FMC Corporation

Good morning and welcome to the first quarter 2020 earnings call for FMC Corporation.

Thank you and good morning, everyone. Welcome to FMC Corporation's first quarter earnings call. Joining me today are Pierre Brondeau, Chairman and Chief Executive Officer, Mark Douglas, President and CEO-elect, and Andrew Sandefur, Executive Vice President and Chief Financial Officer. Pierre will review our first quarter performance, Andrew will provide an overview of select financial results, and Mark will discuss the outlook for the rest of the year. We will then address your questions. Our earnings released in today's slide presentation are available on our website, and the prepared remarks from today's discussion will be made available after the call. Please note we published an updated slide presentation this morning to add one slide that flew into Pierre acquisition. Finally, let me remind you that today's presentation discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our earnings release and in our filings with the SEC. 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 include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, pre-cash flow, and organic revenue growth, all of which are non-GAAP financial measures. Please note that earnings shall mean adjusted earnings and EBITDA shall mean adjusted EBITDA for all income state references. A reconciliation definition of these terms as well as other non-GAAP financial terms to which we may refer during today's call are provided on our website. With that, I'll now turn the call over to Pierre.

Thank you, Michael, and good morning, everyone. FMC delivered another very strong performance in the first quarter with 9% organic revenue growth. Despite all the challenges posed by the COVID-19 pandemic, underlying demand for our products remained very healthy in the quarter. These results were driven by the exceptional work of our global supply chain, operations, and commercial teams. Before going into the detail of our Q1 results, we felt it was important to provide a high-level view of the state of our company in this uncertain global economic environment. We are an agriculture sciences company, and our products are critical to the global food supply chain. Since agriculture is considered an essential industry in the countries where we operate, we have avoided significant plant closures and all our facilities are operational. In fact, all our key plants in China operated through the Chinese New Year holiday and continue to do so today. The well-being of our employees is FNC's top priority. Although most FNC employees around the world have been working from home during these last several weeks, we have hundreds of employees who continue operating on manufacturing sites, blending and packaging facilities, and distribution warehouses. These sites, as well as certain non-manufacturing locations with limited employees in the office, are using a variety of best practices to address COVID-19. This includes the use of facial PPE, social distancing protocols, expanded cleaning procedures, and other precautionary measures recommended by leading health authorities. Due to the stay-at-home orders around the globe, our commercial teams use a variety of digital technologies, including workshops, webinars, and virtual field days to continue working closely with our customers and generate demand. We successfully mitigated the impact of COVID-19 in Q1, but given the spread of the pandemic in March and increased FX headwinds, we are conscious of potential risks in the rest of the year. Therefore, we have already implemented price increases and cost-saving measures across the company. Marc will describe the potential headwinds as well as the pricing and cost containment actions in more detail later. Turning to slide three, FNC's strong financial performance from 2019 continued in the first quarter against an industry-leading comparison. Last year, our business grew 14% organically in Q1. This year, we reported $1.25 billion in first quarter revenue, which reflects 5% year-over-year growth on a reported basis and 9% organic growth. This increase was driven by double-digit growth in India, Pakistan, France, UK, Russia, Brazil, Mexico, Argentina, and Canada. Adjusted EBITDA was $357 million, an increase of 4% compared to the prior year period. EBITDA margins were 28.6%, essentially flat with prior year. despite $52 million in combined headwinds from FX and costs in the quarter. Adjusted EPS was $1.84 in the quarter, an increase of 7% versus Q1 2019. This year-over-year performance was driven largely by the $14 million increase in EBITDA, reduced share count, and the benefit of a lower tax rate partially offset by higher interest expense. Moving now to slide four. Q1 revenue grew by 5% versus prior year with volume contributing 7% growth and price adding 2% offset partially by a 4% headwind from FX. we achieved higher pricing in all regions. New product launches this year generated 1.5% of the 5% top-line growth we posted in Q1, offsetting half of the 3% headwind from products that were discontinued either because of registration cancellations or rationalizations that we had planned for and discussed in our last earnings call. Latin America grew 26% year-over-year and 38% excluding effects, driven by double-digit growth in Brazil, Mexico, and Argentina. Insecticides were especially strong in Brazil on cotton, sugarcane, and soybean, and herbicide growth in Brazil was driven by sugarcane replanting. As we have commented for many quarters, we monitor our product in the channel in Brazil very closely, and our channel inventories continue to be at low levels as we come to the end of the season. In Argentina, solid demand for insecticide drove new sales, and in Mexico, fruit and vegetable exports continue to present increased opportunities for a dynamite portfolio. In North America, sales increased 3% year-over-year, driven by strong demand for an active peer insect control, as well as fungicide and a new pre-emergent herbicide authority edge. In Canada, our authority herbicides continue to gain adoption, driven by weed-resistant concerns. Over the past couple of years, we have invested in upgrading our authority herbicide franchise to focus on newer, more effective formulations to combat changing weed resistance. This has allowed us to reduce sales of less effective, older formulations and lower our channel inventories. Plus, channel inventories in North America continue to improve, and with the new season starting, we do not see a reason for concern going forward. Sales in EMEA grew 1% year over year and 4% excluding FX due to robust demand for newly introduced fungicides and solid growth in herbicides for cereals. We saw growth in over 10 countries, and new products drove a 2% increase in overall revenue. Registration cancellations and product rationalizations were a headwind. In Asia, revenue decreased 3% year over year, but was flat, excluding FX. The decline was driven primarily by foreign currency headwinds, and product rationalization, as well as COVID-19-related challenges in China, which impacted both supply and demand. These were partially offset by broad-based double-digit growth in India and Pakistan, along with a return to growth in Australia as weather improved. Turning to the first quarter EBITDA bridge on slide five, you see a $40 million volume contribution, which drove the year-over-year growth. We also realized price increases of $26 million against $45 million in FX and WINS. I will now turn it over to Andrew.

Thanks, Pierre. Let me start this morning with a few brief highlights from the income statement. The U.S. dollar strengthened against virtually all major currencies important to FMC during the first quarter, reducing revenue growth by 4%, twice the level we had anticipated when we last gave guidance. It is important to note that the BRL represented only half of the Q1FX headwinds on revenue, with a broad set of European and Asian currencies accounting for the remainder. As Mark will discuss further when he shares our outlook, We now expect these FX headwinds to continue at an elevated level throughout 2020, with pricing trailing FX impacts in Q2, but catching up during the second half of the year. Interest expense for the quarter was $40.8 million, up $6.3 million from the prior year period, primarily due to the impacts of our third quarter 2019 debt offering and higher foreign debt balances, partially offset by lower term loan and commercial paper balances. With the decrease in interest rates since the beginning of the year, we now anticipate interest expense between $155 and $165 million for the full year, somewhat better than our prior guidance. Our effective tax rate on adjusted earnings for the first quarter was 13.5%, consistent with our expected full-year tax rate of 12.5 to 14.5%. Moving next to the balance sheet and liquidity. Global credit markets saw significant disruption in volatility in March, driven by the COVID-19 pandemic. Despite this, FMC had and continues to have more than ample liquidity to support our operations. FMC has historically relied on commercial paper to finance working capital. U.S. commercial paper markets are the most cost-efficient source of working capital financing in the world. Additionally, we also have a $1.5 billion revolving credit facility that serves both as a backstop to our commercial paper program and as a direct source of borrowing when needed. As COVID became a more clear crisis in the U.S. in mid-March, out of an abundance of caution, FMC drew down $500 million on our revolver to ensure we had sufficient liquidity regardless of near-term volatility in commercial paper markets. However, we continued to place commercial paper to stay active in the markets. That market has now returned to more normal conditions. As such, we have reduced our revolver borrowing to $250 million through mid-May, when we anticipate taking them to zero, presuming commercial paper market conditions remain stable. Gross debt at quarter end was $3.8 billion, including the $500 million in revolver borrowing. Because of this revolver draw, we had surplus cash on the balance sheet at quarter end in excess of $300 million. Considering the surplus cash, gross debt to trailing 12-month EBITDA was 2.8 times at the end of the first quarter, above our targeted 2.5 times annual average leverage, and reflecting the seasonal working capital build intrinsic to our business in the first quarter. As many of you may be aware, our maximum leverage covenant was set to tighten from 4.0 times debt to EBITDA at March 31st to 3.5 times on June 30th. As the COVID crisis became more pronounced during March, we assessed a wide range of potential downside scenarios for the company. We did not see any of the scenarios resulting in greater than 3.5 times leverage as being likely, and we were confident that we have levers we could pull to further conserve cash if the situation really began to deteriorate. However, again, out of an abundance of caution, we decided to reach out to our bank group to discuss a covenant amendment. Our bank group was very supportive, and we quickly aligned on moving our debt to EBITDA covenant to 4.25 times for the remainder of 2020, stepping down to 4.0 times on March 31st, 2021, and 3.5 times on June 30th, 2021. Moving on to slide six, and specifically cash flow and cash deployment. Free cash flow for the quarter was negative $371 million. The primary driver of the variance versus the prior year period was increased working capital, which is partially offset by positive cash benefits and other operating assets and liabilities. Net receivables increased on higher sales, partially offset by the catch-up of collections delayed from Q4. Inventories improved somewhat. Payables, however, were significantly lower than the prior year period, which benefited from elevated payables related to delayed site transfers. Looking ahead to the full year, we are maintaining the free cash flow guidance range of $425 to $525 million. Due to increased uncertainty in the global business environment, we are taking several prudent steps to reduce cash outflows in 2020, such as deferring discretionary capital investment and aggressively managing the balance of collections and payables to protect our cash position. While we continue to expect to generate substantial free cash flow in 2020, We are temporarily suspending share repurchases until we have a more clear line of sight to normalization of COVID-related disruptions. Our Board remains committed to the dividend, as evidenced by the dividend declaration made last week, and we do not anticipate any change to our dividend policy. We will also continue to fully fund our growth plan, including making smaller technology-driven investments, such as the transaction we announced this morning. Mark will describe this compelling investment in more detail in a few moments. To be clear, our capital deployment policy has not changed. We are only pausing share repurchases given the current environment. Over the mid and long term, we are firmly committed to returning cash beyond what is required to fund the growth of the company to shareholders through share repurchases and growing dividends while maintaining solid investment grade credit metrics. Finally, let me also give an update on progress in implementing our new SAP S4 HANA system. At our last earnings call, we were literally in the midst of going live across the business acquired from DuPont, which represents roughly 40% of F&C. That go-live has been extremely successful. This quarter's close was the first quarter end, where we closed with 60% of the company on the new S4 HANA system. Additionally, due to COVID-related workplace restrictions, This closed process was completed with nearly all of our finance team working remotely, reflecting the agility of our organization. We are focused on completing the implementation of the new SAP system across the remainder of FMC by year end, which will give us a thoroughly modern system across the entire company and will enable further efficiencies in our back office processes. And with that, I'll turn the call over to Mark.

Thank you, Andrew. Shifting to the global crop protection market, we previously forecasted the global market to be up low single digits in 2020. We now project the markets will be flat versus the prior year due to the various impacts from COVID-19 and the strength of the US dollar. All these forecasts are for the market, not FMC, and are in US dollars. We forecast that the North American market will grow in the low single digits, same as we thought three months ago, based on the assumptions of increased acreage for row crops and a recovery in Canada after two years of dry conditions. We expect the market in Europe will grow a little faster than we thought before, but still low single digits, driven by strength in Eastern Europe and in the cereals and corn markets. We now expect the Asia market will be down slightly, versus our prior estimate of low single-digit growth. based on the impact we have already seen from COVID-19 in China, India, and other countries, in addition to FX headwinds. We also lowered our forecast for the Latin American market significantly, as we now expect it to contract by low to mid-single digits versus slight growth in our prior view. This decline is driven by weaker currencies rather than lower demand. Moving to slide seven and the review of our full year 2020 and Q2 earnings outlook. Factoring in certain potential challenges brought on by the COVID-19 pandemic and FX headwinds, the company is widening guidance ranges to incorporate more risk to the downside of our prior guidance. FMC full year 2020 adjusted earnings are now expected to be in the range of $6.05 to $6.70 per diluted share, a year-over-year increase of 5% at the midpoint. EPS estimates do not include the benefit of any share repurchases in 2020, which the company is suspending, as Andrew indicated. 2020 revenue is now forecasted to be in the range of $4.65 billion to $4.85 billion, an increase of 3% at the midpoint versus 2019, and 8% organic growth. We believe the strength of our portfolio will allow us to deliver high single-digit organic growth, continuing a multi-year trend of above-market performance. Adjusted EBITDA is now expected to be in the range of $1.23 billion to $1.34 billion, which represents 5% year-over-year growth at the midpoint. We believe Q2 will represent the most challenging and uncertain conditions related to COVID-19 and currencies. Adjusted earnings per diluted share are expected to be in the range of $1.58 to $1.74 flat at the midpoint versus Q2 2019. We forecast Q2 revenue to be in the range of $1.17 to $1.23 billion, which is flat at the midpoint compared to second quarter 2019. Excluding the significant FX headwinds, revenue is expected to increase 5% organically, driven primarily by an improvement in Western Europe, strength in Latin America, and new products gaining traction around the world. Adjusted EBITDA is forecasted to be in the range of $317 to $347 million, representing a 2% decrease at the midpoint versus the prior year period. turning to slide 8, and full-year revenue drivers. Revenue is expected to benefit from 4% volume growth, with the largest growth expected in North America and Asia. New products are driving about 1.5% in total revenue growth, with the largest contribution coming from EMEA. With the significant shift in global currencies, you can see that FX is now forecasted to be a 5% top-line headwind, For reference, in February, we were only forecasting a 1% revenue headwind from currencies. However, we expect to offset most of these headwinds with price increases throughout the year. Regarding EBITDA, we're expecting COVID-related impacts to supply chain costs, pockets of demand, and global currencies. To help mitigate these, we quickly implemented proactive cost-saving measures to offset approximately $60 million of the anticipated headwinds, in addition to significant price increases. When you net out the expected COVID-19 impacts, including currencies, with our cost-saving measures and price increases, COVID-19 could still reduce EBITDA by a range of $0 to $70 million. Therefore, the midpoint of our current EBITDA guidance is $1.285 billion or 35 million lower than our prior guidance. I should note that if we see the headwinds pushing the net impact towards the higher end of the range, we will implement further cost-saving measures in the second half of the year. Foreign exchange is obviously a critical factor in our outlook. We now foresee an impact of $170 million for the full year, driven by numerous currencies, including the euro, Indian rupee, Indonesian rupee, Brazilian Real, and the Mexican peso, et cetera. This broad-based movement is an important factor in the timing for how we will recover price versus FX. In the second quarter, we expect an FX impact of $45 million, with price recovery of $15 million, or 33%. This price-to-FX gap is driven by two main elements. First is the relative lack of pricing power in the second quarter in Latin America, specifically in Brazil. This is driven by the fact that it is the tail end of the season in Brazil, and historically very little pricing changes are made in the season at this time, as volumes tend to be lower and growers are focusing on the harvest. Second is our approach to the market in Asia. In markets significantly impacted by COVID-19, we do not feel that it would be appropriate to increase prices at this time, and as such, we will be looking to recover pricing over the latter part of the year rather than in Q2. Looking at the full year, pricing actions of $160 million are expected to cover approximately 95% of the FX headwind. This change in coverage is mainly the recovery of price in Latin America as we set prices for the new season in Q3, which will reflect the exchange rates we are seeing and is a normal pattern. Pricing recovery in Asia in the latter part of the year is another element as previously discussed. Supply chain is also an important factor for our outlook, as we have already seen some temporary shutdowns around the world. As you know, we in the industry have been managing plant shutdowns in China over the past two years, and FMC has successfully met the demands of our customers. The same teams that helped us successfully navigate those situations are now very active in managing COVID-19-induced restrictions. In addition, we are taking a conservative approach that we may see pockets of reduced demand due to food chain dislocations and labor availability. Our cost-saving measures will help offset these headwinds. We began implementing them in early March, and we will realize savings in each quarter this year. The cost savings are focused on two elements, SG&A and R&D, We are eliminating or delaying all non-essential expenditures and have frozen hiring. In R&D, we are not canceling any projects, but we are phasing some differently to allow a lower cost this year without fundamentally impacting long-term timelines. These cost-saving actions will be temporary. Most of these costs will return in 2021, and we can confidently say that we will not impact the growth of our company. On slide 9, you see the main reason EBITDA is expected to fall 2% in the second quarter is due to the significant FX headwind as discussed previously. New product launches in Europe, North America, and Asia will all contribute to solid overall volume gains in Q2, and we expect organic revenue growth of 5%. Turning to new technologies and our strategic intent to expand our fungicide portfolio on slide 10. Please note, this is the slide we added to the updated deck this morning. Earlier today, we announced a binding offer to acquire the remaining rights for Fluendipyr fungicide for geographies we didn't already control from ISAGRO for 55 million euros. You may recall us talking about Fluendipyr as one of the first active ingredients coming out of our R&D pipeline. We have been co-developing this broad spectrum fungicide with ISAGRO for several years, and are set to launch the active ingredient in Paraguay this fall and in the U.S. next spring. With the full global rights, we now believe peak sales will be in the range of $350 to $400 million, including estimates for Isagra's key European, Asian, and Latin American territories. As a carboxamide, Fluendipia belongs to one of the newest classes of fungicides, targeting a broad range of plant diseases, including Asia soybean rust. in row crops, specialty crops, and turf applications. Following the launches in Paraguay and the U.S., we expect to launch Fluendapyr in China in 2022, Europe and Argentina in 2023, and Brazil in 2024. We expect to close the acquisition by the end of the third quarter of 2020. Additionally, the second new active ingredient from our R&D pipeline, Bixlazone, now branded as Isoflex Active, is also progressing towards a launch. We recently received full registration for Overwatch Herbicide with Isoflex Active in Australia, and is set to launch in the 2021 winter crop season. It offers a new mode of action for grass weeds in cereals. We intend to launch Isoflex Active in all four regions by 2025, and we anticipate peak sales of $450 to $500 million. Isoflex is an exciting addition to our herbicide portfolio and will serve as a centerpiece to many of our herbicide crop segment and mixture strategies. Finally, in the U.S., we recently received EPA approval for a new diamide-based formulated product. Elevest Insecticide allows growers to upgrade the superior residual control of Renaxiper insecticide while keeping the rapid action of bifenthrin. It will play an important role in our plans to expand the diamide franchise. While the US is the first country to receive the registration, we expect to launch this product in all key geographies. Before I close, I would like to highlight FNC's recent recognition as the American Chemistry Council's Responsible Care Company of the Year for the third time since 2017. This annual award is the highest ACC distinction for excellence and leadership in environmental, health, safety, and sustainability. While FMC has undergone many changes over the past few years, our commitment to operating safely and sustainably remains steadfast. I'll now turn the call back to Pierre.

Thank you, Marc. We realize that forecasting and guiding is a difficult process in such an uncertain environment. Even if the forecast range is broader than what we usually show at this time, We felt that it was important to share our views on the business and markets. Underlying demand for our products is strong, and our ability to recover the adverse impact of FX with price remains intact, despite the difficult situation we are facing today. FMC will face challenges through the year. but we believe that our company will continue to adapt quickly to what comes at us and once again deliver another strong year of growth above the market. Even with the challenges we are facing in 2020, we expect to close two years of a five-year plan solidly within our long-term targets for revenue, EBITDA, and EPS growth. This is my last earnings call as CEO of the company. I am proud of the transformation we have accomplished over the last 10 years. FMC is stronger than ever, and the transition to new leadership is in place. Thank you for your support, questions, and challenges over the years. I will now turn the call back to the operator for questions.

If you'd like to ask the question, please press 1 then 0 on your telephone keypad. Please limit yourself to one question only. If you have additional questions, you can jump back into the queue. To withdraw yourself from the queue, please press 1 then 0. We'll pause for a moment to compile the Q&A roster. And our first question comes from the line of Chris Parkinson with Credit Suisse. Please go ahead.

Great. Thank you. First of all, Pierre, congratulations. A little bit of a crazy time, but either way, obviously wishing you the best of luck. And as far as the question is concerned, can you talk a little bit more about the fungicide acquisition you made this morning? and what the product's growth trajectory was before and after your acquisition on a global basis, just given the broader market access. And then also, is it safe to say that FNC is still willing to further add to the FungiSight portfolio? Just how should we be thinking about this transaction and as well as just enhancing your competitive positioning? Thank you very much.

Yeah, Chris, it's Mark. You know, when we started to work on Fluendapyr many years ago, we've built over the years an appreciation for what we believe this molecule can do. And as we said today, we think we're in the $350 to $400 million range. Frankly speaking, I think it's closer to $400 than $350. FMC had a view that our other pipeline of Fluendapyr, the ones that we developed together, were in the $250 million range. So you can see we're adding somewhere in the region of $150-plus million of peak revenue with this acquisition. Overall, the fungicide portfolio for us continues to grow. We're doing some interesting things with third parties around getting access to new fungicides. And certainly, as we scour the world and look at what is available, we will add acquisition targets to our list and continue to build out fungicides. You know, I've said for many quarters and certainly the last few years, it is an area for us to build out. It is fast growing. We like where we are. We think we have a very good position. But more to do as we go forward. Thank you.

Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thank you. Good morning, everyone. I was hoping just to maybe dig a little bit deeper into the revised market outlook. And clearly, FMC is keeping the organic revenue growth outlook that you shared, lowered the kind of global market outlook in USD a little bit. But maybe frame a little bit kind of the areas of strength where you're more encouraged by market traction in the first half of the year and areas that you're watching most closely and specifically around any color on specialty crops and fruit and vegetables that you hear a lot of issues around labor issues and crops getting run under and just thinking about the demand outlook in that part of the channel.

Yeah, thank you. I'll ask Mark to go into maybe the details of the crops opportunities. But let me make a statement around a bit where we are in this forecast, how it is built, and and what we believe the situation is. I think it's important to say that we created the forecast with the intent to be cautious. We are four months into the year and the underlying demand for our product today as we speak and year to date is very strong. So we do not have at this stage of the year where we are specific concern for what has been happening so far. From a logistical and manufacturing standpoint, we had issues like everybody else, but nothing we could not address. So when we build the forecast, we looked at where are the places where we could have issues from a logistical standpoint. And where are the places where we could have weaknesses from a demand standpoint? Knowing that in many cases, you know, you've heard about corn, you've heard about cotton. In many cases, those areas of weaknesses are balanced by areas of opportunities. So we built this forecast out of prudence. We're being cautious. Today, I have to say, first week of May, we are four months into the year. Things are going well. But, you know, it's a very fluid situation. So we had to build into the forecast possibly issues which could be coming at us. We had to counterbalance with opportunities. Klaus, you want to go maybe on the detail of some growth opportunities?

Sure, yeah. You know, Adam, as you all know, it's a very complicated marketplace. I'll try and hit some of the highlights and some areas where we're really focused on in terms of where we think we may see a slowdown. Certainly in the U.S. right now, when you look at the balance of corn and soy, I have to say our pre-emergent business is doing very well, especially with our newer products such as Authority Edge, which are extremely high-performing. not only in the US but also in Canada. I would say wheat is also a positive right now with what we see going on around the world. We have a very strong portfolio of sulfonylurea herbicides on wheat. Sugarcane in Brazil is another area that is actually, some people view it as a negative. We actually don't view it as a negative. The big Brazilian producers of sugar are actually benefiting from an extremely weak BRL, which allows them to participate to a greater degree on the world market, obviously somewhat offset by lower ethanol demand in the U.S. But it was very strong for us in Q1, and we expect to see that continue. The fruit and veg area is somewhere we've been focused on. You know it's an important part of our portfolio. We continue to see growth. A couple of the reasons we see growth. Part of our product launches that we talk about where we believe we have about 1.5% of growth, a lot of that is coming from new applications in fruit and vegetables. I'll give you an example. We have about 300 new registrations this year across the world for all sorts of different crops, many of those focused on the specialty and niche crops. So yes, when we talk about demand destruction or dislocations in the food chain or labor availability, I would think fruit and vegetables is one of the areas where we're keeping a very close eye on. In other parts of the world, we're expanding into new areas. For instance, in soy and sugarcane, in particular in India, where we have new herbicides, we're seeing growth there. So for us, Once again, the portfolio is very fragmented. It's well balanced across the world. So we do see areas of lower demand. One of the obvious ones for us right now is cotton. The cotton market is extremely challenged given where world demand is, given the situation from COVID-19. I expect Brazil will have a lower planted area this year, probably India as well. So we're watching those two places as potentials for lower demand.

That caller is very helpful, and congratulations, Pierre, on the retirement. A helpful caller. Thank you.

Thank you.

Your next question comes from the line of PJ Hulvikar with Citi. Please go ahead.

Yes, hi. Thank you. Good morning, everyone. And, Pierre, thank you for your help, first at Roman Haas and then at FMC. And good luck. Thank you. You commented about getting pricing to offset U.S. dollar strength. Given that there is lack of credit in the system in some areas, particularly in emerging markets amid this COVID impact, would they expect some kind of price concessions? And secondly, are you extending any credit to any of your customers in Latin America or other regions? Thank you.

Let me start with the... The pricing question, and Mark, you can go in more detail what we are doing in the second half. But yes, I mean, pricing is a sensitive topic when you are in such a situation. And if you look at the first half of the year, we do have a pricing deficit versus the FX headwind. It is a conscious decision we have made. First of all, as Mark said, it's difficult to recover pricing and FX headwind in Latin America, especially Brazil, when you are at the end of the season. So you don't have a lot of leverage. Prices are set. But we made a conscious decision. because of the economic situation, to not push too hard on pricing in Q1 and Q2 in Asia, or even the MEA, where we had adverse effects. We gave a break to our customers. We are prepared in those two regions of the world to take a little bit of a lag in a pricing strategy, and we will be targeting those regions more toward the second half of the year. Brazil is a different situation. It's just a country where pricing and currency, there is a business model. It is built in the business model. And, you know, we've been operating quite well in the fourth quarter last year with the BRL close to five. We've been operating very well in the first quarter this year with the BRL between 5.5 to 5.7. I think there is a mechanism for it. And when we're going to get into the new season, second half of the year where you are preparing for orders, you reset the pricing. And that's just a mechanism which happens. So you're right. It's a bit of a different situation. That's why we're prepared to take a lag on pricing in Asia and EMEA in the first half of the year and focus to do that in the second half.

Yeah, I think, PJ, to the second part of your question around terms, You know, liquidity is not bad everywhere. A lot of people tend to focus on the stress that the U.S. market's been under for some time. But, you know, you look at places like Brazil where, in local currencies, the growers are doing extremely well. So in those particular markets, which are large for us, we're not looking at extending terms. If you look at our DSOs, you will have seen them grow a little bit over the last year. The reality is we're growing in some jurisdictions that have longer natural terms. And that's something that we're willing to accept. It's obviously profitable growth for us. So a mixture of price and then growth in different jurisdictions causes that DSO to move out a little bit. But it's not something that we're – unconcerned with, we're watching very closely. And obviously, we will react to the markets. As the markets move, we will move. And in some cases, we lead the markets, especially on price.

Great. Thank you.

Your next question comes from the line of Laurent Favre with Exxon. Please go ahead.

Yes. Good morning, all. My question is on your comments on feeling a bit better about Europe in the markets. I was a bit surprised given the weaker euro, but also the fact that your peers seem to have only mentioned fungicides as an area where they are seeing strength. And this is not one of, I believe, one of your strongholds. So I was wondering if you could tell us a little bit more about your comments on Europe.

Yeah, Laurent, yeah, we are feeling a little more confident in Europe. I mean, obviously the season has started very dry, although it is raining now in northern Europe, which is good. Southern Europe has been much better. And even during the extensive lockdown in Italy, our business has been very good, teams using very different tools to actually sell. We do have new product launches really in herbicides in Europe, which are for cereals. That is a big market that FMC is growing into. So we don't necessarily have to be linked to the market growth for us to grow very well. And then we continue to see an extension of our insecticides, the diamide sales, continue to grow in Europe as well. So a combination of herbicides, insecticides, and some new third-party fungicides that we're putting in place as well. You're right, we're not very big in fungicides in Europe, so anything we can do there will help boost our growth. I would say that the other piece to that is we're growing in Russia, Ukraine, Eastern Europe, where we've never over the last two years had a huge presence, but we've put a lot of effort into those countries. The team in Europe is expanding the number of people on the ground, and we are growing in those areas. That also boosts our confidence for our growth in Europe.

That's great. Thank you.

Your next question comes from the line of Vincent Andrews of Morgan Stanley. Please go ahead.

Thank you, and congratulations, Pierre. My question would just be on the – The cost side of the equation, the raw material cost in particular, you know, obviously you showed in the full year bridge that they're moving in the right direction. I just wonder if you can contextualize, you know, sort of the timing lag that you might be seeing just as crude oils move down. And I assume that some of the chemical intermediates that you buy are going to move lower with it. But, you know, what sort of embedded in that guidance range versus what might happen and sort of provide some help to 2021 as well?

Sure, Vincent. I think looking at 2020, you know, we do still have some modest increase in cost in part. If you remember, cost increases that we see in the second half of last year roll forward into the first half of this year. We are seeing some opportunities for cost improvement with lower petrochemical oil costs. These are really for some of the non-active ingredients, some of the lower value inert kind of things that are part of our formulations. But there's definitely some room there. I would caution not to forget that the cost savings program that Mark discussed earlier in the call directly impacts our cost line. So there's about $60 million in cost savings in the rest of the year that's built into that improved cost outlook. So if you back that out, we actually see an increase versus our prior guidance of about $25 million in costs versus our prior guidance. And that's really COVID-driven costs, additional logistics costs, dealing with more just-in-time shipments because of difficulties of managing logistic networks. And that is net of benefit that we're anticipating coming from lower raw material costs. It's hard to anticipate just yet all the way to 2021, but certainly if we have normalization of global product flows, Some of these increased costs that we're seeing due to COVID disruption should fade away, if not be outright gone in 2021. And with the easing of some of the petrochemical inputs and otherwise easing of other disruptions that impacted costs over the past two years, we should also see a tailwind on underlying raw material costs as well. So a bit early to dimension fully, but certainly absolutely there are some solid tailwinds on the cost side going into 2021.

Your next question comes from the line of Frank Mitch with Fermion Research. Please go ahead.

Good morning, and Pierre, Team Fermion wants to wish you obviously all the best as you move on to the executive chairman.

Thank you, Frank.

I was wondering if you could add a little more color with respect to the products that are not being re-registered or rationalized. I believe you said that there was a 3% negative impact Was that in a – I believe that was mainly coming from Europe and Asia. Was that a 2Q comment? Was that a rest of the year comment? Any more color you can give on some of the decrement you're seeing from some of those products rolling off would be great.

Yes, Frank, we're going to go into the detail. Just want to remind what we said at the last quarter and – It's a bit more pronounced this year because there's a specific product. Mark will talk about it, carbofuran. We decided ourselves to discontinue around the world. But every year, every year, when we announce a growth rate, there is a 2%. of negative growth due to registrations which are being lost or to product we decide not to continue to sell so it is not a uh it is not a very unique situation we are facing it's a situation we have been facing for years now the difference bit more pronounced this year because there is a product we decided to stop which was a bit bigger And there is more of a concentration on the MEA and Europe than in the past. Mark, do you want to go into more detail?

Yeah, you hit the highlight, Pierre. Carbofuran, at the end of last year, we decided to exit that older insecticide. I would say it's a combination of some smaller products and then a couple of big ones this year. Carbofuran, Europe has been hit with the removal of dimethylate, which is another insecticide, tebuconazole, which is a fungicide, Asia also was hit by the carbofuran removal. So when you think about it, it's really related to older insecticides that we're removing out of the portfolio, and I would expect the vast majority of that to occur in Europe as we go through the rest of the year outside of the carbofuran removal.

Thank you. Very helpful.

Thanks, Frank. Thanks, Frank.

Your next question comes from the line of Steve Bond with Bank of America. Please go ahead.

Yes, I'd like to drill into the Latin America region. Your results there the last few quarters have outperformed your peers. What is it that you see that you have in your commercialization strategy down there or your portfolio that gives you an edge in that region? also wanted to ask a little bit about the sugarcane herbicide you mentioned replanting that's a multi-year crop was there a surge of replanting and therefore that's maybe not recurring uh just just would like to get any any uh details that might help us assess the sustainability of the growth that you're showing down in that region yeah sure steve um so so listen latin america i mean

Most people associate Latin America and Brazil with FMC, which is fine. But I think what we've seen over the last two years is a return to growth in many parts of Latin America. We talked a lot about Argentina and how we've restructured the business. Argentina is growing very rapidly for us. We have a very good portfolio that meets the crop needs down there, good position on pre-emergent herbicides for soy and insecticides with the diamides. In the rest of Latin America, Mexico is benefiting a lot from our portfolio in terms of fruit and vegetables and specialty crops. And then we're returning to growth in many of the Andean countries, Colombia, Ecuador, Peru, and Chile. So not only are we seeing geographic growth from our portfolio, but then you look at Brazil. We have been very careful in Brazil of how we've grown over the last few years. We talked about being careful on our balance sheet, but we've really focused on, in the south, the major co-ops, expanding a position that we really never had until the last couple of years since the acquisition of the new portfolio. We're also now turning our attention, where we have major presence in market shares in cotton, in coffee, in sugar cane, we're also turning the portfolio to market access in the north for the soy corn business. That suits us very well. We're gaining market access there, so we expect to continue to see growth on the row crops in Brazil, which have never really, never been a big market for us, and we have a very small, low single-digit market share. One of the things on the sugarcane, the second part of your question is, you're right, sugarcane is a multi-year crop, and replenishment tends to occur at the 15% to 20% range. some years higher, some years lower. We are a little higher than normal. But what is happening is the growers are looking for as high a yield as they can possibly get. And therefore, they're using the highest quality products, which will allow that yield to come forward. We have some very good herbicides and market-leading position. So we take more of a share when the growers are looking for higher sugar yields than they would normally do in the past. Thank you.

And then our next question comes from the line of Mark Conley with Stevens. Please go ahead.

Thank you. Um, here, Mark, um, there really doesn't seem to be any end in sight to the trade war with China. And now with COVID has your view of China's position in your supply chain evolved further. Um, I'm curious how far along you are in your diversification of sourcing, but also whether you're thinking about diversifying further.

Yeah, you know, I think it is something we've been looking at, and certainly with the current situation, not something we want to slow down doing. We are, of course, China is critical to us, and we're operating lots of parents with partners. China used to be 95% of our raw material and active ingredient supply. Today it's down to less than 60%. And we are increasing our investment in places like India, like Europe, so North America. So yes, we are thinking, if you think about the next five years, you will see us continue to rebalance our supply between China and the rest of the world. Couple of calls ago, Marcel, one of his targets in not too distant future would be to be in the 30 to 40% coming from China, the rest from the rest of the world. It takes time. Registrations are very important, but certainly for anything which is new product we are bringing to the market, we are looking at manufacturing sites which are very often non-China based.

What about the Mercosur?

Yeah, you know, Mark, we talk about it a lot. Why don't we put active ingredient manufacturing down into Latin America, especially in the south between Argentina and Brazil? It would be an obvious place to go for us from a demand perspective. The only problem is with a lot of specialty and fine chemicals, you need infrastructure around you. You need close supply of many intermediates that are sometimes not easy to make. Unfortunately, there is not that chemical infrastructure in the Mercosur region, and therefore we intend to import active ingredients and then formulate and package in Brazil, in Argentina. That makes sense. Thank you. Thank you.

Thank you. Your next question comes from the line of Alexey Yarmov with KeyBank. Please go ahead.

Good morning, and I would join everyone in congratulating Pierre. Pierre, in a recent newspaper interview, you were asked about what Mark might be doing different when he succeeds you, and you noted that Mark has been investing in Precision Ag. Could you or Mark elaborate on this?

Yes, absolutely. Listen, We went through a transformation, and I would say, you know, Mark and I have been working very, very closely with each other for the last five years, so I don't think you should expect a fundamental change of the direction of the company. But if you look back over the last couple of years, Mark has been, and his role within the senior leadership team here at FMC, has been to push technology, among other things, and he's been the champion for sustainability and precision ag. So if you think about those three areas, among others, we're in places where it's going to take the company, I believe, to the next level. So precision ag being one, we're making progress. Maybe, Mark, you want to say a couple of words on where we are and progress we're making?

Sure. You know, we talked about it in a roundabout way over the last year in terms of what we've been doing behind the scenes. I'm not going to spoil the team's thunder because we have something coming up in the next couple of weeks that will be very public. But we do believe, like many in our industry, that from a sustainable ag perspective, the use of data, the use of forward-looking applications and mechanization has to help the industry. And we want to be part of that. We've invested in that so far. We continue to invest. And you will be seeing something in the next few weeks from us that shows that we're not thinking in the same way as many of our competitors, but we are going to do some very different things with products and applications that will allow growers to utilize our products at the right point in time for their applications, therefore would be much more sustainable in terms of amount of product used and where it is used. So stay tuned. This will be the first move we're making, but we will be making more moves. We have some very, very novel and interesting ideas of where we can take technology that's not core to our base, but will be enabled by the growers and distribution.

Your last question comes from the line of Joel Jackson with BMO. Please go ahead.

Hi, this is Tassian Pierre. Quick question. When would you feel comfortable or what conditions would you need to see to reinstitute the buyback program? Thanks.

I'm going to let my good friend Andrew compliment my question. But, you know, we haven't put a date because we want to see how things are evolving. You know, We were cautious in the forecast, but the company is doing well today. We believe we had no reason to change the forecast from a cash flow standpoint. We've been going over it day after day after day. We are watching that very carefully, and we today feel very confident around our ability to generate cash flow. Our balance sheet is in good shape, so we do not believe it would be prudent to stay with the buyback program, but I would not be surprised from us as soon as we have more clarity on how the situation is evolving to get back into the buyback. Andrew said it in his prepared comment. We are committed to returning the cash per the five-year plan we gave in December 2018. That has not changed. there is no reason to have a prolonged suspension of the stock buyback program. So I would expect us coming in as soon as possible and as soon as we get more clarity around this pandemic situation is going. Andrew, you want to add a couple of words?

Yeah, thanks. Sure, Pierre. I don't think they're bright lines, Joel, in terms of trigger points. I would say Leverage is a tick or two high of where it should be for us to be buying back stock at the moment. But I think the biggest thing is really this uncertain environment that Pierre discussed. We're feeling pretty confident about the cash flow, but our cash flow mix during the year is very strongly positive free cash flow in the second half. The first half is a build of working capital. Just given that uncertainty, I'd like to see more cash in the hand before we get comfortable with the full-year cash flow being there to support buybacks. I think we're well on our way there. We've seen very good progress with collections in the first quarter, particularly in Europe and Latin America. We continue to put tremendous focus on driving improved collections and through forecasting of collections. But I think we just want to get past a little of this uncertainty, see the leverage get down back more into the target range, and then recognize a bit of the seasonal pattern of our cash flow where that really strong cash generation in the second half is a much better base to drive sort of a restart of share or purchase. So more to come as we get more view of the global situation.

Thank you. That is all the time that we have for the call today. Thanks and have a good day.

This concludes the FMC Corporation conference call. Thank you.