FMC Corporation (NYSE:FMC) Q2 2023 Earnings Call Transcript

FMC Corporation (NYSE:FMC) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good morning, and welcome to the Second Quarter 2023 Earnings Call for the FMC Corporation. This event is being recorded and all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Mr. Zack Zaki, Director of Investor Relations for FMC Corporation. Please go ahead.

Zack Zaki: 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 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. Let me remind you that today’s presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning certain factors, including, but not limited to, those factors identified in our earnings release and in our filings with the Securities and Exchange Commission.

Information presented represents our best judgment based on today’s understanding. Actual results may vary based upon these risks and uncertainties. Today’s discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, free cash flow, net debt and organic revenue growth, all of which are non-GAAP financial measures. Please note that, as used in today’s discussion, earnings means adjusted earnings and EBITDA means adjusted EBITDA. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today’s conference call are provided on our website. With that, I will now turn the call over to Mark.

Mark Douglas: Thank you, Zack, and good morning, everyone. Our second quarter results are detailed on slides 3, 4 and 5. Sales in the quarter were significantly impacted by a substantial decline in volumes across all four regions. During our first quarter earnings call, we already had reduced our outlook for the crop protection market and thought 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 and planted acres continue to grow in key geographies.

Channel feedback indicates the destocking actions are a result of three factors: first, higher interest rates have increased the carrying cost of inventory; second, there is increased confidence in product availability as the supply chain disruptions of the past few years have eased; and third, price reductions in fertilizers and nonselective herbicides have led to a wait-and-see approach to ordering. As a result, growers in the distribution channel are 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 were at levels similar to last year which aided product mix and illustrates the value of our innovative portfolio.

Branded diamides 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 perform 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 diamides, including Coragen MaX, also showed strong growth, primarily due to elevated insect 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. 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.

Pricing momentum continued in the quarter. Costs became a year-over-year tailwind for the first time since 2020 as input costs continue to decline, and we closely manage spending. FX was a headwind to EBITDA in the quarter. Moving to the outlook for the rest of the year. Slide 6 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 be 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 growers will continue to order products closer to the planting season. Business fundamentals remain solid as grower consumption and product 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 in the midpoint, which is a 16% higher than the prior year results. The main drivers are expected tailwinds from lower input costs, improved mix from new products and a modest pricing tailwind, partially offset by volume headwinds. This is expected to result in EBITDA growth and healthy margin expansion.

Slide 7 provides the quarterly guidance for the second half of the year. Volumes are forecasted to 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. However, 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 orders 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 midpoint, primarily from higher volumes and the positive mix impact from new products. Slide 8 provides the second half assumptions for the outcomes at each end of our guidance range. The largest variable in the range is 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 tailwinds. However, we are aggressively managing our working capital in response to the current trend of order patterns, including adjusting production levels across our manufacturing lines.

Many of our lines are currently not operating which will result in some unabsorbed fixed costs. I will now turn it over to Andrew to cover cash flow and other the financial items.

Andrew Sandifer: 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 headwinds 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 tailwinds, 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 tailwinds, 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. Substantially 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 is 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 and equal tranches of 3-year, 10-year and 30-year maturities. Proceeds 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 30th, up $470 million from the prior quarter. Gross debt to trailing 12-month EBITDA was 3.8 times, while net debt-to-EBITDA was 3.0 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 on our revolving credit agreement. We signed the final amendment on June 30th, which raises our leverage ratio covenant to 4.0 times through March 31, 2024, and 3.75 times thereafter. We believe this amendment provides us ample room to navigate through the current disruptions. Moving on to 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 as substantially lower use of cash for receivables was more than offset by negative cash flow impact on nearly every other line.

Capital additions and other investing activity spending was up while legacy spending was down. With this result, year-to-date free cash flow at June 30th was 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 impact on working capital of the current channel inventory reset. We returned $123 million to shareholders in the quarter in a combination of $73 million in dividends and $50 million in share repurchases. Between May 10th and May 17th, we purchased approximately 457,000 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 reduced our free cash flow guidance to zero at the midpoint for 2023. This is a result of the decline in EBITDA, lower first half sales resulting in lower cash collection and an expected 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 million 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 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 evaluate restarting share repurchases in 2024 as leverage levels return to targets. And with that, I’ll hand the call back to Mark.

Mark Douglas: 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 the 16th. 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, 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 add real value to our overall profitability, as well as new products we have coming in Q4, especially in Latin America for soy 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.

See also 10 Best Small Cap AI Stocks To Buy Now and 20 Best Apps for Getting Laid and Casual Sex.

Q&A Session

Operator: [Operator Instructions] We have our first question comes from Laurent Favre from Exane BNP Paribas.

Laurent Favre: I’d like to go back to what changed since the May outlook and you — Mark, you mentioned the volumes seen at low single digits and now up to low double digits and yet with consumption being broadly flat. I was wondering, has it changed your assessment of how much went into the ground last year, or do you think that channel inventories will end up abnormally low this year. And I guess it’s a way of asking if there are reasons to hope for a big volumes reversal into 2024? Thank you.

Mark Douglas: Yes. Thanks, Laurent. Well, first of all, you can tell by the comments we made, as we went through the quarter and 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. And this came, I think, through basically starting at the grower level. What we suspect now is that growers were holding inventory to levels that have not seen before. And let’s be clear, it’s not normal for growers to hold inventory. It’s not something they usually spend their cash on. So, our analysis today says that growers were holding inventory. When retail went to sell to growers, growers basically said, “Well, 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.

And 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 has now been 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 they’re going to be much closer to the planting season.

That doesn’t normally occur. We’ve talked about in the past that at this time of year, we have a certain percentage of orders on hand. That’s not the same this year at all. We’re expecting those orders to flow as we go through late Q3 and into Q4. Now that’s 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 phenomenon. We won’t see that in Europe until Q1 and into Q2 just because of the way the seasons flow. Asia is a little more balanced because we have both Northern and Southern Hemisphere. So it is going to be a case of we expect inventories to start normalizing as we go into Q4 and order patterns 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. I think 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.

Laurent Favre: Thank you. And you also mentioned the price declines in fertilizers and nonselectives as the reason, I guess, for growers to change behavior. In that context, what gives you confidence that you can avoid price cuts into the second half and into next year, in particular, given the context of variable cost deflation? I’m not aware of such a strong pricing discipline in the industry, but maybe especially for diamides, it might be a different story.

Mark Douglas: Yes. Listen, I think given the strength of the portfolio, and I just alluded to the fact that 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’re bringing that are differentiated. And 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 pretty much already have in place the prices. Now it’s a case of managing through the disruptions and the holding price as we go forward, which we’re confident of doing. 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.