'll be within the quarter or very close to the quarter little early to say at this point.
But as we get.
No exactly how we're playing and how the market is moving our expectation as I've said numerous times as we expect orders to be coming very close to the planting season, and that's what we're gearing up for.
Thank you.
Due to time constraint I will now pass it back to Mr. <unk> for closing remarks.
Alright, that's it Glenn Thank you very much that's all the time that we have for the call today. Thank you and have a good day.
Thank you.
This concludes.
Corporation Conference call. Thank you for attending you may now disconnect.