FMC Corporation

Good morning, and welcome to the second quarter of 2020 earnings call for FMC Corporation. This event is being recorded, and all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's prepared remarks, there will be an opportunity to ask questions. To be placed into the Q&A queue, please press the star key, then one, at any time. If you are using a speakerphone, please pick up your handset before pressing the keys. I would now like to turn the conference over to Mr. Michael Wortley, Director of Investor Relations for FMC Corporation. Please go ahead.

Thank you, 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 Sandefur, Executive Vice President and Chief Financial Officer. Mark will review our second quarter performance and the outlook for the rest of the year. Andrew will provide an overview of select financial results and discuss the sustainability of FMC's tax structure. Following the prepared remarks, we will take 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. 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 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, pre-cash flow, 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 of which we may refer during today's conference call are provided on our website. With that, I will now turn the call over to Mark.

Thank you, Michael, and good morning, everyone. At our last earnings call, we forecasted Q2 would be a challenging quarter. Despite this outlook, we delivered solid financial performance and navigated the challenges posed by COVID-19, severe headwinds from foreign currency, very dry weather in Europe, and an industry-leading comparison from Q2 2019. Our proactive cost control actions, along with price and volume increases, delivered earnings growth in the quarter. Our confidence in the outlook for the second half of the year has increased, which is why we are raising the midpoints of our EBITDA and EPS guidance and tightening those ranges. Underlying demand for our products remains healthy and we expect double-digit organic revenue growth in the second half of the year, driven by volume, market access expansion and the full effect of our pricing actions. We also continue to invest in innovation to support and enhance the long-term sustainable growth model we have built at FMC. In the past few months, we announced the launch of our Arc farm intelligence platform and a related agreement with Nutrien to increase the adoption of this technology. We launched FMC Ventures with an initial investment in trace genomics, and we announced a partnership with Cyclica that will enhance our R&D discovery engine. Let me now turn to the impact of the COVID-19 pandemic on our business. As we said last quarter, we have avoided significant plant closures and all our manufacturing facilities remain operational. The well-being of our employees is FMC's top priority. Although most FMC employees around the world have been working from home during these last few months, we are slowly bringing employees back to offices and laboratories in locations where health officials have deemed this to be safe. In addition, we have thousands of employees who continue operating our manufacturing sites and distribution warehouses. In all our facilities, we are using a variety of best practices to address COVID-19 risks and following the protocols and procedures recommended by leading health authorities. In Q2, sourcing of raw materials and intermediates was not a significant issue, although we continue to see some logistics challenges and related higher costs. We are seeing some pockets of reduced demand, as expected, due to food chain dislocations and labor availability. As we commented in May, we implemented cost-saving measures across the company and price increases to offset the impact of COVID-19 and the related FX headwind caused by a stronger US dollar. Turning to our results on slide three, FNC's strong financial performance the past several quarters continued in the second quarter, despite a robust prior period performance. Last year, our business grew 9% organically in Q2, This year, we reported approximately $1.16 billion in second quarter revenue, which reflects a 4% decrease on a reported basis, but 3% growth organically. After removing the FX impact, our business saw double-digit growth in Argentina, Brazil, Australia, Pakistan, and Canada. Adjusted EBITDA was $341 million, an increase of 1% compared to the prior year period. EBITDA margins were 29.5%, an increase of 150 basis points compared to the prior year, driven by significant cost containment measures and pricing actions. Adjusted EPS was $1.72 in the quarter, an increase of 4% versus Q2 2019. This year-over-year performance was driven equally by the increases in EBITDA, reduced share count, and the benefit of a lower tax rate. Relative to our Q2 guidance, however, the $0.06 B was driven almost entirely by our $9 million EBITDA outperformance versus the midpoint. Moving now to slide four. Q2 revenue declined by 4% versus prior year as a 7% FX headwind more than offset growth contributions of 2% from volume and 1% from price. We overcame a 3% volume impact from products that were discontinued either because of registration cancellations or rationalizations that we had planned for and forecasted earlier this year. We should note that 2020 has a higher than normal level of product discontinuations. Latin America sales grew 2% year over year and 24% excluding FX. Pricing actions across the region offset some of the currency headwinds while the underlying volume gains were very strong in Argentina and Brazil. Sales grew fastest in Argentina, driven by herbicide sales for wheat and soybean applications, including Finesse herbicide. In Brazil, sales grew double digits organically, led by continued robust demand for our products on sugarcane, including Boral herbicide and Altacor insecticide. Our channel inventories in Brazil continue to be at normal levels as we head into the new seasons. Mexico's sales grew organically but were impacted somewhat by COVID-19-related pressures on the growers that export fruit and vegetables. In Asia, revenue increased 2% year-over-year and 8% excluding FX. Volume growth in India, Australia, and Pakistan, as well as modest price increases across the region, were mostly offset by FX headwinds and some COVID-19-related impacts in India. Herbicide sales, including for the newly launched Authority NXT, were robust for soybeans in India. We also continue to see a strong market recovery in Australia, with the improved weather and record demand for hammer and affinity force herbicides due to strong broadacre season. In North America, sales decreased 6% year over year, driven by our continued focus on drawing down channel inventories of our pre-emergent herbicides following the wet spring last year. Coming out of this summer, we forecast our channel inventories will be in a much better position in this region, which should lead to a good restocking at the end of the year. We also saw robust sales of Lucento fungicide in our second U.S. season. Sales in Canada were strong, driven by herbicide blends from our precision-packed systems for use on cereals and insecticides to control early-season pests. Sales in EMEA were contracted 13% year-over-year and 10% excluding FX due to hot, dry conditions across northern and eastern Europe and Ukraine, as well as the expected registration cancellations and product rationalizations. This was partially offset by insecticide growth in southern Europe for specialty crops. Turning now to the second quarter EBITDA bridge on slide five. We had strong operational performance offsetting a $62 million FX headwind with a $46 million contribution from lower costs, a $16 million benefit from higher pricing, and modest volume growth. Moving now to slide six, where we've included first-half results to highlight the overall performance we've delivered in a very challenging market. We posted organic revenue growth of 6%. On the EBITDA bridge, balanced contributions from volume growth price increases, and cost reductions more than offset the FX headwind. I will now turn the call over to Andrew.

Thanks, Mark. Let me start this morning with a few highlights from the income statement. FX was a larger than anticipated headwind to revenue growth in Q2, at 7% versus our expectations of a 5% impact. The Brazilian REI was more than half of this total, followed by the Indian rupee, Pakistan rupee, Australian dollar, euro, and a broad set of other European currencies. While we did take pricing actions in the quarter, we were intentionally less aggressive, particularly in countries hit hard by COVID. We continue to expect FX headwinds to remain at an elevated level throughout 2020, with pricing trailing FX impacts for the full year, but with prices increasing ahead of FX during the second half of the year. Interest expense for the second quarter was $40.7 million, up slightly from the prior year period, primarily due to the impacts of our third quarter 2019 debt offering and higher foreign debt balances, partially offset by lower term loan and commercial paper balances. With a decrease in interest rates since the last quarter, we now anticipate interest expense between $150 and $160 million for the full year, somewhat better than our prior guidance. Our effective tax rate on adjusted earnings for the second quarter was 13.5%. consistent with our expected full-year tax rate of 12.5 to 14.5 percent. Before leaving the topic of taxes, I think it's important to spend a few minutes this morning on the long-term sustainability of S&C's tax rate, particularly given tax rates impact on our stock valuation on a price-to-earnings basis as opposed to an enterprise value to EBITDA basis. As many of you have noted, S&C currently trades at a premium to our peers on an EBITDA basis, but at a discount on a PE basis. When we completed the DuPont crop protection transaction in 2017, we aligned the legal entity structure of FMC in such a way that, in conjunction with our broad geographic dispersion of sales, led to the advantage tax rate which we now benefit from. We believe this will prove to be durable. FMC operates our business through regional hubs in which we have established principal operating companies, or POCs, Our POCs own, operate, and protect business-critical assets, particularly intellectual property, trade secrets, and other intangible assets. As a result of this POC structure and our geographic mix of sales, approximately 40% of FMC's overall profit stream flows through jurisdictions where we pay the statutory tax rate on corporate earnings, such as the United States. The remaining roughly 60% of FMC's profit stream flows through jurisdictions where we have made significant investments and commitments, and as such, pay an effective tax rate that is below the statutory tax rate. These arrangements are formalized through what is commonly referred to as a tax ruling, which sets the specific rate that FMC pays over a defined period of time, based on the commitments and investments FMC has made in the relevant jurisdiction. We believe with our existing and planned investments, we can maintain or improve upon our current tax rulings at least through the year 2030. with further opportunities to extend them beyond that time horizon. As such, we are highly confident in maintaining a very competitive tax rate, particularly as compared to peers with very different entity structures and larger in-earning streams in statutory rate jurisdictions such as the United States. Over the 2030 horizon, we expect our tax rate to stay in the range of 13 to 16 percent based on our expectations for geographic sales mix and the durability of our tax rules. Despite our competitive global effective tax rate, let me be clear, FMC pays substantial taxes in the United States, particularly due to the guilty or global minimum tax provisions of the 2018 tax bill. Moving next to the balance sheet and liquidity, gross debt at quarter end was $3.5 billion, down by approximately $300 million from the prior quarter. Strong free cash flow led to lower short-term financing needs, We also reduced the amount of excess liquidity we maintained due to the heightened uncertainty caused by the COVID pandemic. We fully repaid the revolver draw made late in the first quarter at the height of the pandemic's impact on short-term financing markets. We ended the quarter with over $200 million of surplus cash on the balance sheet. Considering this surplus cash, gross debt to trailing 12-month EBITDA was 2.7 times at the end of the second quarter. still somewhat above our targeted 2.5 times annual average leverage, reflecting the seasonality of working capital and cash flow. We continue to expect leverage to be at or below 2.5 times at year end. Moving on to slide seven, and specifically free cash flow and cash deployment. Free cash flow for the second quarter was $205 million, up significantly from the prior year period, with very strong collections in the quarter and improved payables. We are maintaining our full-year free cash flow guidance range of $425 to $525 million. With improving confidence in our outlook, we expect to revisit share repurchases at the end of third quarter and at present anticipate restarting share repurchases during the fourth quarter. Moving next to slide eight, FMC is making good progress in both improving our free cash flow conversion from earnings as well as growing the absolute amount of free cash flow. As you can see on the left-hand side of this slide, at the midpoint of our guidance range, we expect to improve cash conversion by 18 percentage points compared to last year, while growing cash flow by nearly $175 million. We continue to believe we have substantial headroom to improve further on both free cash conversion and the absolute free cash flow we generate, particularly as we complete our SAT implementation later this year and end the period of high cash spending on transformation efforts. On the right-hand side of this page, you can also see the breakdown of free cash flow generation by semester for last year and this year. Note that the seasonality is very similar in both years, with negative free cash flow in the first half of the year and strongly positive free cash flow in the second half, but with improvement in both semesters in 2020 versus 2019. Finally, a quick update on progress in implementing our new SAP S4 HANA ERP system. This was the second quarter in close that we've completed with 60% of the company on the new system, and the closing in went very smoothly. We continue to push forward to complete implementation of the new FAP system across the remainder of FMC by year end, which will give us a thoroughly modern system across the entire company and will enable further efficiencies in our back office processes. The most recent implementation phase has gone so well that we are accelerating some synergies planned for 2021 into 2020. We continue to expect total synergies of $60 to $80 million from implementing the new system, but we now forecast $40 million of synergies in 2020, up $20 million from our prior forecast. We will capture most of the remaining $20 to $40 million in 2021. With that, I'll turn the call back over to Mark.

Thank you, Andrew. Turning to the market outlook for 2020, We now expect the overall global crop protection market will be flat to down slightly on a US dollar basis, which is slightly worse than our previous outlook. The change is driven by a reduced outlook for Europe, where we believe the market will be flat year over year versus up low single digits in our prior forecast. Our views on the other regions have not changed. We expect the North American market to be up low single digits, the Asian market to be down slightly, and the market in Latin America to contract by low to mid-single digits. All these forecasts are for the markets, not FMC, and are in US dollars. As such, the Latin American market is seeing the largest headwind from FX. Moving to slide 9 and the review of FMC's full year 2020 and Q3-Q4 earnings outlook. As I said earlier, we are expecting double-digit organic revenue growth in the second half of the year, driven by both volume and the full effect of our pricing actions. We expect continued headwinds from FX and, to a lesser extent, from impacts related to the pandemic. At the onset of the pandemic, there were numerous contingencies to consider, but after several months of navigating in this environment, we are more confident in our ability to deliver on our 2020 forecast. FMC full-year 2020 earnings are now expected to be in the range of $6.28 and to $6.62 per diluted share, a year-over-year increase of 6% at the midpoint and 7% above prior guidance. EPS estimates do not include the benefit of any share repurchases in 2020. 2020 revenue is forecasted to be in the range of $4.68 to $4.82 billion, an increase of 3% at the midpoint versus 2019 and 9% 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. EBITDA is now expected to be in the range of $1.265 to $1.325 billion, which represents 6% year-over-year growth at the midpoint. For the third quarter, we expect earnings to be in the range of $1.03 to $1.17 per diluted share. a year-over-year increase of 17% at the midpoint versus Q3 2019. We forecast Q3 revenue to grow 6% year-over-year at the midpoint. Excluding the significant FX headwinds, revenue is expected to increase 12% organically, driven primarily by robust growth in Asia following a good monsoon season, as well as improved market conditions in EMEA and a normal start to the Latin American season. EBITDA is forecasted to be in the range of $233 to $257 million, representing a 12% increase at the midpoint versus the prior year period. The third quarter is seasonally the smallest quarter for FMC, which is in line with the quarterly pattern from the past two years, as Q3 is not a high season in any of our regions. Guidance for Q4 implies a strong quarter, with sales growth of 6% at the midpoint on a reported basis, and 11% organically, as compared with Q4 2019. We are forecasting EBITDA growth of 10% year-over-year at the midpoint. EPS growth is forecasted to be 3%, limited by the large tax adjustment in Q4 2019. Turning to slide 10 and full-year EBITDA and revenue drivers. Revenue is expected to benefit from a 5% volume growth, with the largest growth in Asia and Latin America. New products are driving about 1.5% in total revenue growth, with the largest contribution coming from EMEA. FX is now forecasted to be a 6% top-line headwind versus 5% in our prior forecast. However, we expect to offset much of this with price increases totaling 4%. Regarding EBITDA, we will deliver significant cost savings this year to offset the COVID-related impacts to supply chain costs pockets of lower demand caused by food chain dislocations and labor availability, as well as a portion of the FX headwind. This includes the earlier realization of some SAP synergies that Andrew referenced. Foreign exchange remains a critical factor in our outlook. We now foresee an impact of $230 million for the full year versus $170 million in our prior forecast. We increased our full-year pricing actions to $177 million last to cover over 75% of the full year FX impact. But in the second half of the year, we expect to cover the full impact. Pricing will come from all regions led by Latin America. Moving to slide 11, where you see the Q3 and Q4 drivers. On the revenue line, volume and price are expected to drive the top line strength in both quarters. We expect the second half volume growth to be driven primarily by Asia and EMEA, in addition to the overall strength of our Diomides business. Regarding EBITDA drivers, pricing is certainly the largest positive factor, and volume contributions are also meaningfully higher than in the first half. As my first quarter of CEO, this was certainly an interesting time to start. Q2 was a quarter to focus on execution, cost management, the health of our employees, protecting the balance sheet, as well as setting the stage for a strong second half. It was not the time to chase volumes or significant price increases. We are looking forward to the rest of the year as we continue to launch new products, expand our market access, and stay aligned with our customers as we collectively manage through these difficult times. Before closing our prepared remarks, I'd like to announce that we will host an Investor Day call on November the 17th to provide an update on our R&D pipeline. This will cover some of the topics we had planned to discuss at our Investor Technology Day that was canceled early this summer due to the pandemic. More details will be available in the coming weeks. I will now turn the call back to the operator for questions.

We will now begin the question and answer session. To be placed into the queue, please press the star key, then 1, on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing keys. Please limit yourself to one question only. If you have additional questions, you can jump back in the queue. To withdraw from the queue, please press star, then two. And the first question today will come from Mark Conley with Stephen. Please go ahead.

Thank you. Mark, conventional wisdom has been that India is going to get its GSP status back before the elections. So two questions. How much has losing that status affected you And is your sourcing strategy going to change materially if it's not backed by the election?

Yeah, thanks, Mark. No, the GST didn't fundamentally impact us when it came in. I think at the time when it happened a couple of years ago, we did see issues with collections given just the dislocation between the old methodology, which was running across many different provinces and more of a standardized system. So, no, we don't see any change to our demand in terms of how we look at the market. I would say from a manufacturing perspective, you know, we've taken a very broad look at rebalancing the supply chain over the last four to five years. And consequently, that has meant that we have moved resources out of China into the rest of the world. And one of those destinations has been India. Now, at this point, India is very important for us and will continue to grow as we put... more manufacturing assets into our own facilities, mainly in Pinole and Savly, but also into tall manufacturing partnerships that we've been growing over the last few years, very similar to what we do in China. So I don't see that strategy changing. You know, when you look at the overall economics of moving products out of China, there is obviously a cost impact. However, over the years, that cost impact has declined as not only China costs have increased, But a lot of our partners around the world have got used to making the products that we make, and we've improved the processes. So for us, it's not so much a question of cost. It is very much a question of surety of supply and quality. So bottom line for your question, we don't see a lot changing for us with our investments in India.

Thank you.

And the next question will come from Steve Byrne with Bank of America. Please go ahead.

Yes, thank you. Have you seen your South American customers during the second quarter place more orders, you know, for this next crop, you know, their crop inputs than normal when farmers sold their grain in recent months? And if that is the case, do you recognize those orders in the second quarter? Or is that just a booking thing? that you hedge and gives you the confidence that you can indicate what you think the currency impact is going to be in the second half. Your guidance is very specific on how you can offset the currency drag with pricing and you've got an estimate of the EBITDA drag. Does that just imply that a lot of the second half has already been booked?

Yeah, there's a lot in that question, Steve. I think what I'll do is let me talk about where we see ourselves in Latin America right now. And then I'm going to let Andrew jump in and talk a little bit about our established hedging process that we use for our Latin American business, in particular in Brazil. You've heard me talk over the last couple of years that we'd seen an uptake in early ordering for the forthcoming seasons in Brazil. So I talked about a number of around about 70% of orders in hand in sort of the early July timeframe over the last couple of years. Should be noted that that was really in times of somewhat more stable currency than we have today. And indeed what we'd had in the past. A more normal rate for early July for us and into July is about 50% of the orders remaining for the year are taken at that point. So we already have them in hand. I would say today we're in the 55% to 60% of the orders needed for the rest of the year. Slightly behind the last two years, but well ahead of the average for the last five or six years, I would say. What's driving that? Well, obviously FX has changed a lot over this year, and basically it's got nothing to do with the season being delayed. We see the weather patterns as being good for a normal start to the season, which would mean planting in the late September, early October timeframe. It's more farmers and growers and distribution looking at the exchange rate and pushing out the decision of when to just simply place the order. Now, obviously, that FX has an impact on us, and we've highlighted very clearly what we think that impact is. To your second part of the question about receiving an order, when do we book it? We book it when we receive it. Now, let me talk about when Andrew can go through the FX hedging process. Andrew, why don't you talk through what we do when we get that order?

Sure. So I think that the practice in Brazil, we've had a similar hedging strategy for several years now. As we go through the earlier parts of the calendar year into this time of year where there's heavy negotiation of terms of orders and pricing, et cetera, with customers, as we get those open orders confirmed, we will hedge a significant portion of those open orders from the time we confirm the order where the customer until we actually ship the product and then recognize the revenue. Just to be clear, we don't recognize revenue until we actually ship and invoice the product. But that exposure between the time we come to commercial terms with the customer to the time we actually ship it, we hedge the majority of that exposure during that time period. Once we invoice the customer, we ship the product and invoice it, we hedge 100% of the receivables. Now, hedging, of course, is not free, but that's built into our margin structure in Brazil, and it's been an important part of limiting the impacts of FX volatility on our business. So I say the bottom line message for us with Brazil around FX, it is a more volatile situation than we've seen in the past several years. Pricing continues to be the first lever that we have to offset those moves in FX. But we continue to follow the same disciplined hedging strategy that we've had for several years now to limit the impact of FX and certainly to increase the ability of the company to deliver on its guidance.

Thank you. And the next question will come from Chris Parkinson with Credit Suisse. Please go ahead.

Great. Thank you very much. Mark, despite COVID, your organic pathway still looks pretty solid. you know, heading into the roaring 20s here, but can you just offer some additional framework in terms of the volume contribution from the diamides versus the past few years? It does appear as, you know, size appears further kicking into gear in a few geographies. And also, how should we think about the volume contributions from new registrations and products as we head into the 2021? Has there been any change in assumptions since your analyst day?

Thank you. Yeah, thanks, Chris. Listen, yeah, we do have strong organic growth as we go into the second half of the year. And, you know, I sort of touched on it in the script. Asia and Latin America are two of the drivers. And then following up behind that is our expectation for a healthy 2021 season in the U.S. and Canada. From a from a dynamite perspective, growth rates are still in the high single digits, low double digits organically. a little lower than they were last year, but that's not surprising when you consider that, you know, in 18, I think we grew something like 25%. Then we grew mid-teens in 19. Now we're growing high single digits, low double digits this year. To be expected, those compounding numbers are very large indeed. From a registration perspective, you know, this year we talked in the past about having around about 285 registrations and submissions going out through 2026 for the diamides. That was when we put the original plan together back in the early part of 2018. Today, we're at about 350 submissions and registrations. So that number has continued to climb as we've learned more about the types of products that we've got our hands on. This year, we're pretty much on track to where we thought we'd be. We've added about 90 different registrations and label expansions this year. which keeps that growth rate moving forward in that very high, well above market type of number.

Thank you.

And the next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thank you. Good morning, everyone. So I guess my question is twofold. First, just in the quarter, And year to date, I mean, R&D has been down. And I'm just wondering if you could give any comments in color around maybe COVID impacts to how you could spend the R&D and just impacting your research pipeline in any way. And then maybe following on Chris's question, around registrations this year. Has COVID caused any issues in terms of your ability to get all the documentation and trials done for new product registrations to launch into 21-22?

Yeah, thanks, Adam. First of all, on R&D, when we saw what was happening with COVID and we knew we were going to face headwinds both from a cost and potential market disruption, we decided to take a broad look at the cost structure of the company and we put in place roughly $60 million of activities that we knew would reduce costs. Part of that was R&D. Now, we were very specific with our R&D organization when we looked at our cost structure. We did not want to slow down any of the mid- to long-term projects where we're investing significant dollars in the development phase, and that is fundamentally where we spend a lot of our time and effort. So it's safe to say that the changes that we've made in R&D they're more timing than they are anything else. They're not cancellation of projects. They're not cancellation of development activities. It's more looking at your project timelines and pushing out of the first half of the year as far as possible costs. Now, we will obviously take a look at that in the second half of the year as well. We've been very clear that we think we have a good view of our demand situation. If for any reason that was to change, we would be able to once again go back to our cost structure, not just in R&D, but in SG&A and look at other levers to pull. Outside of R&D, we looked across the whole company, every single item of spend, whether it was related to our human resource groups, our legal groups, finance, IT, the commercial activities, global marketing, everywhere. We looked at costs. We looked at what was absolutely mission critical for the first three quarters of this year and what could we, again, push out rather than automatically cancel. So we've done a good job with that, yet we still have levers to pull if we should see any situations that get worse than where we are today. The second part of your question is slowdown in registrations. You know, it's interesting. Many governments around the world have been very adept at keeping their organizations running, even though you would expect things to slow down. They actually have not. We've been getting registrations on time. And in fact, we launched a new product this year in the U.S. called Elevest, which is one of our first formulations for Ranaxapur plus another insecticide. We actually got that registration earlier than we thought, which allowed us to launch this year rather than next year. So to answer your question, Adam, we have not seen any slowdown in registrations that would impact the future growth of the business. All right, that's helpful, Collar. Thank you.

And the next question will come from Joel Jackson with BMO Capital Markets. Please go ahead. Hi, good morning.

I wanted to talk about the pre-emerge demand commentary you gave in the U.S. for herbicides. Can you talk about how much of this was just a destocking issue where channel inventories were high? And we had heard some stories a couple months ago that Perhaps this year, farmers in the U.S. attempted to apply less pre-emerge because last year they didn't apply as much because of the wet weather. Yield ends up being okay. This year, the spring was early. The spring was good. The weather was good. Maybe they tried to get away with lower pre-emerge just like last year. Can you comment on that, please?

Yeah, Joel. Easy answer is no, that's not what we saw. We did not see growers applying less pre-emergent herbicide this year. What we did see is very much a swing towards the much higher performing newer products in the portfolio. You know, weed resistance continues to build in the U.S. and some of the weeds are getting very, very difficult to knock down. So we've introduced Authority Edge, Authority Supreme, which are very high potency formulations for glyphosate resistant weeds. Um, that ended the portfolio has done very, very well and continues to drive our growth. And we would expect over the next few years that the portfolio shifts to the higher performing products. The reason we commented on our volumes is very simple. We did not like coming out of last year with higher inventories. So the revenue reductions that you've seen from us in the U S are solely around us taking out, um, not putting back, sorry, into the channel. the same amount of product that is being used on the ground. So therefore, our channel averages go down. We're in a much better position as we go into next year.

Thank you very much. And the next question will come from PJ Jubicar with Citi. Please go ahead.

Hey, Mark and Andrew. Good morning. A couple of questions on Latin America. You know, you had outsized growth in diamides in Latin America, looks like in Argentina. Did you gain share in sugarcane there? Was that the main driver? And then I may have missed it, but can you just break down the 24% organic growth in Latin America between price and volume? Thank you.

So, yeah, PJ, diamides. Listen, the diamides growth is coming from a number of different areas. It's not coming from what you just referred to as sugarcane. you know, we already are the number one player in sugar cane with a very high market share. So, you know, we don't necessarily expect to take significant market share in sugar cane. We grow as we introduce new technologically advanced products. That is how we grow in sugar cane. But we've also seen significant growth in soybeans, in citrus, in coffee, and in corn in particular, which is a growing market for us in Brazil. Of the 24% Of the 24% growth, it's really equal between sort of price and volume when you look at where we're going. I don't want everybody to focus on Brazil. I know it's a big market for us and we like it a lot, but I do have to say the rest of the region is performing very, very well. You know, you heard me talk about Argentina and the growth rates we've seen in Argentina. Our structure has taken us a while to get right, but now we have it right. The team down there is doing a great job. We have a very good, strong portfolio for soybeans. And we also have a very good portfolio now for more of the specialty crops in Argentina. Mexico is a little bit more of a challenge right now. We've seen some demand destruction because of COVID, especially with exports of fruit and vegetables. But overall, you know, that growth is pretty evenly balanced, which is what we like. Thank you.

And the next question will come from Lauren Fabre with Exane BNPP. Please go ahead.

Thank you. Good morning, all. My question is regarding the impact of phase-out. Mark, you just said that there would be more impact in 2020. So I was wondering if you could give us a percentage impact on volumes, for instance, for 2020 and perhaps your best guess on 2021. And then related to that, with the new Green Deal and farm-to-fork strategy in Europe and the 50% targeted reduction in risk, I think, from pesticides, I was wondering if you think that this is more the risk for you or whether you think it's more for the, I guess, more generic players. Thank you.

Thanks, Laurent. On the discontinued products slash loss of registrations, we think it's about 3% of our revenue this year, which is probably double what the average is for us. It's about 1.5% a year. We had a particularly... difficult year because we made a very strategic decision at the end of last year to remove one of our oldest insecticides called carbofuran from the marketplace. This was a proactive move, impacted Asia, Latin America. It was very deliberate. We have more sustainable products that we can put in place. So it was an obvious move to make, although it hurts the top line. And then we had a couple of other products in Europe that were impacted. I have to say Europe was probably the most impacted region from that 3% number that I just mentioned. You raise a very good point, Laurent, about the farm to fork and the European Green Deal. You know, a 50% reduction in all pesticide use in Europe is an enormous number. And, you know, I know ourselves and our industry colleagues are very skeptical that that number can actually be realized. In one way, it sounds like a very large drag on a particularly large part of the market. Yet in another way, for the technology-based players that are bringing new, more sustainable chemistries that are targeted, I think it is an opportunity for us because there are still a lot of generics used in Europe that are older chemistries, not with the same sustainable profiles that the newer chemistries have. So we tend to look at it in a slightly different way. We tend to look at this as an opportunity. to advance the new technologies into Europe, to have less of an environmental footprint impact, and also really remove all the products that are clearly there, both in our portfolio and in the market in general. Thank you.

The next question will come from Vincent Andrews with Morgan Stanley. Please go ahead.

Thank you. And, Mark, congratulations on your first quarter as CEO. My question is this. You talked about, I understood your comments on being thoughtful about taking price in the COVID environment. You obviously were able to take a lot of costs out at the same time. So just trying to think about as we move through the back half of the year into next year, I would assume you're going to look to get a little bit more aggressive on pricing into next year. And then also just wondering if some of those costs that came out this year will need to come back in next year and if those two things are going to offset each other or if you think you'll price more than the cost will come back or just how we should be thinking about that relationship in our models for 2021?

Yeah, it's a great question, one we're having internally now as we start the very early part of our budget process for next year. Yeah, listen, I do think as we raise our prices in the second half of the year, they naturally have an impact on the first half of next year. You know, you think of the Latin American season, it doesn't stop at the end of Q4, it carries on well into the end of Q1, beginning of Q2. So whatever we do now will obviously have a beneficial impact as we go into next year. As I said, Asia also will be and are looking at pricing now for the second half of the year, followed by Europe and North America. So I do expect to see pricing being a tailwind as we go into next year. On the cost front, the $60 million of costs that we've taken out of this year, there will be some spring back next year for sure. You know, I talked about pushing back on timing on some projects and some expenditure. Some of that will come back. Obviously, you're going to have the very real tailwind of the SAP implementation, which will lower costs once again. We've already talked about another $20 million to $40 million next year on top of what we've done this year, and we accelerated this year. So net-net, I would see price as a tailwind. I would also believe that because of the balance of SAP plus how we will manage whatever spring back occurs, I would expect cost to be a tailwind as well next year.

Thank you.

And the next question will come from Michael Tyson with Wells Fargo. Please go ahead.

Hey, guys. Nice quarter. Mark, just curious on where you have your manufacturing facilities. Raw material sourcing was an issue this quarter, but you have a lot of your manufacturing in China. Any thoughts longer term? Can you shift some of that around the regions, given your sales are a little bit more even? And just wondering how long of a process would that take if you could sort of move some of your manufacturing around?

Yeah, thanks, Mike. So if you go back, well, I don't know, seven, 10 years now, time moves on. You know, FMC was probably 90, 95% dependent on China. We had that very, very good model that we used to run called an asset light model. We moved a long way since then. I was looking at some numbers over the last couple of months, and I think we're about 60% sourced from China today. Our longer term, midterm plan is to get that down to 40, 45%. That will come through investments in India, investments in Europe, and investments in part of the U.S. and Mexico. It's not easy in this industry to just pick a product up and move them. The registration process is tied to your point of manufacture. So if you move your point of manufacture, you have to go reapply for a new registration. That can take anything from two to five years, depending on the jurisdiction that you're in. So you really have to plan for a plan for the move. So when I say we went from 90 to 95 percent dependent on China to 60 percent, you know, we've done that over a four year time frame. And really, since the acquisition of coming over and the DuPont assets really allowed us to accelerate that because we have our own manufacturing facilities in India, Europe, U.S. now. So you should expect us to see a continuous, gradual spreading out of our manufacturing so that eventually we're in that 40 to 45% dependency on China, the rest being spread around India, Europe, and the US.

Thank you.

The next question will come from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Yes, good morning. Mark, a year ago on this call you provided, you know, a helpful, discussion of your long-term growth strategy and diamonds, taking those molecules through the various patent expirations around the world. I was wondering if you could provide an update on what's transpired over the last year in terms of your discussions around manufacturing agreements, actions on maybe new formulations and other aspects of that transition.

Yeah, thanks, Kevin. Amazing that it was a year ago that we talked about that. So the plan has been a very robust plan that we've put in place for the continued growth of diamides. We talked about a two-pronged approach, which was obviously defense of our significant patent estate, and then also the commercial aspects of bringing in other partners to allow them to sell the products. I have to say both pieces are going very well. We've had a number of legal successes in India related to manufacturers of illegal material that we've managed to identify and shut down, which has been very successful. And we will continue that process both in India and in China and other parts of the world when we see people trying to break our patents or infringe our patents. The second part related to the use of diamides with our fellow industry players has gone very, very well. We have, as I said before, about four global agreements in place today and over 40 what are called local agreements with local companies. Some of those big ones are already up and running. Some of the smaller ones are starting. A number of them require new registrations, which will take a period of time, but they're well on the way in their process. So it's very much steady as it goes. We're on plan. With regards to formulations, we have a lot of work ongoing inside the company. As I said earlier, we just launched a new product in the U.S., which is our first FMC reformulation of Renaxapur with a pyrethroid very specific to U.S., but we have a number of those activities underway. And I would expect those formulations to come out in the next two to three years as we gain the registrations because they are new types of technology. So overall, Kevin, it's a very good question. I think we're very much on track and we continue to grow these technologies very much well above market.

Thank you so much.

The next question will come from Frank Mitch with Fermium Research. Please go ahead.

Yes, good morning and let me add my congrats to the start of your reign, Mark. This year you launched the Arc Farm Intelligence platform and notably have trials underway with Nutrien. I was wondering if you could give us some insight as to how that's progressing, and what are your overall overarching thoughts for how this new platform can impact FMC?

Thanks, Frank. Yeah, you know, the ARC platform really was and is a first in the industry. It is a predictive model for insect pressure. We were very careful in thinking this through and how we would go to market. And, you know, we are going different ways to market in different parts of the world. Obviously, the nutrient agreement is one of those activities. It's a very specific crop, brassicas in California. It's not a particularly easy crop to grow, and it takes a lot of time and effort. And we believe using something like ARC, which is predictive in terms of what pests and when they will come, which will allow the growers to be much more optimal in terms of how they think about spraying. It is the first of what we will consider a series of technologies that will blend into the ARC platform. I see it as both defensive and offense in terms of how we could gain market share, but equally how we defend our market share. You know, we are the number one provider of insecticides in the world. So we have some franchises that we wish to defend. ARC will allow us to do that from a very sustainable perspective. Using the right product at the right time allows you to use less product, which is good for the grower, good for us in the sense that we defend our business, but once people get used to that, they're willing to expand the portfolio of products that they buy from FMC, and we're already seeing that. We actually see that with another technology that we have, which is called Thrive 3D, which is our application of pesticides in soil during planting via what is essentially a patented shaving foam. It uses tremendously low amounts of the product and low amounts of water. The growers that are using that in the U.S. for corn are actually now acquiring more of FMC's portfolio as they get used to that type of technology. So we see these very targeted precision applications as being a boon to our growth. and bringing more sustainable chemistry and technology to the marketplace.

Very helpful.

Thank you.

Thanks, Frank.

And the next question will come from Michael Harrison with Seaport Global Securities. Please go ahead.

Hi. Good morning. Good morning. Mark was wondering if you can provide some examples of areas where SAP is helping to enable you to run more efficiently And with the acceleration of some of these benefits, are you more confident in delivering on the high end of that $60 to $80 million of eventual synergies?

Mike, great question. I'll let, soon as Andrew is running the project in FMC, I'll let him talk about where we see the benefits. Andrew?

Yeah, great. Thanks, Mike, for the question. Look, SAP really is the plumbing we run all of the business processes of the company on. So it's substantially a platform we run the back office on. We have seen tremendous efficiency improvements as we've gone live on the new system, allowing us to leverage shared service centers rather than broadly distributed fragmented workforce. With the experience from transitioning off the DuPont TSA to bringing that work into our own systems, we were able to do it substantially lower cost than what we were paying DuPont. And the acceleration we're seeing this year you know, what we're being able to do is we're being able to run more efficiently and actually take headcount reduction, some through attrition, earlier than what we'd planned with the full go-live of SAP in the rest of FMC at the end of the year. So that, you know, that's $20 million in additional benefit we've been able to capture this year. You know, as hard savings, it will continue and roll over into 21 and thereafter. You know, the additional savings, the $20 to $40 million, I think we're highly confident in that range. Could it creep up to the above midpoint of that? Certainly. Some of the questions will be just timing. It will take some time during the year 2021 to implement that next wave of improvements as we get the full company on the full SAP platform. So part of that will be timing what's run rate for the year versus what we actually get into the P&L next year. But we're very, very confident that we will be able to run, if you think about all of the the business processes, the finance close process, how we do planning, budgeting, how we buy things, how we plan and run our supply chain, all of those things that are run through an enterprise resource planning system. You know, the degree of efficiency we can get by moving to a modern system that was designed and built for an agricultural sciences company rather than, you know, a collection of systems that were designed 30 years ago for a variety of different businesses. I don't also, just very briefly, also make sure everybody thinks as well, It's not just the efficiencies we get by taking some of the costs out of the back office. We'll also get some very new and much more updated analytical capability and tools and visibility on things like working capital, where the way our systems are stitched together today limits our ability to drive as aggressively to the kind of efficiency and improvement we'd like there. So we certainly see the new capabilities and the increased visibility by having all of the business in a common platform as being very helpful in our efforts to continue to drive working capital efficiency as well.

All right. Thanks very much.

And the final question today will come from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Great. Thanks. And congrats on the quarter. If I can ask a question on cash flow, looks like you're going to be converting about 56% of your adjusted earnings to free cash, and it's about 37% of your EBITDA guidance at the midpoint. How should we think about if there's any discrete items that maybe could push cash flow up higher and then that conversion rate higher next year? Where do you see that going over time, I guess? And if you do see that going higher, How would that affect your capital allocation? I mean, could we see, you talked about $1.5 billion in buybacks at your analyst day a couple years ago. Maybe could we see some upside to that, or would you be... Great.

Yeah, Andrew, what do you... Yeah, thanks, Lorenz. A lot in that question, but let me try to hit most of those points. Certainly, yeah, we continue to guide free cash flow conversion in the mid to high 50% percentage points this year. It's moved around a little bit as we've changed earnings guidance for the year. We've maintained free cash flow guidance throughout and still expect to be at that midpoint around 475. We're pretty confident at this point in that range. Obviously, a lot of things that can move. There are large items in working capital that move in the fourth quarter, in particular with prepayments that we receive in the U.S. business, for example. But we have increasing visibility and sense of confidence as we go through the end of the year in terms of that cash flow number. As we think about the cash flow improvement trajectory, when we laid out our strategic plan at the end of 2018, we set a goal to take free cash flow conversion up in the 65% to 75% range. We think we can get well into that range in the next year to two years. 70% is very much within reach. That's ahead of the plan that we laid out initially, moving faster there. The big couple of movers as we go into 2021, first, we will be finishing the SAP program. This period of high-level cash spending on transforming our portfolio that we've gone through essentially comes to end. That $100 million to $125 million in cash spending we'll make this year largely goes away, and 2021 becomes a tailwind of free cash flows. There's always timing issues and fluctuation in working capital, but we think there'll be continued improvements in working capital. And as we go, you know, particularly as we get, as I mentioned in the previous answer, previous question, as we get better tools with the new SAP system, you know, we have high confidence in our ability to drive further working capital efficiency as we continue growing. And then the third piece is just simply, you know, we do have some non-trivial legacy liabilities. They're pretty stable. They will shrink as a percentage. of the income over time, so they become a smaller and smaller drain on percent free cash flow conversion. I do want to be careful not to excessively focus on free cash flow conversion. It's an important metric for us, but that absolute amount of free cash flow that we generate, we expect that to continue growing that. The last part of your question, that's really what allows us to have the funds to either buy back shares, increase the dividend, or make inorganic investments in the business. And that's where we'd expect to see continued solid growth, and it ties to our capital deployment policy, which has not changed. It's simply been paused because of COVID, which is we're going to fully fund the growth plan, take advantage of some opportunistic small inorganic opportunities, but anything else, any other cash that's left over after staying at our targeted leverage level goes back to shareholders in the form of either higher dividends or through share purchases. It's exactly what we've done in the first two years of the plan. We have $600 million in share buybacks and almost $350 million in dividends returned to shareholders since we launched this strategic plan in December of 2018. We have currently about $600 million in remaining authorization on our existing share purchase authorization, and we would expect to revisit that with the board as soon as that's exhausted. So I'd say really no change in our capital deployment policy, and just, you know, we are going to continue to focus on driving more and more cash flow out of the business and maintaining discipline with how it's deployed.

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

This concludes the FMC Corporation conference call. Thank you for attending, and you may now disconnect.