FMC Corporation

Good morning and welcome to the first quarter 2024 earnings call for FMC Corporation. This event is being recorded and all participants are in 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 in 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. Kirk Brooks, Director of Investor Relations for FMC Corporation. Please go ahead. Thanks.

Good morning, everyone, and welcome to FMC Corporation's first 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 first quarter performance as well as provide an outlook for the second quarter and implied first half expectations. He will also provide an update to our full year outlook and implied second half expectations. Andrew will provide an overview of select financial results. Following the prepared remarks, we will take questions. Our earnings release and today's slide presentation are available on our website, and the prepared remarks from today's discussion will be made available after the call. Let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning 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'll turn the call over to Mark.

Thank you, Kurt. Good morning, everyone. Our Q1 results are detailed on slides three, four, and five. We delivered a solid first quarter with EBITDA at the higher end of our guidance range and excellent improvement in cash generation. First quarter revenue declined 32% versus the prior year period. Volume declined by 27%, in line with the magnitude we've observed in the prior three quarters. The volume reduction was driven by continued channel D stocking and is consistent with the change in grower behavior to delay purchases until closer to the timing of application. Market conditions were largely as we anticipated. And if not for some negotiated returns in Argentina, first quarter sales would have been in the lower end of our guidance range. We delivered EBITDA in the high end of our guidance range and earnings per share above the midpoint of guidance. In addition, we reported a very significant improvement in free cash flow versus the prior year period. Our earnings benefited from restructuring actions and we still expect to deliver the targeted savings net of inflation of $50 million to $75 million this year. Slide 4 provides detail on our sales at a regional level. North America sales declined 48% due to lower volume against a record prior year period. Price was essentially flat. New products introduced in the last five years, or NPI, showed greater resilience versus the rest of the region's portfolio, with strong growth in fungicides, including Zyway, which is based on flutriofol, and Adastrio, which is based on our newly launched active ingredient, Fluindafir. Turning to Latin America, sales were down 20%, a decline of 22% excluding FX. Volume was lower in most countries and included negotiated returns in Argentina, resulting from a change in a distribution relationship. LATAM reported the least volume decline of our four regions. Our differentiated products in the portfolio performed well. Branded diamides grew double digits, aided by the recently launched Premio Star insecticide, and continued growth of our Cyazopyr brands. New products reported strong growth, including sales of Onsuva fungicide, which is based on Fluendipir. Sales in Asia declined 29%, 28% lower excluding FX. Reduced volume was the primary driver, with the most significant downturn in China driven by poor weather. India Channel D stocking continues, although dry weather limited the applications. Pricing pressure was in the high single digits. NPI sales were essentially flat to prior year and outperformed the rest of the portfolio, including sales in Australia of overwatch herbicide based on isoform. EMEA sales were 20% lower than the prior year period, a decline of 17% excluding FX, driven primarily by volume, including headwinds from registration removals and rationalization of lower margin products and poor weather in the UK and Northern Europe. We did grow volume in other parts of Europe, most notably France, Poland, Italy, and Spain. A moderate FX headwind was partially offset by low single-digit price increases. Adjusted EBITDA declined by 56% primarily due to volume and to a less degree price. Costs were favorable with significant contributions from our restructuring actions, and lower input costs more than offset other COGS headwinds. Slide 6 includes further detail on our restructuring actions. We're making strong progress and will continue to transform our operating model, including how we are organized, where we operate, and the way we work. We've moved quickly to right-size our organization and remain diligent in our cost controls and reduce in indirect spend. These changes have been made without sacrificing strategic investment in areas such as plant health and our R&D pipeline. Restructuring provided significant year-on-year savings in the first quarter. As the year progresses, our prior year comparisons will include cost actions taken in 2023 to limit spending. This resulted in an outsized cost saving versus Q1 in the prior year, compared to what we expect will be reflected in Q2 through Q4. We are tracking to deliver cost savings within our $50 million to $75 million range in 2024, net of any inflation impacts to our operating costs. We continue to anticipate $150 million of run rate savings to be realized by the end of 2025. The sale of our global specialty solutions business is progressing well. We're now in the second round of a robust bid process. There has been significant interest from a mix of both strategic buyers and financial sponsors. We expect the sale of this business to be completed towards the end of the year. Slide seven and eight cover FMC's Q2 and full year earnings outlook. Our full year outlook remains unchanged. The fundamentals of our business are strong. Grower incomes have come down from peak levels, but remain positive in most countries. Generally speaking, weather's been favorable in many countries, which has led to steady application of products on the ground. Overall, we see a healthy ag industry. Data from third parties, as well as input from our commercial teams, shows that the inventory reduction actions in the channel are making good progress. On a regional basis, the pace of destocking is varied. We see North America furthest along, with inventories at the retail and grower level back to normal, while distributors are still working to reduce their level of inventory. EMEA is in a similar condition, except in countries hit by unfavorable weather. In both these geographies, our customers are now targeting to operate with inventories at lower than normal levels. In Latin America, inventories are materially lower and are expected to trend towards more normal levels as we move through the rest of the year. We expect India destocking to persist well into 2025, but parts of Asia, such as ASEAN and Pakistan, have made strong progress in destocking in Q1. While these activities continue to run their course, we're encouraged by the first signs that customers are starting to return to historical order patterns. In North America, We continue to receive orders for products that will be used early in the current season, which indicates that the inventories of such products have now been depleted. In Brazil, customers are now discussing next season's volumes, providing visibility that we did not have last year. Our full year outlook assumes that the market improves as the year progresses, but the customers will seek to hold lower levels of inventory. We are forecasting our second quarter results to be similar to the prior year. Sales are expected to be between $1 billion and $1.15 billion, which represents a year-on-year growth of 6% at the midpoint, driven by higher volume. This is the first quarter during which we expect to report an improvement in year-over-year volume since the start of global destocking. Prices anticipated to be a headwind in the low to mid single digits, and the FX outlook is neutral. Our outlook assumes customers continue to reduce and maintain levels in many countries, with a significant amount of the volume growth we're forecasting in the quarter coming from new products. These include Corrigan Evo insecticide in Argentina and the US, Premio Star insecticide in Brazil, Adastrio fungicide in the US, and Geordi fungicide in Germany. EBITDA in the second quarter is expected to be between $170 million and $210 million, up 1% versus the prior year at the midpoint. At the EBITDA midpoint, we expect that volume growth and restructuring benefits will be offset by lower price and COGS headwinds. Adjusted earnings per share is expected to be between $0.43 and $0.72, an increase of 15% at the midpoint due mainly to lower interest expense and DNA. Slide 8 provides our full-year financial outlook, which is unchanged from our last update. Sales are expected to be between $4.5 and $4.7 billion, an increase of 2.5% at the midpoint. Volume growth is forecasted to benefit from improving market conditions in the second half, with a substantial amount of the growth expected to come from new products. We anticipate strong growth in new products between Q2 and Q4, with the major contributions coming from Corrigin Evo insecticide in Argentina and the US, Premier Star insecticide in Brazil, Isoflex active herbicide in Australia and Argentina, and Onsuva fungicide in Brazil and Argentina. We're also excited to launch new diamide formulations in Australia, Indonesia, and other countries throughout Asia. We expect moderate pricing pressure for the full year, with the largest impact in the first half. FX is expected to be a minor headwind. Our EBITDA outlook remains between $900 million and $1.05 billion. which is essentially flat to 2023 at the midpoint. Volume growth and restructuring benefits are forecasted to be offset by lower price and COGS headwinds. Adjusted earnings per share is expected to be $3.23 to $4.41 per share, an increase of 1% at the midpoint from lower interest expense and D&A. Slide 9 illustrates the implied growth in sales and EBITDA in the second half to deliver the midpoint of our full year guidance. Revenue growth of 23% and EBITDA growth of 46% may appear outsized on a percentage basis, but considering the low 2023 comparison, we believe the required growth on an absolute dollar basis is achievable. The implied second half revenue and EBITDA are both in a range that we have delivered in the second half of 2020 and 2021. We expect improving market conditions as we progress throughout the year and transition to more normal conditions in 2025. Slide 10 outlines the various factors that will impact our results within the EBITDA guidance range. The magnitude and timing of improving market conditions remains the biggest variable. Our expectation is that recovery will vary by region, but broadly speaking, we anticipate meaningful improvement in market conditions in the second half. We expect new products will continue to show greater resilience in sales, which is a trend they've demonstrated for several quarters. We also anticipate the raw material costs will stay flat for the year and that pricing will be a modest headwind, mainly in the first half, as we shift to more favorable comps in the second half. As for what we directly control, we're confident not only in our ability to successfully launch new products, but also in delivering the $50 million to $75 million of restructuring benefits in 2024. With that, I'll turn the call over to Andrew to cover details on cash flow and other items.

Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a minor, less than 1%, headwind to revenue growth in the first quarter, with the most significant headwind coming from the Turkish lira, offset in part by a stronger Brazilian RIAI, Mexican peso, and euro. Looking ahead to the second quarter, we see continued minor FX headwinds, primarily from the Indian rupee and Turkish lira, offset in part by strength in the Mexican peso. Interest expense for the first quarter was $61.7 million, up $10.3 million versus the prior year period, driven by higher commercial paper borrowings and to a lesser degree by higher interest rates. We continue to expect full-year interest expense to be in the range of $225 to $235 million, down slightly to the prior year, driven by lower debt balances as we reduce borrowings through the year. offset in part by a change in the mix of short and long-term debt as compared to 2023. Our effective tax rate on adjusted earnings for the first quarter was 15.5%, in line with the midpoint of our full year expectation for a tax rate of 14 to 17%. As a reminder, we are forecasting a one-point increase in tax rate at the midpoint versus 2023 and providing a broader guidance range to reflect uncertainty related to tax law changes associated with Pillar 2, as well as transitionary impacts related to our recently awarded Swiss tax incentives. Moving next to the balance sheet and leverage. Gross debt at March 31st was approximately $4.3 billion, up $378 million from the prior quarter. Cash on hand increased over $100 million to $418 million, resulting in net debt of approximately $3.9 billion. Gross debt to trailing 12-month EBITDA was 5.6 times at quarter end, while net debt to EBITDA was 5.0 times. Relative to our covenant, which measures leverage with a number of adjustments to both the numerator and denominator, leverage was 5.7 times as compared to a covenant of 6.5 times. As a reminder, our covenant leverage limit was raised temporarily to 6.5 times through June 30th of this year. It will step down to 6.0 times at September 30, 2024, and then again to 5.0 times at December 31, 2024. We believe we have ample headroom under these limits as we progress through the year. Leverage is improving as we shift to positive year-over-year EBITDA comparisons in the second half, and as we reduce debt through strong free cash flow generation and through proceeds from the anticipated divestiture of our global specialty solutions business. We expect covenant leverage to be approximately 3.5 times by year end. We remain committed to returning our leverage to levels consistent with our targeted BBB or BAA2 long-term credit ratings, or better. As I discussed at our November 2023 investor day, we've shifted our midterm net leverage target to approximately two times on a rolling four-quarter average basis. While we will still be meaningfully above this level at the end of 2024, we are confident that with EBITDA growth, and disciplined cash management, we should approach targeted leverage by the end of 2025. Moving on to free cash flow in slide 11. Free cash flow in the first quarter improved over $725 million versus the prior year period. This is a critical first step towards substantially improving cash flow in 2024, which is an essential part of our deleveraging plan. Adjusted cash from operations improved by $748 million compared to the prior year period driven by working capital release from lower inventory as well as lower accounts receivable. Capital additions were lower as we continued to constrain investment to only the most critical high return projects. Legacy and transformation cash spending was up due to costs related to our restructuring program. We continue to expect free cash flow of $400 to $600 million for full year 2024. a swing of more than $1 billion from 2023 performance at the midpoint of the range. This increase is expected to be driven by significant cash release from rebuilding accounts payable and reducing inventory, partially offset by higher accounts receivable due to revenue growth in the second half of the year, and with modest improvement on other items such as cash interest. With this guidance, we continue to anticipate free cash flow conversion of 104% at the midpoint for 2024. And with that, I hand the call back to Mark.

Thank you, Andrew. We started 2024 as we planned, serving customers with innovative technologies, improving our cost structure to deliver on our restructuring targets, as well as delivering much improved cash flow. The crop protection market has started to turn to more normal buying behavior, and we believe market conditions will continue to improve as we move for the rest of the year and into 2025. Growers are constantly looking for new technologies to combat pest resistance, and FMC is delivering these innovative new products. We expect approximately 17% of our revenue this year will come from products introduced in the last five years, a record for our company, up from 10% in 2021. This growth is despite the challenges the industry has faced over the last year and shows the value growers place on new technologies. With that, we're now ready to take your questions.

We will now begin the question and answer session. To be placed in the queue, please press the star key, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question. If you have additional questions, you can jump back in the queue. To withdraw from the queue, please press star, then two. At this time, we will pause momentarily to assemble our roster. First question today comes from Vincent Andrews at Morgan Stanley. Vincent, your line is open. Please go ahead.

Thank you, and good morning, everyone. I'm wondering if you can give a bit more color on the first quarter sales. You referenced the Argentina issue, that that would have gotten you to the low end of your sales guidance. Could you just tell us a little bit more about that and then help us understand what could have happened that might have gotten you to the midpoint of 1Q? It also sounds like you're expecting volume growth in 2Q to largely come from your new product initiative. So what does the base business need to do in 2Q in order to hit your guide?

Yeah, thanks, Vincent. Let me just expand on the Q1 comment first of all. We did highlight, obviously, a distributor arrangement that we changed in Argentina. We talked before about being very careful how we do business in the Southern Cone and in Brazil. We've been extremely diligent in protecting our balance sheet. we saw an issue with a distributor that we had in Argentina, and we decided to take material back from that distributor and end that relationship. So that's the type of activity that, yes, it slowed down the top line, but from a balance sheet perspective, it was absolutely the right thing to do. I think the second feature that impacted us in Q1 that we were not expecting was really the terrible weather in Northern Europe. For those of you that follow these things, the UK has had, I think, its wettest spring for about 200 years, and the same in Scandinavia, the same in Germany, Holland, Belgium. That was really the other factor that brought down our revenue. So over and above everything else, pretty much all the regions performed as we expected. Moving forward and looking through Q2 and then into the rest of the year, I would start by saying, first of all, the market, the fundamental market, the use of products and technologies on the ground remains robust. around the world. Yes, there are pockets where weather has impacted, but generally speaking, growers are protecting their crops with the best technologies they can find. What does that mean for us? Well, relationships with our growers are, I would say, at a different level in terms of communication and conversation about the future today than we've seen over the last year. I'll give a couple of examples. Brazil. Our orders on hand today are significantly higher than where they were this time last year. In other words, growers have depleted much of their inventory. They are now asking distribution and retail, and hence FMC, we need materials going into the next season. Acreage is expected to increase in the 24-25 season in Brazil, so they're expecting a good year. We now have those orders on hand. What does that mean for us? It gives us better insights into the second half, but also it's given us confidence to now carefully start bringing back manufacturing lines that have been closed over the last year. So we're bringing back manufacturing on the basis of the orders that we have on hand for Brazil. That also means we're extending payables now, which is the first time we've really started to buy raw materials, I would say, over the last year. And Andrew can comment on that a little later. In Europe, conversations with growers are now changing to be, what do I need for the rest of the season, rather than what do I need for this week or the next week. So that starts to give you the feel that there is more of a longer-term view. Yes, people have changed their inventory levels, and that's the way they're going to operate their business, but they're asking for materials. In the U.S., we're still selling products that are used very early in the season, even in May. which is unusual. What does that tell you? It tells you that the inventories of those products have been totally depleted. We're selling for products that will be used right now. So you take those three big regions alone, there is better visibility for us as we go forward. That also contributes to our view of new products and our launches of new products. I listed in the scripts numerous products that have been launched from herbicides through the new fungicides through insecticides. It's the new technologies that drive the value. And growers are always looking for new tools to invest in resistance breaking. And that's what we provide. So generally speaking, that's how we expect the year to flow. It's why today in May do we feel confident to leave our forecast where they are versus where we were in February. We have a better sight of where our customers are today than we had in February.

The next question comes from Alexey Yefremov from Key Corp. Alexey, your line is open.

Thanks, and good morning. This is Ryan on for Alexey. Just a quick one from me. Can you guys talk about the level of pricing for your brand in diamides versus the rest of the portfolio? Just any color there would be helpful. Thank you.

Yeah, we don't give pricing for our products versus other parts of our products. I think you all know that the diamides are a very healthy franchise for FMC, continues to be so. When I look at Q1 and I look at this year, we expect the diamides will perform better than the overall portfolio. We did highlight in the release that our diamides in Brazil grew double digits in Q1, and that is against a very difficult backdrop. The reason they grew is exactly what we said we would do in November at the investor day. We're producing new formulations that are differentiated, and they are being accepted by the market. Premier Star is a brand new insecticide for soybeans, and it has been well attended in the marketplace. That allows us to move from the older products to the newer products and gain market share and growth.

The next question comes from Christopher Parkinson at Wolf Research. Christopher, your line is open. Please go ahead.

Great. Thank you. Uh, this is Harris fine on for Chris. Um, just quick one for me in North America, uh, obviously volumes were down on a tough calm pretty significantly, but you still held price flat. I'm just curious what your thoughts are on, you know, potentially adjusting the rebate structures to get volumes flowing again. Is that something that you think could be necessary or that you're exploring?

No. When we look at the portfolio, I think one of the facets that's kind of getting missed in FMC's North American business is just the sheer mix change that's going on there. Something like 25% of our revenue has come from products launched in the last five years. That's probably the highest of any region we have in the world. The North American team has done a great job in introducing new insecticides based on the diamides, introducing brand new fungicides such as the one I mentioned, Zyway and Adastrio. This is new market opportunities for us. Generally speaking, when we introduce those new products, they are at a higher price point, a higher profitability point. They're bringing new attributes to growers. So when we change that mix, obviously we see the business start to change. No, we're not doing anything with our rebate programs in North America. We believe that our proposition to growers is based upon technology and availability of that technology. We feel very good about where the North American business is. I think if you looked at that on the face of that statement and said, but you dropped 48% in Q1, if your business is good, why is that? Frankly speaking, Q1 2023 was a blockbuster quarter. mainly driven by Canada. There was huge pest pressure in Canada last year, and we haven't seen that same pest pressure this year. That's normal for these ag markets, but the North American business fundamentally is in very good shape.

The next question comes from Josh Spector from UBS.

Josh, your line is open. Please go ahead.

Yeah, hi, good morning. So I wanted to ask specifically on your second half guidance. I think one of the parameters you have in there is second half pricing out flat year over year. Can you characterize your level of confidence in that, just especially given that you're seeing, you know, mid-teens down in Latin America today, high single-digit down in Asia? What normalizes that? And, you know, would you flag that at risk or not at this point? Andrew, do you want to make a comment?

Yeah, thanks, Josh. Look, I think you have to look at the price of where we are and the overall progression of this correction. We've had downward price movement in Q3 and Q4 of last year, as well as in the first quarter of this year, with overall low single, mid single-digit, minus three in Q3, minus five in Q4, low single-digit, mid single-digit kind of price ranges overall, but with a significant amount of that pricing being in Latin America. As we finish this season, we will be going into the new season in the fall, anniversaring very significant price reductions in Latin America. So we're not anticipating that there's big shifts in list price as we go into the new season, given where we already are.

Next question comes from Adam Samuelson from Goldman Sachs.

Adam, your line is open. Please go ahead.

Yes, thank you. Good morning, everyone. I was hoping to get a bit more color on kind of the market expectations and performance in India. So one area where I think the destocking kind of trend is kind of sold into high channel inventories. Feels like that's been a pretty consistent narrative in that market for running on two years now. And just love to get kind of what gives you kind of line of sight to maybe that ending, if anything, and how maybe you're disaggregating kind of channel destocking and potential lower application rates from any competitive pressures that might exist there. Thank you.

Yeah, thanks, Adam. Yeah, India is a very important market for us and one that is facing its own individual challenges, not necessarily related to the same reasons as the rest of the world is facing the channel inventories. I would say India is almost unique in the sense of The channel inventory pressure that we face there is purely due to weather and dislocated monsoons over the last few years. We're not the only market participant to comment on this. Others have also commented on it. It's an industry-wide phenomena and it's just time that takes us to get through that. The monsoon in the last season was not great. We're hoping for better weather conditions as we continue through the rest of the year. We are reducing channel inventory every quarter. Some quarters is faster than others. But it will take some time to remove what is a third degree of channel inventory. The markets themselves are good in India from where the weather is good. Generally speaking, the Indian growers do like to use the latest technologies and the more advanced technologies. It's one of the only markets in the world right now where we have online spray services with drones. It just shows you that some markets like India that appear highly fragmented really do adopt technology very quickly. So we're drone spraying. I think we're on over 5,000 acres right now. That number is growing. That's a differentiated approach because it allows us to take our brand new products and apply them in a way that is very beneficial to the small farmholders in India.

The next question comes from Kevin McCarthy at Vertical Research Partners. Kevin, your line is open. Please go ahead.

Thank you, and good morning. A lot of talk about destocking, but I had a question on your own internal inventory. It looks like that came down $324 million on a year-over-year basis, if my math is correct. Can you frame out where you are now versus where you would like inventories to be? Just thinking about, Mark, I think you made a comment, bringing some manufacturing back online as it relates to Brazil. inventories in other parts of the world you know maybe a little bit higher so maybe you just kind of put that internal effort of rationalization into context for us and you know any related thoughts on on operating leverage would be appreciated yeah absolutely Kevin thanks for the question I'll make an overarching comment that Andrew if you want to jump in with some different views yeah we peaked inventory basically round about August last year internally

And we've been obviously on a track since we first came into this channel D stocking to really remove inventory as fast as we could. We're getting close to the point. We're not quite there yet. We're getting close to the point where at the macro level for our inventory, we're going to be pretty much where we want to be. We do have pockets, however, where our inventory levels are lower than they should be. And hence, we're now bringing back up manufacturing. That's normal not everything moves at the same pace, but I would say by the time we get through q2 and into q3 We're going to be in pretty good shape in terms of where our revenue is reset this year versus where the inventory needs to be It's important to to to notice that we really took some hard steps here I mean we really did crash manufacturing in the sense of stock manufacturing that's painful to do in an organization like ours and But we're now coming through the other side of that, and we will rebuild specific inventories as we see that demand come forward. Andrew, do you want to make any other comments?

Yeah, certainly. I think we're certainly mid-innings on the journey and getting our own inventory in the right place. As Mark pointed to, our reported inventory at June 30th was about $2.1 billion. We're down to just under $1.6 billion this quarter. We have another couple hundred million to go. It won't be a one big step. It'll be bit by bit, because I think there's a very delicate balancing of ramping up production, as Mark mentioned, particularly for products where we're already in short supply, and balancing it with the inventory we have on hand and its sell-through. This is a part of the algorithm for generating free cash flow this year. As we ramp up that production, build up our payables back to more historically normal levels, but maintain inventories that are more in line with our current sales level. So it won't be one big step, but through the rest of the year, you should expect another couple hundred million in inventory to come out of our balance sheet. And that will translate to contribution if you cash flow generation for the year.

Yeah, Andrew just had one comment, Kevin. Andrew mentioned here that it's what he called a fine balance. I call it a fine balance, fine dance. Remember, we have to go to our raw material suppliers and ask for products to feed this pipeline. And many of them are in the same position that we are. In other words, they have their manufacturing shut down. I think you know that this is a very, very complicated supply chain and quite long. So this whole notion of how products flows from our suppliers to us to the customers, it's not easy. And starting this up is going to be interesting because as we run down our inventories, Over the last year, our customers have got used to us holding their inventory. That is not going to be occurring in some places in the world with some product lines. So I think this whole notion of the distribution and retail folks running at very low inventory levels compared to historical, we've never done that. So it's going to be interesting to see how this plays out for the value chain and how we manage inventory going forward as growth starts to come back.

Thanks very much.

Thank you. The next question comes from Joel Jackson from BMO Capital Markets. Joel, your line is open. Please go ahead.

Hi, good morning, everyone. I'm going to ask you two questions in one. Just you reset, I think, senior management in Brazil. Maybe you could first talk about what's changed there, maybe what you're seeing there, maybe what you've learned with new eyes looking at it. Second of all, just to reconcile a couple of things you said on this call this morning. So I think you said that you're seeing customers now giving you order visibility a bit later than they were and have to hand them out. But I think you also said that customers are going to be running with lower inventories than they normally have. I may have got that wrong, but can you reconcile those two comments if I got that right?

Yeah, thanks, Joel. Yeah, new management in Brazil. It's the first time that FMC in a very long time has brought somebody in to be the president of the region from outside the company. We have a very robust human capital process inside the company where we develop talent and move them around the world. We felt now was a good time to bring in talent from the outside and we brought in a very experienced industry veteran who has both crop protection background, but also retail and distribution background. So we're getting the best of both worlds there. What are we learning? We're learning that we can expand our customer presence in the sense of where the market's pockets are that we can go and expand into. So that's a good sign from a market growth perspective. Also bringing that retail and distribution mentality allows us to think about how we build our offers into that part of the channel to make FMC's overall portfolio very attractive. I think from the order of visibility and lower levels of inventory, Joel, I would say both are caring. The fact that people are holding lower levels of inventory is one thing, but it's where it is in that chain that you have to think about. It may be the distribution wants to hold lower levels of inventory, but retail might not because they have to service the customer for what they have. So don't think of the two pieces as being opposed to each other. They actually do work hand in hand.

The next question comes from Steve Dunn from Bank of America.

Steve, your line is open. Please go ahead.

Yes, thank you. When we look at your volume trends over the last five years, there's a fairly meaningful difference between first half and second half. And perhaps that's a reflection of second half is nearly half driven by LATAM. But when we look at like your volumes in this first quarter, They're, they're, they're, they're lower than the two to five years of volume growth. So something really led to sharp contraction in, in the first quarter and volume, but yet your second half volumes, presumably that flat town are, are look like they're going to get back to 2022 levels, just reversing 2023. So I guess I'm trying to understand your, your. why the difference is between first and second half in your outlook. And is that second half potentially driven by just robust demand for insecticides? There are some additional insect pressures in South America these days.

Do you want to make some comments? Yeah. Hey, Steve. It's Andrew. Thanks for the question. First, just to put some of this in context, I think Q1 of 24 here is the last quarter where we're comparing to a pre-channel inventory disruption world. As Mark mentioned earlier, Q1 of 23 was a record quarter for us. Our North America region was up 41% in Q1 of 23 year on year, put it in perspective. So we're dealing with a big swing from a peak to more correction kind of zone. And the volume performance in Q1 of 24 is very much in line with what we've seen with all four quarters of this channel correction. I mean, Q2 of 23, we dropped 31%. Q3 of 23, we dropped 27% volume. Q4, we dropped 25% volume. The Q1 performance, I would say, just put in context, is just a continuation of the channel correction that we've always said was going to take at least a year to clear up. You had to get through an anniversary, this change, before you would start seeing any kind of volume return. So I'd put Q1 in that context. But to the second part of your question, which I think is an interesting one, in terms of the size, the growth in the second half. And look, if you look at percentages in the slide that's in the presentation, You know, 23% top line, 46% bottom line growth in the second half. Those feel like very large numbers. I get it. But when you look at our historical size of business, you know, revenue dollars in the second half that we're implying are similar to what we did in 2021, well before the overbuying of 2022. EBITDA dollars are actually lower than 21, sort of between our performance in the second half of 2020 and 2021. So we're not counting on, you know, massive correction. We're not counting on recouping 2022 type positions, uh, where, where we acknowledge there was overbuying. What we have here is a return to more normalcy. Um, you know, and given that Latham in particular, if you think about what drives our second half, certainly Latham's a big chunk of it. Um, and the U S market and the pre-stocking Q4, big, big chunks of it. Both of those business took big corrections in 23 and it taken big corrections through the remainder of the season. um as mark's described we finished this we're finishing up the current season in latin america with much lower inventories uh particularly at grower and retail level um so we're going into a market that you know not normal uh but improving and i think that's the key the improving market conditions so net net you know we think that the size of the absolute dollar business we're forecasting doing in the second half is reasonable given you know that we are past the worst of these year-on-year comparisons, and we're certainly growing from a smaller base. So again, just be careful. Don't get overwhelmed by the percentage change here. The absolute dollar size of the business, again, compares pretty much to what we were doing in 2020 or 2021.

The next question comes from Andrew Keshis from Barclays.

Andrew, your line is open. Please go ahead. Thanks.

Good morning. Andrew, I have a question on the cash flow discussion that you hit on a couple of questions ago. So you've said, or at least you've indicated that cash flow will be more back half weighted in 2024. But I also heard Mark talk about starting to rebuild some of those payables already in Brazil. So can you give us a sense just for the cadence of cash flow from here? The second quarter is typically a source on a free cash flow basis, but just any sort of relative sense and how back end weighted should we expect it? And then if I can sneak in a tiny follow-up, you did mention continued deleveraging in 2025. This year appears to be mostly cash inflows and debt repayment driving that. Is next year going to include debt repayment as well, or is that more about EBITDA growth? Thanks.

Certainly. Thanks, Eddie. I appreciate the question. Look, I think on a dollars of cash flow basis, the free cash flow is very heavily weighted to the second half this year. We were negative free cash flow in the first quarter as is normal, but significantly less so than the prior year quarter, right? And that's a big inflection and marks the change in inventory levels for us where we would traditionally have a working capital building Q1 with growing inventory. Q2, I would expect still probably to be breakeven to negative cash flow. And we're not going to guide it precisely. There's just too many moving variables. But I would tell you that, you know, essentially all of the positive free cash flow for the year is going to come in the second half. And, you know, again, the key drivers for the full year on free cash flow, it's reduced inventory and it's rebuilding of payables. And this dance, this balance that Mark and I have been talking about this morning, you know, we are starting to spool up and restart manufacturing lines. That will pull through purchases. That will, you know, add in, you know, create some work in process and finish goods inventory that flows in the inventory and then we sell through. What we are carefully balancing is continuing to bring down our absolute level of inventory while selling through, at the higher rate we're expecting to sell in the second half, new production. So it will be a stagger step as we go through the rest of the year to bring payables back up to a more reasonable level and to get inventory, again, a couple hundred million less than where we are today. So that will be the combination of those two, and it really will take through the full second half to get the cash benefit from those actions. As we think about the second part of your question and thinking about leverage, certainly we've been very clear that the priority for all available cash after paying the dividend this year is paying down debt. So proceeds from divestiture, from pre-cash flow, we generate organically. In 2025, we still have a significant way to go to get the leverage to the right place. We will continue to see leverage improvement, but it will be driven by two factors instead of just debt repayment. It will be driven by growth in EBITDA. We absolutely are expecting to have growth in EBITDA that will help us to bring leverage back to more of a normal level for this business and well within the kind of covenant range we should be at. But we will also continue to prioritize free cash use for debt repayment until we get the balance sheet into the right place. So I think it will be that combination of the two levers. It will be growth in EBITDA in 2025, as well as still a commitment to utilizing free cash flow to get leverage to the right place as we go through 2025. It gets us to that, you know, where we think we'll be right about the targeted levels by the time as we get to the end of 2025.

The next question comes from Adelaine Rodriguez from Mizzou. Adelaine, your line is open. Please go ahead.

Thank you. Good morning, everyone. Just a quick follow-up on market normalizing. As inventory destocking comes to an end and as you get into 2025, how do you see volume growth for the portfolio in 2025 and 2026?

As we go through 2025, I think we've said that we expect what we would consider a more normal type of growth for the marketplace. Acres continue to grow, certainly in Latin America and Brazil, so we expect that to be a driver. And don't forget, at that point, people will be then resetting from a lower level of inventory, so you'd expect more of a normal market growth. Typical market like this grows at anywhere from 2% to 3% per annum, and we, generally speaking, with our differentiated portfolio, outgrow the market in the long haul. So I think it's more about a normalized market. Demand on the ground, as we said, even in these conditions, is very good. We expect that to continue. Test pressure continues to change. So we see that market piece as being pretty robust. Obviously, our MPIs are growing rapidly. So we would expect 25 and 26 to be actually faster than the growth we see in 24. The other piece of, which is not really market driven, but just a view of 25, we have a lot of cost headwinds flowing against us right now that are obviously depressing our EBITDA and our EBITDA margin. Those turn into tailwinds as we go into next year. And I think it's an important facet as we walk through the next couple of earnings calls, as we build out the picture of what 25 is going to look like. You certainly have got a more stable, more robust external market. But we also have some pretty significant tailwinds in the sense of how we think about our P&L. Andrew, do you want to comment on that?

Yeah, I think, Mark, as we looked at 25, obviously one of the headwinds we're dealing with this year is unabsorbed fixed costs from low manufacturing activity. As we go through this delicate dance we've been describing this morning and get back to more normal operating rates, by the time we get to the end of this year, we anticipate being past that. to where the relatively significant headwinds we've had this year from unabsorbed fixed costs are no longer there. So if you think about the absence of a headwind going into 25, itself being a bit of a tailwind or a stronger base for performance in 25, I think certainly that will be a key element of our outlook. Now, we've got to see how the rest of the year develops, but I think based on how we see things today and the way we're planning to wrap up production, do expect that volume variance piece, that, you know, unabsorbed fixed costs to really ease by the time we get through the end of this year.

The next question comes from Mike Harrison at C4 Research Partners. Mike, your line is open. Please go ahead.

Hi, good morning. I was hoping that maybe you could give a little bit of additional color on the recent new product launches and how they're performing relative to expectations. And then you mentioned just now that you would expect some acceleration in 25 and 26. Maybe help us understand how you see grower adoption evolve and those adoption rates change from the launch year into the second and third year post-launch for those new products?

Yeah, thanks, Mike. If you look at what we've been talking about today in terms of how we think about what we call MPI, products launched in the last five years, we've gone from back in 2020, 2021, about 10% of our portfolio from those new MPIs In 23, it was about 13%, where you expect it to be about 17% this year. You can see that it takes a number of years for those numbers to start to creep up. And the reason is you never get to peak sales in year one. I mean, it's impossible in this market. Peak sales can be anything from five years through 10 years. I mean, we still have some active ingredients that are 10 plus years old that continue to grow as we find new applications for them. We've talked about the fungicides. North America is doing a very good job, especially with the Fluendipia-based fungicides. They've now been launched in Brazil and in Argentina, and they'll be launched in other parts of the world as we go through 2025. So you should expect us to talk about the Fluendipia fungicides growing nicely in 2025, 2026, easily through 2027. The diamides continue their track of new introductions. The premier star insecticide that we talked about has grown rapidly. We launched it in Q4. It grew very well in Q1. We expect the 24-25 season to be very interesting and continued growth. Pest pressure is not going away in Brazil, and we have by far the most robust portfolio of insecticides in the world. So that's a market that we do expect to continue to grow. On top of that, we have Isoflex, which is The grass herbicide that we released in Australia that is now being put into Argentina. It will go into other parts of Asia as we go through the 25 season and then probably more exciting than all of those and trust me, they're pretty exciting molecules. We have the brand new rice herbicide that comes in 2026 and that really is a game changer. Rice is a grass and killing grass in rice is not easy. We have the first new mode of action in 30 years. So Asia is a major target for us in 2026. And then outside of that, on the biological and pheromone side, we will have our first soft launch of our first pheromone in Brazil in 25. And that means it will build in 26 and 27 and beyond through the next decade. That's really the first launch of that whole new platform that we've built. We're making excellent progress in terms of R&D. We have our manufacturing and supply chain coming together very well. We're producing our first real amounts of these pheromones through our new process. So you can tell that over the next few years, the robustness of that portfolio, it's really, really strong.

The next question comes from Aaron Rishwanathan from RBC Capital. Aaron, your line is now open. Please go ahead.

Great. Thanks for taking my question. Congrats on a good Q1 here. So I guess I just wanted to ask about the second half. Andrew, you provided some very useful comments, I guess, noting that on a dollar basis, looks like your second half looks like you should be at 2020 or 2021 levels. And you will be exiting, according to your guidance, at least at the midpoint, at, say, $1.25 billion or so on an annualized basis, if you were to annualize that second half guidance. So is that kind of how you're thinking about 2025 and maybe informing your comments? I think in 2020, you did that $1.25 billion. In 2021, you did $1.32 billion of EBITDA. I know it's still a ways away, but just kind of thinking if you think that the second half guidance really encapsulates that normalization. Thanks.

Yeah, thanks, Aaron. Certainly, look, always cautious when trying to annualize a very seasonal business, right? And obviously different dynamics in each quarter with regional mix and product mix, et cetera. But I think your bigger point, right, return to sales levels that not necessarily 2022 by any means, but the sales and EBITDA levels that look more like where the business was a few years ago, not an unreasonable assumption going into 2025. It's too early to get too granular here, but I do think a combination from top line, we're in a situation right now where inventories downstream of us are really getting more and more light. People are targeting levels of inventory that would argue are not sustainable over a multi-year period downstream of us um you know that at some point there has to be some rebalancing that's not going to happen quickly but over time there could be some rebalancing and just getting back into the more normal flow look the one thing we've pointed to and we're very comfortable and confident with grower use of crop protection chemistry has been steady and increasing throughout this disruption we had an overbuying in the channel in 2022 that built up excess channel inventory We've had an overcorrection and rapidly drawing that down in 2023 and into 2024. That as those draw down, manufacturing supply has to get back more in balance and in sync with underlying consumption by growers. That will drive healthier top line demand in 2025 than we've seen in 2024. When you look down to EBITDA, We've talked a little bit about what's going on with our manufacturing operations and through the second half when we start ramping up production and getting back to more normal capacity utilizations. There will be cost tailwinds or the absence of headwinds from unabsorbed fixed costs as we go into 2025. So that top line growth with better manufacturing costs or with mixed benefits from new product introduction and some of the the exciting things Mark was just talking about in terms of growth drivers for us long term with new products, that should drop more of that growth to the bottom line. So, again, too early to give firm outlook for 25, but I do think we feel pretty strongly that there's a positive outlook out there. We have a couple more quarters to really get through here. Q2 is a big inflection with a return to volume growth. And then the second half, you know, getting back into, you know, much improved market conditions from what we saw in 2023. Mark, with that? No, good review, Andrew.

Our final question today comes from Lawrence Alexander from Jefferies. Lawrence, your line is open. Please go ahead.

Good morning. This is Dan Rizwan from Lawrence. Thanks for squeezing me in. You talked a lot about getting inventories down and payables and working with those. I was just wondering in terms of receivables, if you're comfortable where they are, that's something that has to be worked on as well.

Sure. Thanks for the question. I think, yeah, I think we're comfortable with receivables. There's always opportunities to continue to be more efficient. This is a working capital intensive business. We get it. There will be some use of cash in the second half as we return to growth, and that naturally brings some growth in receivables. But we have been managing very carefully our balance sheet. And I think if you look at how we've chosen to manage through this correction period as opposed to some of our peers, we have been disciplined about pricing and about not chasing volume that wasn't there, so as not to build up receivables and longer-term collection risk. You know, I think we're at a position now where, look, there's always collection risk, but we are at a very good position. We understand where our risks are. We understand, you know, we've taken some lumps by, again, not pursuing extra volume when there really wasn't volume in the market to be had. And instead, you know, working through this so that we can come into, you know, what will be an upturn here in the second half and into 2025 with a strong balance sheet, with healthy receivables. So, again, always room and opportunity to continue to look for ways to improve our working capital efficiency. But in terms of the quality of our balance sheet, we feel very confident.

We've now completed our Q&A session, so I'll hand the call back to Kirk Brooks.

Thanks, everyone. Have a good day.

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