FMC Corporation

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.

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.

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.