FMC Corporation

Good morning, everyone, and welcome to FMC Corporation's third quarter earnings call. Joining me are Pierre Brondeau, Chairman and Chief Executive Officer, and Andrew Sandefur, Executive Vice President and Chief Financial Officer. Today, Pierre will provide an overview of our third quarter performance, as well as an outlook for the fourth quarter. Andrew will provide an overview of select financial results. After our 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 on these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, free cash flow, organic revenue growth, and revenue excluding India, 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 Pierre.

Thanks, Kurt, and good morning, everyone. Before we get into the details of our third quarter results, I want to acknowledge that our sales this quarter were below our expectation. Two factors led to these results. The first is constrained credit for our customers in Brazil and Argentina as a result of low liquidity. The second is pricing pressure from generics, mainly in Latin America. These issues became apparent as we neared the end of the quarter and as the planting season was getting underway in Latin America. We expect both dynamics to persist in the fourth quarter. Consequently, we're accelerating planned cost actions similar to what we did with the next appear in order to keep a less differentiated portfolio product competitive. Our belief remains that being a pure plain agricultural sciences company is the right focus. And we have a strong pipeline of innovative technologies to support that. Slide three through five provide details on a third quarter performance. we reported third quarter gap net sales of $542 million, which is 49% lower than prior year. The vast majority of the year-over-year decline is attributed to significant one-time actions taken in India to better position the commercial business for sale. During our last earning calls, I share that we are not operating our business in India differently, following the designation of that country's commercial business that held for sale. We've also discussed elevated inventory in the India channel many times. Over the course of the third quarter, we made the decision to take back a substantial amount of channel inventory in the form of returns. To further clear inventory from the channel, we offered pricing credits to distributors, encouraging faster movement of products. These actions are intended to support the sale over India commercial business. The process is moving forward smoothly with strong interest and a high volume of inbound inquiries. Excluding India, from current and prior year sales, third quarter revenue of $961 million, down 4% year-on-year on a like-for-like basis. This was driven by a 6% price decline, half from adjustment in certain cost-plus contracts with specific dynamite partners, and half from intensified competition in the market. Despite increased competitiveness, volume grew 2%. The company's growth portfolio increased by mid-single-digit percent, with sales of new active ingredients nearly doubling versus prior year. This is evidence of the strong demand for this technology. We remain confident in reaching a target of $250 million of new active ingredient sales by the end of the year. Overall, sales were below our expectation. Much of the shortfall was driven by Latin America, where our sales lagged prior year by 8%. The market landscape in that region is more challenging than we expected due to the two factors I touched on earlier. Low liquidity leading to constrained credit for our customers in Brazil and Argentina, and pressure from generics. About half of our sales shortfall in Latin America was driven by an unwillingness on our part to sell full volumes to customers with credit risk. The other half was due to lost sales, mainly to mega farmers, where we were not willing to lower price to levels offered by Generics for off patent products. Generics have always been active in this region, but their impact is increasing in large part because of the favorable registration environments. For example, product registration in the EU or the US can cost upwards of $1,000,000. Whereas in Brazil, the cost of registration is approximately $70,000. in combination with recent regulatory legislation, make it faster and cheaper for generics to obtain registration. On a positive note, our decision to invest in an additional route to market in Brazil to serve large soybean and corn growers is proving to be worthwhile. Sales are still ramping up, but we're seeing good results with over 300 new customers invoiced to date. The other regions performed more in line with expectation. While not as intense as Latin America, we did observe generic pressure in Asia, and to a lesser extent, North America and the MEA. Sales improved in North America and the MEA, driven by higher volumes, including contribution from the recent launch of Isoflex active in Great Britain. We reported adjusted EBITDA of $236 million with EBITDA margin of approximately 25%. Adjusted EBITDA was 17% higher than the prior year on an as reported basis and 23% higher than prior year on the like for like basis adjusting for India. The $6 million above the midpoint of the gallons, a strong EBITDA performance reflects disciplined cost control and a focused approach to pricing that prioritize margin and create quality. The year-over-year improvement was driven mainly by cost of goods sold, including lower raw materials improved fixed-cost absorption and restructuring benefits. EBITDA also benefited from higher volumes and a favorable product mix as our new products saw greater demand. This was partially offset by lower price and an FX headwind. Adjusted earnings per share was 89 cents, up 30% from prior year, and just above the midpoint of our guidance. The year over year improvement was driven by higher adjusted EBITDA. Slide six and seven provide detail on our outlook for the remainder of the year. We're anticipating the condition we observed in the third quarter to continue in the fourth quarter. We're now expecting fourth quarter sales excluding India to be in the $1.12 billion to $1.22 billion. On the like-for-like basis, value presents a 2% increase at the midpoint after adjusting for India. We're expecting higher volume to be driven by the growth portfolio. Fourth quarter price is expected to be a mid to high single-digit headwind due to competitive pricing as well as the impact of cost plus contract to diameter partners. FX is expected to be a low single digit tailwind. Fourth quarter adjusted EBITDA is expected to be in the $265 million to $305 million, a decline of 16% at the midpoint on a NAS reported basis, and a decline of 7% on a like for like basis Lower cost, higher volume, and minor effects tailwind are expected to be more than offset by lower price. Adjusted EPS is forecasted to be $1.40 to $1.36, a decline of 30% at the midpoint due to a lower EBITDA and abnormally low tax rate in the prior year. We are adjusting full year guidance to include third quarter results and updated fourth quarter guidance. Revenue is now expected to be between $3.92 billion and $402 billion. Full year adjusted EBITDA is now expected to be $830 million to $870 million. with the reduction to private gallons mainly due to lower sales. Adjusted EPS is now forecasted to be $2.92 to $3.14. As a reminder, these gallons ranges include contribution from the India business for the first half only. Free cash flow gallons has been lowered to a range of negative $200 million to $0 driven by lower cash from operations. The reduction in guidance reflects the increased pricing pressure we are facing in our core portfolio. To address this issue, we are taking cost action to improve the competitiveness of patented ingredients. When I returned as CEO, my focus was on completing several transformation initiatives. These included correcting FMC inventory in the channel to align with customer target levels, implementing a post-patent strategy for an XRP, establishing a national route to market in Brazil, ensuring the right resources were in place for a growth portfolio to deliver its full potential, and initiating the sales of the India business. With those initiatives now complete, we are continuing to evaluate business to ensure alignment with the strategy priorities and long-term objectives. Over the last two years, we've removed about $250 million in cost from the business to navigate the challenges of destocking and adjust Renex Appear costs to prepare for its off-patent lifecycle. We now need to apply that same discipline across our core portfolio. particularly for a non-differentiated product where we are competing directly on price. We are taking two key actions. First, we have initiated a strategic review of a manufacturing footprint. Our intent is to exit active ingredients and formulation plants as well as other sources that are too expensive to operate and transition that production to lower-cost sources. This is a major undertaking. We've already begun the work to identify and develop those alternative sources, and we expect the plan to be fully in place by the end of 2026. Earlier this month, we moved production of two active ingredients from one of our facilities to other manufacturing locations. where lower cost will strengthen FMC's ability to compete in this post-pandemic market. Second, we're implementing a broader cost reduction plan across Asia to account for reduced size of the business following the India sale. Our objective is straightforward. Become a cost-competitive company capable of competing with generic or less-differentiated products in the region while also growing a portfolio of IP-protected products that command higher margins. By 2028, we expect to have four new active ingredients in commercialization alongside a growing family of biological products. Some are already launched in select markets, such as Isoflex Active and Fluent Appear, which are tracking in line with expectations. We continue to strongly believe in the power of a new product pipeline. In a world with more generic products and increasing resistance, new active ingredients will become even more of a true differentiator for FMC. I'll now turn the call over to Andrew to provide more detail on our India results for the quarter and on the cash outlook.

Thanks, Pierre. Let me start with some additional details on the impact of the India held for sale business on this quarter's financial statements. As Pierre noted earlier, we reported GAAP revenue of $542 million for the third quarter. This reflects negative revenue of $419 million in our India held for sale business. The substantial channel inventory in the country was reflected in our financial statements primarily as receivables. During the quarter, We took several one-time actions to prepare the business for sale. These included physical product returns, taking provisions for additional product returns that will be completed in the fourth quarter, and granting price credits to customers on the remaining channel inventory to encourage faster clearing of that channel inventory. Each of these actions had the effect of reducing revenue as well as receivables. The net result was negative revenue for India for the quarter. This will also result in a substantial reduction in inventory held in the channel to much more normalized levels, with excess inventory to be held directly on FMC India's books as FMC-owned inventory. We are doing this as we believe it is much easier for a buyer to ascribe more certain value to physical inventory being purchased in a business sale than to receivables, which are subject to collection and other risks. Rapidly correcting channel inventory reduces risks associated with recent changes in the application of local indirect taxation rules. We intend to manage the India business with a heightened focus on liquidation of inventory in advance of completing the sale of the business. Third quarter gap net loss of $569 million reflects approximately $510 million of charges and write downs for the India held for sale business. Of this, $282 million reflects the channel inventory actions I just described. The remaining $227 million represents an impairment charge to bring the carrying value of the business to its estimated fair market value. The combination of the channel inventory actions and the impairment charge led to a write down of the net assets identified as held for sale on our September 30th balance sheet to $450 million. As a reminder, third quarter total company adjusted EBITDA of $236 million excludes the results of the India held-for-sale business. Moving now to some other specific income and statement items. Third quarter revenue excluding the India held-for-sale business was $961 million, which reflects a 1% currency tailwind, with benefit primarily coming from strengthening of the Brazilian REI and the euro. We now expect the minor FX tailwinds to revenue experienced in the third quarter to continue in the fourth quarter, primarily driven by the Brazilian REI and to a lesser degree by the euro and Mexican peso. For the full year, FX remains a minor headwind to revenue due to the 2% headwind in the first half. Third quarter interest expense of $64.1 million was up $5.4 million. with the impact of the higher rate on our recent subordinated debt offering only partially offset by lower short-term domestic rates and balance. We now expect full-year 2025 interest expense to be in the range of $230 to $240 million, essentially in line with the prior year, but up from our prior guidance, reflecting slightly higher than previously expected interest expense in the third quarter. We continue to expect depreciation and amortization for full year 2025 to be between $170 and $180 million. The effective tax rate on adjusted earnings in the third quarter was 12%, which brings our year to date effective tax rate in line with the midpoint of our updated expected full year effective tax rate of 12 to 14%. Moving next to the balance sheet and leverage. We ended third quarter with gross debt of approximately $4.5 billion. up $379 million from the prior quarter. Cash on hand increased $60 million to $498 million, resulting in net debt of approximately $4.0 billion, up $319 million from the prior quarter. Gross debt to trailing 12-month EBITDA was five times at the quarter end, while net debt to EBITDA was 4.5 times. Relative to our levered covenant, which includes adjustments to both the numerator and denominator, Leverage was 4.94 times as compared to a covenant limit of 5.25 times. Moving on now to free cash flow on slide eight. Free cash flow in the third quarter was negative $233 million, $365 million lower than the prior year period. Cash from operations was down significantly due to the absence of working capital released from payables seen in the prior year period, as well as due to delays in collections. Free cash flow year-to-date is negative $789 million, with the absence of the working capital improvement seen in the prior year being the key driver. Relative to our internal expectations, free cash flow in the third quarter was significantly impacted by collection delays. In Latin America, these delays are a result of both reduced liquidity in the channel, as well as delays in growers monetizing the cotton crop. Elsewhere, collection delays are coming primarily from intensified competitive pressures going beyond price competition to include payment terms as well. In light of actual performance year to date, our reduced outlook for EBITDA, and our expectation of continued working capital pressures in the fourth quarter, we've reduced our outlook for full-year free cash flow to a range of negative $200 million to $0. This updated free cash flow outlook, combined with the $291 million in dividends paid thus far this year, suggests an increase in net debt of roughly $400 million at year end. As such, we are taking two immediate actions. First, our board of directors has changed the company's dividend policy to establish a new quarterly dividend payout of $0.08 per share affected with the pending declaration of our next dividend payable in January of 2026. This is an over 85% reduction in quarterly dividend which will reduce the funding need for the dividend by $250 million in 2026. This will allow significantly more of the free cash flow we generate in 2026 to be directed to debt reduction. Second, we've begun discussions with our bank group to further amend the financial covenants and our revolving credit facility agreement to provide us with additional flexibility as we navigate these challenges. We anticipate completing this amendment in the fourth quarter and will provide further updates at that time. These actions are in addition to the cost reduction efforts Pierre described earlier in the call, which will also help increase future free cash flow generation. So they will require use of cash in the short term. And to be abundantly clear, all free cash flow generated beyond the roughly $40 million required annually to fund the reduced dividend will be directed to debt repayment until we return leverage to healthier investment grade levels. With that, I'll hand the call back to Pierre.