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spk04: Good morning and welcome to the third quarter 2020 earnings call for FMC Corporation. This event is being recorded and all participants are in this morning 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 in the Q&A queue, please press the star key then one at any time. If you're using a speakerphone, please pick up your handset before pressing the keys. I would now like to turn the conference over to Mr. Michael Worley, Director of Investor Relations for FMC Corporation. Please go ahead, sir.
spk08: Thank you, and good morning, everyone. Welcome to FMC Corporation's third quarter earnings call. Joining me today are Mark Douglas, President and Chief Executive Officer, and Andrew Sandifer, Executive Vice President and Chief Financial Officer. Mark will review our third quarter performance, followed by a review of our business in Asia and the outlook for the rest of the year. Andrew will provide an overview of select financial results. Following the prepared remarks, we will take questions. R&As 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, free 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 to which we may refer during today's conference call are provided on our website. With that, I will now turn the call over to Mark.
spk05: Thank you, Michael, and good morning, everyone. The third quarter was an exceptional quarter for our company. Even in the face of persistent challenges posed by COVID-19, and severe headwinds from foreign currencies, we grew our revenue by 15% organically, EBITDA by 20%, and EPS by 30%. This performance highlights our portfolio strength, balanced geographic and crop exposure, as well as a sharp focus on execution and costs. On the latter point, as we progress through the quarter, We saw the Brazilian season was getting off to a very slow start due to hot, dry weather, which in turn made it difficult to get the pricing we had planned to offset the FX headwinds. To counter this situation, we aggressively managed costs in the quarter and were able to achieve the strong overall performance. Let me now turn to the impact of COVID-19 pandemic on our business. As we said last quarter, all our manufacturing facilities and distribution warehouses remain operational and fully staffed. The majority of FMC's other employees continue working from home, but some have returned to certain offices and laboratories where permitted by local authorities. We have had zero COVID-19 transmissions in our facilities and continue using a variety of best practices to address risks. While we saw very strong demand for our products in all four regions of the world in the quarter, there were pockets of demand reduction related to the pandemic. This impacted certain cotton and fruit and vegetable markets. We expect this level of localized disruption to continue in the fourth quarter and potentially into 2021. Following the outperformance in Q3 and with our outlook for Q4, we are raising the midpoints of our EBITDA, EPS, and free cash flow guidance and tightening these ranges. Underlying demand for our products remains healthy, supplemented by market access expansion, new registrations, and an increasing impact from our pricing actions as we enter Q4. Turning to our Q3 results on slide three, we reported nearly $1.1 billion in third quarter revenue, which reflects a 7% increase on a reported basis and 15% organic growth. After removing the FX impact, our business saw double-digit growth in India, Australia, Pakistan, Brazil, Germany, Italy, and Canada. Adjusted EBITDA was $263 million, an increase of 20% compared to the prior year period. EBITDA margins were 24.2%, an increase of 260 basis points compared to the prior year, driven primarily by cost control measures. Adjusted EPS was $1.22 in the quarter, an increase of 30% versus Q3 2019. This year-over-year performance was driven mostly by the increase in EBITDA, while much smaller impacts from DNA, interest expense, tax rate, non-controlling interest, and share count largely offset each other. Similarly, relative to our Q3 guidance, the $0.12 beat was driven almost entirely by our $18 million EBITDA outperformance versus the midpoint. Moving now to slide four, Q3 revenue increased by 7% versus prior year, despite an 8% FX headwind. as higher volumes contributed 12% to growth and pricing another 3%. In Asia, revenue increased 16% year-over-year and 19% excluding FX, partially due to favorable weather conditions in both India and Australia. Sales in India grew over 20% organically, as the good monsoon drove demand from growers of rice, soybeans, pulses, sugarcane, and fruit and vegetables in the south and central markets. Herbicide sales in Australia were up over 50%, led by cereals and canola. Pakistan also grew in double digits, driven primarily by insecticides in rice and cotton. In North America, sales increased 8% year-over-year, driven by increased planted areas in soybean, corn and rice, as well as continued market expansion of our fungicides Lucento and Rhyme. Sales in Canada were robust, driven by cereal herbicide blends from our patented precision-packed technology, as well as insecticides. We broke a record in Canada this year for acres using precision-packed products. Elavest, a formulation based on Ranaxapur insect control and bifenthrin, is doing very well in its first launch year. Heading into the winter, our U.S. channel inventories are in better position compared to a year ago, which should lead to good restocking later in the fourth quarter. Sales in NEA increased 10% year-over-year, and there was no FX impact. We saw strong demand for an exoper insect control applications for specialty crops, as well as battle delta herbicide for cereals, particularly in France and Germany. In Latin America, sales grew 1% year-over-year and 18% excluding FX. Grower sentiment is strong, but the season started very slowly due to hot and dry weather in Brazil, Argentina, and Paraguay. Pricing actions across the region offset some of the currency headwind, although we expect pricing to have a larger positive impact in Q4 than it did in Q3. In Brazil, sales grew double digits organically, led by outgrowth in the soybean market. Due to the late start in Brazil, channel inventories are higher than normal for this point of the year, for us and the industry. We fully expect this will be worked down as planting catches up now that the rains have returned. Mexico's sales grew organically, but were still impacted somewhat by COVID-19-related pressures on the growers that export fruit and vegetables. Sales in the Andean zone grew significantly as conditions in that sub-market improved. Turning now to the third quarter EBITDA bridge on slide 7. We had very strong operational performance, as a $70 million contribution from volume, a $34 million contribution from lower costs, and a $26 million benefit from higher pricing, more than offset an $86 million FX headwind. The volume contribution was double what we had forecast, partially due to the robust market growth in India and Australia. In addition, stronger than anticipated volume growth in Brazil was also a key driver. However, this did drive an increase in the FX headwind in the quarter. We had significant cost savings in the quarter, well above guidance given on our last call. Approximately $8 million of the $34 million cost savings you see on this bridge are costs that were delayed into Q4. We had excellent cost discipline, including additional accelerated SAP synergies. Taking a step back now, we'll turn to slide six. As we did for Latin America last year, I'm going to highlight a region where we are seeing significant growth. Asia may be the most diverse of our four regions, and therefore, it is the most complicated to understand. We are currently the fourth largest crop protection chemical provider in the region, with sales of around $1.1 billion in a $16 billion market for about a 7% market share. This region is the most seasonally balanced of the four, mainly because it has significant markets in both the northern and southern hemispheres. We manage the Asia business in five sub-regions, with India and North Asia significantly larger than the other three, but we do have aggressive goals to grow in all of them. Not surprisingly, rice makes up about 35% of our sales in the region. In addition, fruits and vegetables are a large and diverse set of crops spread across all countries, Our crop diversity in Asia provides numerous opportunities to grow, and it also mitigates the risk of our results being overly impacted by a poor season in any single crop. Similarly, our geographic mix in the region is also very diverse. Moving to slide seven for a look at how our Asia business has expanded since 2014. We have made two large acquisitions since then, Caminova in 2015 and the DuPont crop protection business in 2017. Through these acquisitions, we added a large active ingredient manufacturing plant in India and two active ingredient manufacturing plants in China, along with several formulation plants, R&D labs, and field trial sites across the region. Total sales were about $350 million in 2014, while this year we expect to be about $1.1 billion. This is in part due to a fundamental restructuring of our India business, which we implemented in 2018 that enabled increased market penetration and efficiencies that improved profitability significantly. I'll walk through some of the sub-region highlights to provide colour on the crop diversity, country exposure and recent commercial activities we have in the region. The five sub-regions include Australia and New Zealand, South West Asia, North Asia, ASEAN and India. In the Australia and New Zealand sub-region, our annual revenue is about $100 to $130 million in a $2 billion market. Our market access model is via large distribution and retail companies supported by our own sales groups. Australia is predominantly a cereals market. We are therefore very excited to be preparing for our launch of Isoflex Overwatch herbicide in 2021 crop season. Earlier this year, we began engaging retailers with a large-scale demonstration plot program. Isoflex is a new mode of action in cereals, and it delivers high performance on weeds that are developing resistance to the other herbicides in the marketplace. The Southwest Asia sub-region encompassing Pakistan, Bangladesh, Sri Lanka, and Myanmar is the smallest market of the five, but our annual revenue of approximately $110 to $140 million equates to a market share of approximately 30%. In Pakistan, we have a unique market access model comprised of FMC-owned retail outlets selling our full range of products. This model has facilitated our growth to be the market leader. we see rapid renaxipur insect control expansions for sugarcane and corn applications. Moving to the North Asia subregion, which includes China, Japan, Korea, and Taiwan, we have annual revenue of approximately $290 to $320 million in a $9 billion market. In Korea, we successfully launched a KUDO biostimulant in 2019 for use in fruits and vegetables. and we are preparing to launch two new microbial biopesticides later this year. In Japan, we've seen strong demand for diamides, particularly in the rice nursery box segment. In China, the market is highly fragmented. Our business is focused on rice and fruits and vegetables. Due to the customer fragmentation, we go to market via local distribution and retail companies. The ASEAN sub-region includes Indonesia, the Philippines, Thailand, Vietnam, Cambodia, Malaysia and Singapore. In all these countries, we work through local distribution and retail companies. This is especially important in the large Indonesian market, given its fragmented geographical nature. In 2020, we also expanded our market access to additional parts of Indonesia, similar to what we have done in India. In this sub-region, we have an annual revenue of about $110 to $140 million in a $2 billion market. We see strong Rhenaxicur insect control sales for rice, as well as growth of Cyazicur on fruit and vegetables, driven by label extensions. Moving finally to the India sub-region, which generates approximately $370 to $400 million in annual revenue for us. On slide eight, we take a deeper dive into this $3 billion market, which has significant structural opportunities for agricultural growth. To start, it has more arable land than any other country in the world. In fact, India has 30% more arable land than China and nearly twice as much as Brazil. This presents incredible growth opportunities for FMC with our very strong footprint and market penetration. You can see in the center of the slide that yields are very low in India, driven by low usage of crop inputs. On rice, for example, India's yield per acre is half of that of Brazil and less than a third of the yield in China. On corn, India's yield is half of that of Brazil and less than 20% of the yield seen in the US. The market is dominated by small growers who do not have the scale to mechanize their operations. That being said, there are meaningful growth opportunities as these small growers recognize the benefits of investing more in crop inputs. Moving to slide nine, India today is about a $3 billion market for crop protection, and we see market growth of 6% through 2025, taking the market to nearly $4 billion by that time. Insecticides make up about 45% of the market today, with herbicides and fungicides about 20% each, and plant health and biologicals, making up the remaining 15%. As you can see on the right side of this slide, the crop mix is similar to that of the Asia region, with rice and fruit and vegetables making up nearly 60% of the market. In a market that is highly fragmented by both geography and a multitude of crops, there are, as we said, significant opportunities to grow. In India, we have a unique market access model. We have exclusive distribution with five major companies that are supported by sales and marketing resources to drive geographical and portfolio growth. This model is currently under expansion as we look to service all of the India market. FMC has developed commercial initiatives in India to expand our market share. This includes crop and geographic expansion of our Diomide brands, such as Corrigin and Fiterra, as well as eight new herbicide and fungicide launches since 2018, that are expected to drive sales of $70 million by 2023. And with that, I'll now turn the call over to Andrew.
spk07: 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 Q3, at 8% versus our expectations of a 6% headwind. The Brazilian real was the vast majority of this headwind, followed by the Indian rupee, Argentinian peso, Pakistan rupee, and Turkish lira. We took substantial pricing actions and were able to recover about one-third of the FX headwind in the quarter. We continue to expect FX headwinds to remain at an elevated level throughout 2020, with pricing covering about half of the FX headwind at revenue in the year. Interest expense for the third quarter was $35.5 million, down $6.1 million from the prior year period, benefiting from lower term loan balance outstanding, lower LIBOR rates, and lower foreign debt balances. These were partially offset by higher bonds outstanding following the debt offering we completed in the prior year quarter. We now anticipate interest expense between $150 and $155 million for the full year. Our effective tax rate on adjusted earnings for the third quarter was 13.5%. We now expect our full-year tax rate to be in the range of 13% to 14%, with the midpoint consistent with the tax rate through the first three quarters of the year. Moving next to the balance sheet and liquidity. Gross debt at quarter end was $3.2 billion, down $300 million from the prior quarter, with strong free cash flow leading to lower short-term financing needs. We continue to carry some excess cash due to heightened uncertainty caused by the COVID pandemic. Gross debt at trailing 12-month EBITDA was 2.5 times at the end of the third quarter, or 2.4 times if you consider the nearly $175 million of surplus cash on the balance sheet. This is consistent with our targeted annual average leverage of 2.5 times or less. Moving on to slide 10 to cover cash flow and cash deployment. Free cash flow for the third quarter was $315 million, up more than 50% from the prior year period. Adjusted cash from operations was up $75 million, with growth in trade working capital more than offset by higher EBITDA, lower change in other assets and liabilities, and lower cash interest. Collections continued to be strong in the quarter, surpassing our expectations. Capital additions were down $27 million, consistent with our updated expectations for four-year investment. Legacy and transformation spending was down $15 million due to timing of expenses and ramp down of our transformation efforts. For the nine months ended September 30th, free cash flow of $148 million is nearly $230 million higher than the prior year period. Change in other assets and liabilities, lower cash interest and taxes, lower capital investment, as well as growth in EBITDA above growth in trade working capital all contributed to the year-on-year improvement. As we look to year-end, we are raising our full-year free cash flow guidance to a range of $475 to $525 million, an increase of nearly $200 million at the midpoint versus the prior year period. We anticipate deploying more than $170 million of free cash flow in the fourth quarter. We paid $57 million in dividends on October 15th, closed on the $65 million acquisition of the remaining rights to the fungicide Fluendipir in early October, and expect to repurchase $50 million of S&C shares. We resumed share repurchases at the beginning of October and have completed $20 million of repurchases to date. By year end, we will have deployed nearly $350 million of free cash flow while maintaining excess liquidity throughout the pandemic. This includes the $115 million being deployed in Q4 on the acquisition and share repurchases, as well as the nearly $230 million that will be returned to shareholders this year via dividends. Moving next to slide 11. SMC 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 we generate. As you can see on the left-hand side of this slide, at the midpoint of our increased guidance range, we now expect to improve cash conversion by 21 percentage points compared to last year, while growing cash flow by nearly $200 million. We continue to believe that 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 SAP implementation and end the period of high cash spending on transformation efforts this year. 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 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 system. Our final go-live is underway as we speak, with the remaining 40% of F&C moving on to the new system this month. Following this go-live, we'll have a single modern system across the entire company for the first time in our history, which will enable significant efficiencies in our back office processes. As we've prepared for this final go-live, we've accelerated more synergies that were planned for 2021 into 2020. We continue to expect total synergies of $60 to $80 million from implementing the new system, but we now expect to capture $50 million in synergies in 2020. with the remaining $10 to $30 million to be achieved largely in 2021. With that, I'll turn the call back over to Mark.
spk05: Thank you, Andrew. Turning now to overall market conditions, with only a couple of months left to go in 2020, we continue to expect the global crop protection market will be flat to down slightly on a U.S. dollar basis, although our view on the regions has changed slightly. The outlook for Europe continues to worsen following a hot, dry summer, and we now believe that market will be down low single digits year over year versus flat in our prior forecast. Offsetting this, we expect the Asian market to be up low single digits versus our prior forecast of being down slightly due to much better weather conditions in India, Australia, and ASEAN. Our forecasts for Latin America and North American markets are unchanged. are down to low mid-single digits and up low single digits respectively. All these forecasts are for the market, not FMC, and are in US dollars. Moving to slide 12 in the review of FMC's full year 2020 and Q4 earnings outlook. As I said earlier, we are raising our guidance for the full year. We are still facing significant FX headwinds and impacts on both cost and demand from the global pandemic. But the underlying demand for our products and our ability to control costs led to our improved outlook. FMC full-year 2020 earnings are now expected to be in the range of $6.45 to $6.57 per diluted share, a year-over-year increase of 7% at the midpoint and 6 cents above prior guidance. The $50 million in share repurchases planned for the fourth quarter will not impact our full-year share count, as the buybacks are too late in the year to alter the math for the EPS calculation. 2020 revenue is forecasted to be in the range of $4.72 to $4.78 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 $1.295 to $1.315 billion, which represents a 7% year-over-year growth at the midpoint. Guidance for Q4 implies a year-over-year sales growth of 5% at the midpoint on a reported basis and 10% organically. led by continued strength in Asia, in addition to the global strength of our diamides business. We are forecasting EBITDA growth of 8% year-over-year at the midpoint. EPS growth is forecasted to be flat year-over-year, limited by the large positive tax adjustment in Q4 2019. Then into slide 13, and full-year EBITDA and revenue drivers. Revenue is expected to benefit from 6% volume growth, with the largest growth in Asia and Latin America, and a 3% contribution from higher prices. FX is forecasted to be a 6% top-line headwind. We have raised our EBITDA guidance by $10 million at the midpoint, reflecting the outperformance in Q3 while recognizing the delay of $8 million of costs into Q4. We now expect a higher contribution from volume growth, and we are also generating higher cost savings, as well as earlier realization of some SAP synergies. We now forecast an FX headwind of $247 million for the full year versus $230 million in our prior forecast. On an EBITDA basis, we now expect pricing to cover over 55% of the FX impact in the year, and pricing will come from all regions led by Latin America. Moving to slide 14, where you see the Q4 drivers. On the revenue line, pricing and volume are expected to drive the top-line strength And regarding EBITDA drivers, pricing will have a larger impact in Q4 than it did in Q3. To wrap up, we executed very well in the quarter, both from an external perspective in driving demand across all regions, but also importantly, internally, by focusing on cost control and delivering critical activities that will drive our future performance. This includes preparing our go-live of SAP, continuing to drive our R&D pipeline forward, and keeping priority capital projects on track. Q4 is an important quarter for cash, and we are focused on cash generation as well as demand generation. We remain confident in our ability to drive above-market performance once again. With that, I'll now turn the call back to operator for questions.
spk04: Thank you. We will now begin the question and answer session. To be placed in the queue, please press the star key and 1 on your touch-tone sound. If you're using a speakerphone, please pick up your handset before pressing the 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 2. At this time, we will pause momentarily to assemble our roster. And the first question today will be from Christopher Parkinson with Credit Suisse. Please go ahead.
spk10: Great. Thank you very much. So on the free cash flow conversion front, there's still a few moving parts, but you're, you know, Pierce, you're definitely moving the right direction. Just given your more stringent definition, can you just give us an update on, you know, some of the key initiatives you were mentioning, as well as some low hanging fruit, which still exists for 21 and even 22, you know, just anything that could further assist us in the pathway to over 80% conversion eventually. Thank you.
spk05: Sure. Yeah, let me just give a couple of high-level comments before Andrew jumps in on the details. You know, one of the reasons you're seeing us move our free cash flow conversion and ultimately the dollars is the reason, I think one of the primary reasons is the focus we've placed on cash as an organization. I think it's important to note that all the executives and senior managers now have a free cash flow component in the long-term incentive rewards for the company. And I do believe that that has helped change our view of free cash flow and how we go about delivering that for the company. So that's an important backdrop for everybody on the call of how you think about us driving not only earnings but also free cash flow. Andrew, do you want to talk about a couple of the drivers there?
spk07: Sure. Thanks, Mark. I think certainly a strong quarter and year-to-date on cash flow for us this year. That very strong focus that Mark is talking to, you see that in the way we've been able to manage the growth of working capital in particular. Also been benefited by some deferral of cash tax items under the CARES Act and lower cash interest based on the refinancing and lower rates that we've seen. As I think about free cash flow from a big-picture perspective, I think, Krista, to your opening comment, and certainly just to level set, when FNC is talking about free cash flow, we're literally talking about the cash that's left over to either pay dividends, buy back shares, or make small acquisitions like the Fluendafir fungicide acquisition that we closed in October. Everything else is built into that number, all of the legacy liabilities, all of the investments that's required to continue growing the business So we really are driving towards, you know, what we have in terms of free cash flow that can be deployed. You know, as we look to 2021, certainly, you know, we fully intend to take advantage of the new SAP system, which will give us some new tools and a much better visibility into working capital to continue to drive working capital improvement. But structurally speaking, I mean, certainly we're spending over $100 million this year in cash to finish out the SAP implementation and finalize all of our transformation efforts resulting from the acquisition of the DuPont business. That $100 million is a tailwind to the cash flow going into 2021. That is always other moving parts. CapEx is a bit lower this year, so it certainly should expect a bit of a tick up in CapEx next year. The legacy portion should be relatively stable. And then the remainder will be driven by our effectiveness in organic growth and driving that increase in growth in the cash flow. So I think people should continue to expect that we show progress on that trajectory, and we think this business should be in the 70% to 80% in the midterm and above that in the long term for a free cash flow conversion. Certainly, just also not to steal too much thunder, I am going to grab a few minutes at our upcoming Investor Day in two weeks, although it's largely focused on R&D. We'll spend a few minutes to talk about cash flow, cash conversion, and capital deployment policies in that event as well.
spk10: Thank you very much.
spk04: The next question will be from P.J. Juvacar with Citi. Please go ahead.
spk00: Yes. Hi. Good morning, Mark and Andrew. You know, you had a big impact of FX in Latin America. There was negative 17%. Can you go back to your hedging strategy? I know that you have an elaborate and well-thought-out hedging strategy. You know, your hedges orders come in. Can you just kind of describe that? Are you trying to hedge revenues, net income? And just talk us through that and what happened in the quarter. Thank you.
spk05: Yeah, sure, PJ. I'll let Andrew talk about the details of the hedging policy, which we talked about on a couple of calls previously. You know, I do think, though, overall, when you have these types of movements, whether it's short-term volatility or a long-term movement in the currency, price is the most effective weapon for closing that FX gap. I mean, hedging obviously helps. It is important for us to understand what we believe the performance of the company will be, and hedging allows us to do that. It is complicated, make no mistake, but I think we do a pretty good job of managing that exposure, but it really comes down to the commercial groups to manage the price lists and how they move price in any one jurisdiction. Andrew, do you want to talk about the hedging policy?
spk07: Sure. Thanks, Mark. I think, look, our hedging policy, our hedging program is all designed around increasing the probability of being able to deliver against our guidance and the expectations that we set. There is no hedging program that can protect you fully from year-on-year changes in currency, you know, at any kind of economic basis. So we're not trying to go to zero FX impact. We're trying to maintain an FX impact within a range that we can manage through the rest of the P&L, through the pricing actions and business that we have. Our hedging approach has been pretty well in place for several years now. We start from anticipation of sales with time to give guidance through entering in commercial terms with customers through the time we actually issue an invoice and create a receivable. And while the specific tools and levels that we hedge at vary at each part of that life cycle, you know, we have a very high coverage all the way up to 100% once we have a receivable on the books. Looking at Q3 specifically, you know, when you look at what we guided coming into the quarter, we'd expected at EBITDA about a $60 million headwind from FX. It ended up being about an $86 million headwind from FX. Part of that is, again, no hedging program covers 100% of the movements, and there were some movements beyond from what we anticipated. But the real driver was we ended up seeing some opportunities to grab more business, and the mix of business in Latin America being more heavily denominated in BRL than what we had forecasted. So with that higher volume of BRL-denominated sales, each one of those sales brings with it an increased amount of FXN. So the real delta in the quarter was the impact of higher volumes. And, you know, again, I think we're happy with the way the hedge program is performing. It, again, doesn't take all the risk off the table, never can, but it does help us increase our ability to manage the performance of the company to meet the expectations that we're setting.
spk04: And the next question will come from Laurent Avray with Exane BNP. Please go ahead.
spk01: Yes, good morning all. My question is on pricing. I guess two parts. The first one, maybe could you talk about the, I guess, same to the point earlier around the bridge. What do you think you came up a bit lightly versus guidance on Q3 pricing, plus three versus plus six? But more importantly, How do you feel about pricing going into Q4 in 2021 in terms of inventories, especially in the Northern Asia? Thank you.
spk05: Yeah, thanks, Laurent. Let's take the first one. First, the Q3 pricing. I said it in the script, and we certainly saw this. As we rolled through Q3 into Q4, the Brazilian market was extremely stressed. We probably think that market was delayed by about 30 days in terms of planting. It was just so hot and dry, unprecedented weather. That causes all sorts of frictions in the channel, as you can imagine. And our ability to move price to the degree that we thought it was just not as we had planned when we gave guidance in early August. So we responded to that. We had opportunities in the marketplace, especially in the soy complex, to go and move volumes, which we did very successfully. But we didn't get as much price. Now, what does that mean going forward? Well, certainly the price lists going forward for Q4, we are at a higher level because that's already been negotiated. So we do have confidence in the price that's going forward. But, you know, we covered about 55% of the total impact of FX in the year. It's going to take us through part of next year and all the way into the beginning of the next season in Brazil to recover the rest of that, assuming that FX stays where it is today. You just don't recover those sort of increases in one season. It is just too much. And you can't expect the grower to absorb that. We will continue in Latin America to push price as we go through this season. And also we're looking at price and we'll be looking at price in the other regions as they come into their new season in 2021. So expect us to be on this all the way through next year. And then we'll wait and see where we get to in Q3 next year for the 2021-22 season in Latin America. On the other part of your question, Laurent, was channel inventories. I'll give a quick run around the world because I'm sure there are other people who have that same question in mind. In North America, particularly the U.S., we feel we're in much better shape than we were a year ago. We were very explicit as we went through this year the fact that we felt following the very poor year in 2019 in terms of weather that we had more pre-emergent herbicide channel inventory than we would like. And that was the case. We've been very diligent in drawing that down this year, and we feel very confident that the levels we're at now are average levels where we can compete from a channel inventory perspective. And it should bode very well for a good restocking at the end of this year, getting ready for the U.S. season in Q1. In Europe, I believe channel inventories are high. Not everywhere, but just given the weather conditions, especially in northern Europe, I expect that herbicides, some herbicides, some insecticides, and certainly fungicides will be high in Europe. It's something we're going to have to watch out for as we go into the next season, starting in Q1. In Asia, I think India is in good shape. Monsoon was very, very good. So a lot of drawdown of inventories there, not that they were particularly high. ASEAN has improved a lot. Indonesia is looking much better now, more average for us. Australia has really got back on track. Excellent season given the drought we've seen for the last two or three years. So Australia is good. I would say more inventory than we would like in China. For those of you that watch the situation, there was significant flooding during this season, which did reduce demand. So we think China is a little heavy on inventory. And then moving down to Latin America, obviously Brazil is the major focus there. Right now inventories are high, but that's got nothing to do with how we feel about the market. Growth sentiment is very strong. We expect acreage to increase once again. Local prices are strong. So the market is very buoyant. It is just purely a delay in the usage of products at this point. Put it in perspective for you, I can tell you we always look at how much we're selling and what the market can take. and we have not sold more than the market can take in Brazil. So we feel very confident that once the planting really gets going, which it is now, the rains have arrived, that Brazil will be in much better shape as we end the season.
spk04: Perfect. Thank you. And the next question is from Stephen Byrne with Bank of America Securities. Please go ahead.
spk03: Yes, your deep dive in India was very interesting today. it would seem that the Indian government is pretty supportive of ag. They subsidize crop prices and fertilizers. I was curious to your view as to whether there's any kind of a structural reason why crop chemical use is as low as you highlight. The distributors that you use there, do they provide any agronomic advice similar to what Syngenta is rolling out in China, or might you consider expanding your retail network that you have in neighboring Bangladesh over into India? Is that a possibility?
spk05: Yeah, I think, you know, Steve, thanks for the question. Listen, I think it is such a fragmented market that that that whole complex of offering advice and developing the market itself has been slow to uptake. I think the value of the goods now are getting to a point where the growers see the impetus for improving both the fertilizer usage, crop protection, the seed quality. They're exporting more from that market, so therefore there is more of an incentive to invest. We certainly, from an agronomic advice, given the fact that our four distributor partners plus the sales and marketing force that we have there, do give agronomic advice to the growers to help them improve their yield and educate the growers on what is happening. I don't see us going to a model where we have FMC stores in India. There's a difference between the Pakistan market and the India market. The India market is just so much bigger and more fragmented. We did a lot of business prior to the DuPont acquisition through small retailers. And I can tell you, a lot of people focus on the P&L for the business. But when you're going direct to retailers in places like India, you have to have a large balance sheet to support that. And we felt that was not the right way to go. So we took the five distributor model and expanded it. But I don't see us going to FMC stores in India. I don't think that's the right model for us in that country.
spk04: Thank you. And the next question is from Adam Samuelson with Goldman Sachs. Please go ahead.
spk12: Yes, thanks. Good morning, everyone. So I was hoping, Mark, Andrew, just to get a reflection a little bit, year-to-date and what's implied in the guidance has been pretty clear, kind of outgrowth that FMC is continuing versus the global crop protection market. I'd love to get your kind of view on kind of the key drivers and the sustainability, whether it's just product, it's geographic exposure, kind of your channel inventory position, just how you think about your outgrowth versus the market this year. and kind of the sustainability of that.
spk05: Yeah, thanks. So a couple of things. First of all, just the way you think about our business. And I know we talk about this a lot, but that geographic balance and the crop balance is very important. Plus the fact that, you know, if you think about the size of our business, we're roughly, you know, almost $5 billion in a $58 billion market. We have a 9% market share, 8% to 9%. There is plenty of room for FMC to grow. We don't need the market to be growing mid-single digits for us to grow at mid-single digits. I think the whole area of how we're expanding our franchise, and I'm not just talking about the diamides. I'm talking about the pipeline of products that's coming, the crops that we have. You know, I've talked before about the number of registrations that we continue to add to our portfolio, which drives that future growth. You know, you think about products this year. We have about $70 million of new revenue from products that were launched this year. So, you know, that's what, one and a half, almost 2% of revenue growth just from products that were launching without the rest of the portfolio moving into new crops. So, you know, that geographic expansion is very important. Not only are we seeing that in India, as we've been very deliberate in moving out to certain parts of the country where we've not had presence, we're doing it in Indonesia. We're looking at our China business in terms of which provinces we need to expand into. And then, surprisingly enough, we're still doing it in Brazil. We are looking at market access in different parts of Brazil. How do we take more share with the quality of the portfolio? So it's not one silver bullet. There are a number of components that we have to keep working on to continue to drive this outperformance of the market. And we strongly believe we can continue to do that. Great. Thank you so much.
spk04: The next question is from Mark Connolly in Stevens. Please go ahead.
spk02: Thank you. I was hoping we could come back to the pricing question for a moment. We've obviously got a pretty amazing record of offsetting FX costs in Brazil over time, and that doesn't look difficult this time with how strong farmers are. But with your discussion of Asia, I was wondering if you could talk a little bit about how pricing is evolving in that market, given that so much of that market has a historical bias towards generics and, you know, pricing has been difficult there in the past.
spk05: Yeah, thanks, Mel. You can see when we talked about the FX impact, Andrew highlighted that the BRL was one of the major impacts, but there were a number of other currencies there, most of them in Asia. We do move price and have moved price in Asia this year, not as robustly as Brazil, given the size of that market, but we do get price. I think what you've got to think about in terms of the generic side of this business, you look at our business today, If you think about third-party products, which for us are essentially how we think about generics, that's probably only about 5% of our total portfolio. Competing with generics is one thing when you compete with the same technology. Competing with what we call value in use, so the value that the grower gets from using your products through either removing a pest to improve yield or productivity, that's where the real core of the business is. It is that value that the growers wish to protect. And think about it, you know, generally prices are looking better. I know people always focus on soy and corn in the U.S. markets or in the Brazilian market. But where we are around the world, you know, rice prices are not particularly bad. Sugar prices are not particularly bad. Fruit and vegetable prices are moving all over the place given the demand has changed due to COVID. But generally speaking, growers in Asia now are looking at being more profitable and therefore are willing to spend on the higher quality inputs that drive that yield and profitability. So we think of it that way rather than the generic market itself. Thank you.
spk04: And the next question will be from Vincent Andrews of Morgan Stanley. Please go ahead.
spk02: Thank you very much. Good morning, everyone. Maybe just to get back to the Asia or India discussion a little bit. Just wondering, you know, sort of as you look at the growth plan there, how much of it's just going to come down to, you know, continuing to penetrate your existing molecules versus, you know, is there going to be, and I don't want to front run your R&D day either, but, you know, is there going to be a story about some new products that are going to have good applicability there? Or is there also, you know, maybe an M&A roll-up opportunity in the region that might make sense? Or is it a bit of all three? Thank you.
spk05: Yes, a bit of the first two, not necessarily the last one, I think, Vincent. Yes, we do have geographic expansion and also crop expansion in India. Those fruit and vegetable markets themselves are highly fragmented. So, you know, we've talked before, as I said, about the registration profile and how we're increasing that. India plays a significant role in getting our products onto more crops in different parts of the country. Certainly, I'm not going to go into all the details of the pipeline. We're going to do that in two weeks. But, yes, the pipeline has applicability in India. I also think there are some agronomic changes going on that we see that are benefiting us. I'll give you an example. In Brazil, the sugarcane business is highly mechanized. In India, it is not, yet there are labor shortages. So in Brazil, where we are a leading provider of herbicides for the sugarcane market, we're now building a pre-emergent herbicide business in sugarcane in and in india which is a brand new market it used to be manually controlled and now they're using starting to use pre-emergent herbicide that's a great example of a market that didn't exist a few years ago that is now growing rapidly and we can transfer technology and know-how from brazil to india and in fact in the past in the past few years we have had india sugar cane growers go to brazil to see the difference between the agronomic practices That's all investment that allows us to continue to expand our market share and our market growth.
spk04: Thank you. And the next question will be from John Roberts with UBS. Please go ahead.
spk02: Thank you. Maybe just to give us a little bit of preview of your technology day, it sounds like you're having good success in the combinations of the diamides. Maybe you could comment what percent of the dynamite sales are currently in combinations, and what would you think that will be a few years from now?
spk05: Yeah, John, we don't actually break out what are straight products versus what are formulated products. But certainly, you know, we are having success. We talk about the Elevest we just launched. We've got a couple of others coming this year. I don't think it will ever make up the vast majority of our sales into this space, but certainly as we fragment the market and some of the partners that we're working with, as they look at the sales, they are also likely to have mixture products that they will use. It may not be that FMC has those mixture partners or those formulated products, but our partner companies will have. So you will see a growth in that type of part of the market, but we might not necessarily have that ourselves. We will have some, obviously, because we're working on that. But I think the general market itself will continue to fragment with more formulated type products. Thank you.
spk04: And the next question is from Frank Misch with Fermion Research. Please go ahead.
spk11: Yeah, good morning, folks, and an impressive result here in the third quarter. So as I look at your results for this year and the guidance for the fourth quarter, it really looks like things are accelerating in the back half of the year. So that naturally gets my mind thinking about the first half of next year and some of this accelerated growth in your results in the back half of this year, you know, on a run rate basis, probably implies a pretty good first half of 2021. Am I thinking about that correctly? How would you handicap, you know, kind of the run rate heading into next year?
spk05: Yeah, you can't, you know, Frank, you can't necessarily say that the first half of next year is the same as the second half of this year, purely because, you know, you look at our growth rates in Q3 and especially in Q4, you know, Latin America and Asia in particular play a significant role. Well, that Asia business is not necessarily as big in Q1 or Q2, not far off, but certainly Latin America is much lower in Q1 and Q2 than Q3 and Q4. So I think you've got to be careful in that. We never look at the business sequentially. It's not something we do because we look at it from a seasonality perspective. Now, do we have traction? Yes, obviously we do, given the market growth rates. But we're right in the middle of our budgeting process at this point. Just to give you – sort of a broad view of the market itself because I don't have FNC's internal numbers yet. But broadly speaking, you know, the market this year is down low single digits. I would expect the market next year to be sort of flattish. I think Europe should improve if the season is anywhere near normal. and everywhere else is kind of looking a little stronger, Latin America looking a little stronger. I expect Asia will too. The U.S. market, you know, with prices for soft commodities where they are today, China continues to buy. The U.S. market should look a little better next year. We'll see. And then you've got, you know, our long-range plan. We pegged top-line growth at 5% to 7%. You know, here we are through our second year. We're right in the middle of that range from a two-year growth rate perspective. People should be thinking of FMC delivering in that 5% to 7% range and 7% to 9% for EBITDA going into next year. I don't have the exact number, but certainly our long-range plan through 2023 is on track. That's how you should be thinking about it.
spk04: Thank you. And the next question is from Alex Yefremov with KeyBank. Please go ahead.
spk09: Thank you. Good morning, everyone. Just wanted to size the pricing versus a fax opportunity into next year. From your 2020 bridge, it looks like you're under recovering about $100 million of EBITDA. Is that roughly equivalent to what you expect to catch up next year?
spk05: Difficult to say at this point, Alexi. We are certainly working with Latin America, Asia, to look at where we're going to be on pricing. We haven't built that model out yet. But you're right. We have recovered about 55%. We've got about $100 million of pricing to go. It all depends on what happens to FX. Does FX stay where it is? Given where the election is, does the dollar strengthen or weaken after the election? All those things come into play. So I think it's a little early to say there is a $100 million tailwind in pricing going into next year.
spk04: The next question is from Joel Jackson with B&O Capital Markets. Please go ahead.
spk06: Hi, good morning. Mark, you and your team have been engaging with investors more on ESG the last few months. Maybe you can share some of the feedback you've heard, maybe some of the changes you might make in things you might do or your outlook or your strategy in these conversations externally and internally. Thanks.
spk05: Thanks, Joel. Yeah, listen, it's a subject that's very close to my heart. You know, I passionately believe in sustainability, and a company like ours, with the marketplace that we operate in, I think there are tremendous opportunities for us to position FMC as a sustainable company and a leader in this space. You will have seen we made an announcement in October. We've now put in place a chief sustainability officer. We are restructuring parts of the company to put that under our sustainability office. For me, it ties so closely into the technology platform that we have, and we'll talk about that in two weeks' time at the Technology Investor Day. I think the feedback we're getting is there is an appetite and a discussion around the types of chemistries that get used. The latest technologies, the more targeted technologies that are softer in chemistry, the biological approach to crop protection is also gaining a lot of traction. and a combination of the two types of chemistries together. And then there is the whole carbon footprint of companies that come into play, how we think about our waste and our utilities. They're all part of managing the company with the expectations of the various stakeholders that we have. So I do see it as an important aspect. You will see more from us. And, you know, we're putting out some pretty ambitious goals for sustainability for the company that we will be reporting on on a regular basis. So more to come from this area.
spk04: Thank you. And our final question will come from Chris Kapsch with Loop Capital Markets. Please go ahead.
spk02: Yeah, good morning. Fairly straightforward one, and sorry to touch on this already. But, you know, there's been some, incremental costs associated with the disruptions from COVID, supply chain expediting, you know, getting, I guess, your product closer to your customers ahead of time, so maybe even some working capital drag. So I'm just wondering if you see that normalizing into the 2021 season, if so, what kind of opportunity from either a cost-saving standpoint year-over-year or, you know, squeezing a little cash out of working capital? Thanks. Okay.
spk05: Yeah, you're right. We have had that drag on costs. I think we said earlier on in the year it was about $20 million of drag. Frankly, I don't see that going away in the near term. When you look at what is happening in Europe today in terms of sort of a second wave, We have already been extremely proactive ahead of the next season of moving material to local warehouses distributed throughout Europe rather than the lower cost model where you use centralized warehousing. We're very cognizant of the fact that things are changing in Europe. So we've been very proactive in putting those products out into the marketplace where we know they're going to be needed. and we have more of an opportunity to move them around. That entails cost. Now, that cost was built into this year, so I just expect it to kind of roll forward. I don't think you'll see a tailwind from that. Given where we are, certainly Q1 is going to look very similar to Q4, I think. And if we see that wave growing elsewhere, we'll do the same thing in terms of you know, logistics costs, moving products around, et cetera. So we're very much at the forefront of this. We're very proactive. We learned a lot over the last couple of years, and we're applying those learnings, but they do come with an added cost.
spk08: Thanks for all the questions. I'd like to remind you about our investor technology update call on November 17th to provide an update on our R&D pipeline. That's all the time we have for the call today. Thank you, and have a good day.
spk04: This concludes the FMC Corporation conference call. Thank you for attending. You may now disconnect.
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