FMC Corp (FMC) — Q4 2017 Earnings Call Transcript

Thank you and good morning everyone. Welcome to FMC Corporation's fourth quarter earnings call. Joining me today are Pierre Brondeau, President and Chief Executive Officer and Chairman; and Paul Graves, Executive Vice President and Chief Financial Officer. Pierre will review FMC's fourth quarter performance and provide the outlook for 2018 and the first quarter. Paul will provide an overview of select financial results. The slide presentation that accompanies our results, along with our earnings release and 2018 outlook statement, are available on our website and the prepared remarks from today's discussion will be made available after the call. Mark Douglas, President, FMC Agricultural Solutions; and Tom Schneberger, Vice President and Global Business Director FMC Lithium, will then join to address questions. Before we begin, let me remind you that today's 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 release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties. Today's discussion will focus on adjusted earnings for all income statement and EPS references. 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 now turn the call over to Pierre.

Thank you, Michael and good morning everyone. Before outlining our fourth quarter results, I wanted to first state that 2017 was a pivotal year for FMC and we are excited about the opportunities ahead of us in 2018. The integration of the acquired DuPont Ag business is progressing very well as is the process of separating the Lithium business into a public company. As we prepare for listing in the second half of this year, we will continue to expand both our lithium hydroxide and our lithium carbonate capacity to capitalize on the significant demand expected in the coming decade. Turning to slide three, FMC reported fourth quarter revenue of $918 million, which was up 42% year-over-year. Adjusted EPS was $1.10 in the quarter, an increase of 67% versus the same period a year ago. Adjusted EPS was $0.02 above the top end of our guidance, driven by a strong operating result in each of our two segments. We are very pleased with the fourth quarter results. In Ag Solutions, our business performed very well and earnings came in above the high end of our guidance range. The integration of the acquisition into FMC is meeting all our expectations. In Lithium, we delivered our first full quarter of commercial production at our new lithium hydroxide facilities in China and finalized an important agreement with the Argentinian government, paving the way for expansion in that country and for the separation of the Lithium business into a standalone company. Moving on to slide four in Ag Solutions, revenue grew 40% year-over-year. Performance of FMC's legacy Agricultural Solution business was very strong, growing 9% year-over-year, driven by double-digit revenue growth in North America, Asia, and Europe. Acquisition revenue of $193 million accounted for the remainder of the growth. We do not have comparable results for the acquired business for the last two months of 2016. However, it performed well as expected. Fourth quarter segment earnings of $189 million increased 48% year-over-year. Segment revenue for 2017 was approximately $2.5 billion, an 11% increase compared to the prior year. Full year segment earnings were $486 million, a 21% increase year-over-year and segment earnings margin improved 160 basis points to 19.2%. Our legacy Ag business posted 3% revenue growth and strong earnings growth in the year. On slide five, we outline the regional performance in the quarter. In North America, we posted a 38% revenue increase. Our legacy FMC business grew 14%. The performance was driven by early demand for pre-emergence herbicides as farmers plan for expanded soybean acreage this year and strong demand for our SU herbicides for cereals. In Latin America, revenue increased 21% in the quarter. Our legacy FMC business grew 3% in Q4 and 9% for the entire year. In Brazil, FMC's legacy business grew 15% on a full year basis, a very strong performance in a market that contracted approximately 10%. In Asia, revenue increased 84% in Q4. Our legacy FMC business grew 14%, driven by successful product launches and strong growth in our Plant Health product portfolio. We also saw strong sales of Rynaxypyr insect control, especially into rice markets in India and Indonesia. And finally, in Europe, revenue increased 59% in Q4. Our legacy FMC business grew 13% with strong sales in Eastern Europe and France, where you may recall we have moved to direct market access. Moving now to Lithium on slide six, Lithium delivered another exceptional quarter. Revenue of $113 million increased 60% year-over-year and segment earnings more than doubled to $44 million. Significantly higher prices and the shift in mix to higher value product drove the increase in segment earnings margin to 39% versus 30% in the prior year period. We took an important step in December when we finalized new operating agreements in Argentina. The provincial government of Catamarca formalized these agreements by passing legislation that sets our royalty rate and our commitment to corporate social responsibility programs while also paving the way for us to expand capacity and move toward the intended separation of our Lithium business later this year. We want to highlight the revised royalties and CSR programs are at the level generally consistent with our prior commitment. Combined, this amounts to a mid-single-digit percentage of sale out of our Argentina operations. Turning to slide seven, which summarizes our outlook for the first quarter and the full year. We expect adjusted earnings per share for full year 2018 to be between $5.20 and $5.60 per share, which represents at the midpoint of the range a near doubling of EPS year-over-year. First quarter 2018 adjusted EPS is expected to be between $1.45 and $1.59. We expect 2018 Ag Solutions revenue will be in the range of $3.95 billion and $4.15 billion and segment EBITDA will be in the range of $1.05 billion and $1.15 billion. We anticipate legacy Ag Solutions revenue will grow 2% to 4%, while the acquired business is expected to grow by 6% to 10%. First quarter segment revenue is expected to be in the range of $1.0 billion to $1.07 billion and EBITDA is forecasted to be in the range of $290 million to $320 million. The Lithium business is well-positioned to deliver another year of significant earnings growth in 2018. We expect full year revenue for Lithium to be in the range of $420 million to $460 million, a year-over-year increase of 27% at the midpoint. Full year EBITDA is expected to be in the range of $180 million to $200 million, which represents an increase of 34% at the midpoint. We expect price mix and incremental volumes to each contribute approximately half of the increase in earnings. The volume increase is largely due to the 4,000 tons of incremental capacity coming online from debottlenecking projects. We expect first quarter segment revenue to be in the range of $95 million to $110 million and EBITDA is forecasted to be between $44 million and $48 million, which represents a year-over-year increase of 78% at the midpoint. Moving on to slide eight and the key drivers for the Ag Solutions business in 2018. Starting with the overall Ag Chem market where our expectations for 2018 remain unchanged from what we saw in November. We continue to expect the global crop protection chemical market on a U.S. dollar basis to be flat to up low single-digits in 2018. We expect the market in Asia-Pacific will grow the fastest, increasing by low to mid-single-digit percent range, driven by India and Southeast Asia. We expect the market in Latin America will increase in the low single-digits. Brazil will be a bit ahead of that base, benefiting from increased acreage for nearly all crops. The market in Argentina should see continued expansion in certain applications. And in Mexico, we expect growth in these crops. In North America, we expect the market will be flat to up low single-digits as farm incomes remain below trend. Growth will come from post-emergence herbicides and a modest increase in serving acreage in general. We expect the market in EMEA will be flat to up low single-digits. Improved weather and growth in Eastern Europe could provide upside to this forecast. Turning now to a forecast for how FMC will perform in 2018 considering the market conditions just outlined. We expect revenue for legacy Ag Solutions business will grow 2% to 4%, driven by several factors. In Brazil, we expect to see a continuation of positive trends in cotton and sugarcane markets where we are well-positioned as well as increased demand in the soybean market. In Asia, we anticipate higher demand for our products going to rice, fruit, and vegetable, as well as cotton. In Europe, the move to direct market access in France, new products for oilseed rates and price increases will all drive growth for FMC in 2018. Moving on to our acquired business, which we expect will grow 6% to 10% in 2018 on a full year basis, well ahead of the market. This will be driven primarily by increased insecticide revenue. We believe Cyazypyr insect control is far from its peak in annual sales. In 2018, volumes are expected to grow for cotton and soybean applications in Brazil. New product registrations in EMEA will also drive growth. Rynaxypyr insect control will continue to expand into new crops and geographies, such as rice and sugarcane in India and further penetrate into Southeast Asia. Finally, we also expect to increase sales of our acquired SU herbicide with new formulations in North America for cereal applications. As I said earlier, the integration process is progressing very well after almost four months of ownership. Our 2018 guidance reflects what we believe will be the maximum operating cost as a percentage of revenue for our combined Ag Solutions businesses. Our assumptions for gross margin, R&D expenses and SG&A expenses are not meaningfully different than what we have shared with you on calls last year. But as the DuPont transition service agreement rolls off and as we implement a new SAP system in 2019, we will see further cost savings and improvements in EBITDA margins. Turning to slide nine and starting with our views on the Lithium market. In summary, we expect global demand for lithium on an LCE basis to grow from about 200,000 metric ton in 2017 to 335,000 metric tons by 2020 and to 1 million metric tons by 2025. This is an average annual growth rate of over 20%. On the supply side, despite recent news out of Chile, we believe that supply for high-cost spodumene producers will continue to be needed to meet the end market demand in every year through at least 2025. We expect this will create a price floor for lithium carbonate of low double-digit dollars per kilogram for at least the next seven years. FMC is very well-positioned to take advantage of these market conditions. Our business is focused on lithium hydroxide and we have demonstrated that our approach to expanding our lithium hydroxide capacity is more than capable of meeting the growth in demand with relatively low capital needs. Our local carbonate production resource in Argentina are capable of expansion to at least three times our current capacity and we have secured the necessary agreements with the local and national governments to allow us to pursue an expansion of this scale. In 2018, prices will be higher than in 2017 across all our product categories. The majority of our 2018 forecast revenue falls under multiyear contracts that have defined pricing already in place. We expect this trend of customers looking for longer term supply commitments to continue, especially in hydroxide, reflecting customers' general view that supply will remain tight into the foreseeable future. In 2018, FMC will produce more lithium hydroxide as well as more base LCEs than in 2017. FMC was the only producer to have significant hydroxide capacity in 2017 when we expanded our production capacity from 10,000 tons to 19,000 tons. We will realize significant growth in 2018 as we run our channel plan for the full year. Our next phase of hydroxide expansion should see us commissioning at least one additional 4,000-ton unit by the end of this year. In Argentina, we expect to produce about 21,000 LCEs in 2018, up from 18,500 tons last year, as we realize higher volumes due to the debottlenecking project at our plant. The completion of this project will lead to an incremental increase in LCEs produced as the year progresses. The subsequent expansion project in Argentina will add around 10,000 tons of lithium carbonate capacity by the end of 2020 and a further 10,000-ton increase by 2022. These first two increments are expected to require total capital spending of around $250 million to $300 million as we have previously stated. We are currently exploring adding a third carbonate expansion phase, providing a further 20,000 tons of capacity by 2025 at the latest. Moving on to market demand, we believe that today, too much of investor focus is on supply and not enough on demand. In particular, we believe the investment community as a whole has yet to absorb the impact that the growth in demand for electric vehicles in the coming years will have on the lithium industry. Simply adding mining or extraction capacity will not be enough without the corresponding increase in manufacturing capacity for battery-grade lithium products that are in a form that customers can use. Equally, producing technical-grade carbonate that needs to be further processed to remove impurities will simply add to the cost of that product. And as we move to nickel-rich cathodes in the high-performance batteries, hydroxide will become a requirement in the production process, not just a preferred option. A view of the demand outlook is summarized on slide 10. Clearly, the source of growth for lithium demand is the rapid penetration of pure EVs into the global auto market. We model the growth of EVs at the individual vehicle level based on public announcements as well as our own direct inquiries with manufacturers and their suppliers. The chart on the left shows the growth of pure electric vehicles and a few things stand out. First, we expect pure EV penetration to reach 2.5% by 2020 and 12% by 2025. The source of this growth is multiple launches by over 30 manufacturers. This is not dependent on any one manufacturer. It shows the influence of China as this country maintains its position as the largest single market for electric vehicles. Of course, this growth in EVs needs to be converted into demand forecasts for lithium. The right-hand side of the chart shows how important the EVs will be to the market as a whole by 2025. Equally important, you can see that the nature of the growth in demand is such that there will be a heavy shift towards lithium hydroxide. We reached these conclusions through a vehicle-by-vehicle assessment of the battery technology and size we expect to be used in each announced vehicle, as well as through discussions with customers and end users. In fact, many of our customers and the ultimate end users of lithium are coming to FMC today looking for multi-year contracts that commence in 2019 or 2020, demonstrating their confidence in the demand growth shown here. Ultimately, it is the detailed relationship with future demand that gives us the confidence to pursue a strategy in lithium. Now, let me move on to the supply side of the equation. There is another reality that we believe the market as a whole is not correctly assessing. We have seen repeated examples of new entrants making large claims about intended capacity additions that are ultimately proven to be far too ambitious. Even a simple review will show that almost without fail, the capital cost increases significantly and the start-up dates are pushed further and further back. Once projects have been brought online, we have seen production rates fall far short of nameplate capacity, product quality that is inconsistent, and operating costs per unit of production that are far higher than what was originally projected. What is possible today to construct the cost curve using announced projects that suggests a risk of oversupply in the future, all available evidence suggests that this is highly unlikely to occur. The supply curves are well-known, and the current status shown on the left side of slide 11 is reasonably well understood and accepted. It is clear that incremental terms of supply are coming from high-cost spodumene, which is being shipped to converters in China. We have marked a range for the market price based on data published by others. The prices publicized by our competitors have been realized prices, plus those quoted by different market observers such as benchmark minerals indicate a price range of between $11 and $14 for carbonate in most markets today. On the right side of slide 11 is the cost curve we expect in 2020, taking into account all of the expansions that have been made public. I would point out a few key items here. First, you can see that at today's price range for carbonate, the higher royalties payable in Chile means that there is no meaningful cost difference between carbonate produced in Argentina and in Chile. Second, the marginal producer of carbonate remains the high-cost spodumene source and will likely remain so even if demand fell by around 10% from our forecast. There is simply not enough brine capacity being added by 2020 to change this. When you overlay the price range from today out to 2020, you end up with a chart that looks remarkably similar to the situation we saw in 2017. We acknowledge that there are many differing opinions about supply and demand growth over the coming decade and that this could see positive and negative surprises. However, we remain of the view that the risk to the demand side is that we are underestimating the level of EV demand and that the risk of the supply side is that we are being overoptimistic about the industry's ability to add capacity on time and on budget. I will now turn the call over to Paul.

Thank you, Pierre. 2017 saw a solid cash flow performance, driven by a significant improvement in cash collection in Brazil. One important metric that we track is, of course, past due receivables in Brazil, which have declined by almost 30% compared to the end of 2016. While we do not expect past dues to completely disappear, we believe that 2018 should see us move back to levels consistent with historical performance. For the full year, we saw adjusted cash from operations slightly below 2016. However, this was entirely due to a cash outflow in the final two months from the acquired business as we started to build trade receivables. As you recall, we did not acquire any of the receivables with the business, creating this one-off cash flow in the quarter. Net debt finished the year at just under $3 billion, reflecting the $1.2 billion payment to DuPont made in the fourth quarter. One important area that is getting a lot of attention today is the tax rate. We finished 2017 exactly where we expected with an effective tax rate of approximately 15%. This rate reflects the fact that the majority of our income is generated in lower tax jurisdictions, reflecting the nature of our supply chain and our revenue mix. Looking forward to 2018 and beyond; recently enacted tax reform in the U.S. impacts us in three main ways. First of all, we will have a transition tax payable over the next eight years of approximately $200 million, reflecting tax on overseas retained income. This will impact cash flows in the coming years but will not impact our effective tax rate. Second, we see a one-off charge to GAAP earnings, reflecting the revaluation of certain assets, most notably deferred tax assets of around $160 million. Again, this will not impact our future effective tax rate. And third, we will see a rise in our effective tax rate for 2018 as a result of the imposition of what is effectively a minimum tax on overseas income, combined with the restriction on the use of foreign tax credit to offset this additional tax. What this means for FMC is that wherever we see a tax rate outside the U.S. of less than around 13%, we will be hit with an additional U.S. tax bill under the guilty provisions of the tax reform. For us, the offsetting reduction in the U.S. tax rate will not be sufficient to offset this minimum overseas tax surcharge since we do not generate significant U.S. income today. While this change is a little as the result of the acquisition of assets from DuPont, the net effect is that our effective tax rate for 2018 is likely to increase by about 300 basis points at the midpoint of the range to 18%. I would caution you we continue to work our way through what is a very complex calculation and legislation that in many areas is somewhat ambiguously worded. We will continue to refine our calculations and seek clarity as to the treatment of certain items and you should expect us to update you on our estimate for the tax rate in each of the coming quarters. Looking into 2018 for cash flow, we expect to generate adjusted cash from operations in the range of $550 million to $650 million. Capital spending will increase to around $250 million at the midpoint. Lithium will invest around $105 million, led by the expansion of lithium carbonate capacity in Argentina and the continued addition of lithium hydroxide capacity. The benefits of these investments will start to accrue later in 2018 for the carbonate debottlenecking, in 2019 for the hydroxide expansions, and in 2020 for the carbonate expansion. Ag Solutions capital spending is expected to be approximately $95 million and corporate-level CapEx will be approximately $50 million, which is mainly the initial spending on the two-year implementation of a new SAP system. Finally, the Lithium separation remains on track. We expect to be in a position to file initial drafts of the required documents with the SEC in the summer of this year, which gives us confidence that we will list Lithium in the late third or early fourth quarter of 2018, with the full separation from FMC taking place late in the first quarter of 2019. And with that, I will hand the call back to Pierre.

Thank you, Paul. In summary, we feel very good about where FMC is today. Our Ag Solutions business delivered a strong Q4, and we are set to deliver an exceptional 2018, with revenue growth significantly above the market growth rate. The integration of the acquired business is progressing very well. We are in the early stages of understanding the growth synergies, and we will communicate further regarding the scale of these synergies on future calls. Lithium had a very strong quarter to finish the year and is on track to deliver another exceptional year in 2018. With that, I will now turn the call back to the operator for questions. Thank you for your attention.

Yes, thank you. How proprietary and/or differentiated would you assess your hydroxide conversion capacity to be relative to the capacity that's out there in the industry? And do you have any Chinese partners for your operations in China?

Hi Steve, this is Tom. I didn't quite hear the second part of your question, so let me answer the first one first and then maybe you can restate that. In terms of differentiation of our hydroxide product, really, what it comes down to is how that product performs. There's not a spec out there that is specified where somebody could produce a product, measure against that spec, and then know exactly how that's going to perform in the cathode material. So, our assets as well as our production processes are geared around detailed processes to produce specific products that then we test and we understand the performance characteristics of that product. And that's how it's going to continue going forward. Can you restate the second part of that question?

Yes, sure, Tom. It's kind of an extension on that, and that is, do you have Chinese partners for your capacity in China and therefore, the risk to ultimately losing that technological edge?

Yes. Partners is a good way to say it. And what we did was we began a partnership with a long-standing partner of our Ag business. We invest in the assets, we manage the technology, and we keep tight control over the sensitivity of that technology.

One comment I would add to what Tom is saying is that we have a very thorough process to protect our process technology. I believe there might not be more than two people within all of FMC and our partners who have a full understanding of this process. So, we have a way to protect the process technology by segregating part of the process, and nobody has complete visibility onto the process and how the parameters of the process impact the performance of the products.

Is that forecast consistent with your expectations before acquiring this business? Do you anticipate any long-term acceleration by expanding Rynaxypyr and Cyazypyr into new markets or developing new formulations?

I think for some reason, we have a little bit of a connection problem. We couldn't hear the beginning of the question. But in a few words, what we believe is that Rynaxypyr, Cyazypyr and overall the acquired market is performing at least at the level of our expectations from where we do have markets and applications today. There is definitely a process and you can see it through our comments, for example, what we said about Asia, India, Southeast Asia where we do have increased penetration of new crops, new registration, new formulations for product, which are allowing us to grow faster. Needless to say that in the coming years, FMC will also be looking at developing new products from those base chemistry. The last point we have not touched here and we are gathering a lot of data is around growth synergies. We do believe there are significant growth synergies to be seen in the years to come between the FMC and the acquired portfolio, allowing additional growth to what we have talked about. So, I would say, all in all, everything we are seeing and we're operating is very positive for us. And I don't believe we are capturing all of the potential today in the numbers we are presenting.

Yes, good morning and congrats on a nice end to the year. Pierre, you were talking about Brazil for full year 2017 of being able to generate 15% growth, whereas the market was down 10%. I was curious as to what percent of that preferential performance was due to some prior actions you took on your channel inventories versus market growth and how we should think about your ability to continue to outperform in that part of the world.

When considering a 15% growth compared to a 10% market decline, there are two key factors driving our performance. First, we are among the few companies maintaining nearly normal inventory levels in the channel, which means we are not hindered by excess products that would restrict our sales potential. This has enabled us to achieve growth rates that align more closely with actual product utilization. Second, our efforts over the past two years to shift away from low-profit products have resulted in comparably understated sales figures due to those strategic changes. These two aspects explain our significant outperformance. Looking ahead, we do expect to continue outperforming the market next year, although not to the same degree, as we anticipate facing tougher comparisons with our 2017 performance.

Thank you. Apologies for being a little shortsighted, but your 1Q EPS guidance is particularly strong, which appears to be driven mainly by the Ag segment. Can you just kindly comment on your expectation for your legacy Ag asset growth as well as the seasonal cadence for the DuPont assets and whether or not you'd expect any considerable FX tailwind? And also are there any key trends within product mix which should further benefit margins? Thank you.

All right. Thank you. Those are some questions. Let me talk about the cadence. I'll ask Mark to comment about legacy products growth. We announced our legacy business will grow in the 2% to 4%, which is above market we're expecting. So, Mark will comment about that, and maybe Paul will say a couple of words around FX. The cadence, as you can see, we do have a first quarter which is stronger as a percentage of the overall business than we used to have. And it's something which is important, very good for us with the acquired business. If you think about FMC legacy business, we would have slightly above 60%, 60% of the business in the back end of the year, mostly driven by the size of our business in Brazil and Latin America. So, it's 60% in the back end, 40% in the front end. If you look at the acquired business, it is reversed. It's slightly above 60% in the first half and 40% in the second half of the year. And this is driven by the size of the business for the acquired business in Europe and North America with a very strong underlying business in Asia and a smaller business in Latin America and Brazil. So, what it does to us, it rebalances across all of the quarters, and as we wanted, decrease our exposure to Brazil and Latin America. Mark, do you want to talk about the growth of the legacy business?

Yes. Of course, as Pierre mentioned, we're expecting a range of about 2% to 4% growth for the full year. That's going to be pretty evenly spread across the four quarters. We're already seeing Q1 well into the business in North America where the retail is getting ready for the season in the Midwest. I would say the market in California or in the West has kicked off a little earlier than normal, so that's going to help in Q1. Around the rest of the world, in Europe, we're seeing growth, as we said, from our business, particularly in France. This is our first year of direct market access. So, we're out in the market now selling and that's going very well. So, I think that 2% to 4% range is roughly what you should expect per quarter as we go through the year.

Yes, the FX question, I think, is pretty straightforward. The euro is the only exchange rate that really had a meaningful difference on a budget basis; think about how we hedge forward compared to what we saw in 2017. A few small changes in other currencies. The net impact of this is actually relatively small across the entire business. We do have a small tailwind, a very low single-digit percent increase in revenue and a very small tailwind to operating profit as well as a result of the forecast FX rates, but really not meaningful numbers.

Good morning. Thank you. In your Lithium business, you earned about $48 million EBITDA in the fourth quarter and you're guiding to $44 million to $48 million in Q1 2018 and sort of similar level for the rest of 2018, if I just average your annual guidance. Can you help us build the bridge between your fourth quarter result and average cadence in 2018? And I mean, the bridge if you look at sequential price changes and also volume.

I believe the performance of our Lithium operations in the first quarter remains consistent with that of the fourth quarter. There are no significant changes in the business between these two periods. Historically, the fourth quarter is a strong quarter with high sales, particularly from our production in Argentina, which is influenced by seasonal factors. This is a typical sequential trend. For this year, you can expect a stronger fourth quarter compared to the first quarter, with earnings reaching their peak in the fourth quarter. However, one positive aspect of the first quarter is that it tends to be a high-profit quarter due to a favorable product mix. Overall, there are no fundamental differences; the variations are mostly driven by the strong performance in Q4, the seasonal production in Argentina, and the product mix in the first quarter.

Hi, good morning. Maybe, Paul, on Lithium. It seems like there'll be short carbonate in 2019. Is that true? And then how will that work out? Will you maybe run hydroxide a little bit lower? Will you go into the market and purchase carbonate? What will margins look like? It seems like the Nemaska project being on finance will probably not be able to offer your carbonate for at least a couple of years, so maybe you could just elaborate on that.

Yes, hi Joel, this is Tom. Yes, I mean, it's a little bit early to be forecasting 2019, but I'll give you an indication of where things are. The debottlenecking will come in over the course of 2018 and there's potential upside there. This is a number of different projects that have different characteristics on yield and some incremental capability of equipment that we may see additional there. We do expect Nemaska volume to begin in 2019 and we still need to see, to your point, how much of that volume will be there, but there are commitments and penalties to that end. And we continue, I would say, a multipronged effort on the acquisition of carbonate elsewhere. So, as you know, in 2018, we'll continue to be long carbonate and we have the ability to shift LCEs toward hydroxide to continue to grow. We have potential for more debottlenecking and we have the potential of more LCEs from the outside as well.

Good morning. Thanks for taking my question. Just looking at the timeline of the Lithium spinoff, I think you talked about as recently as the third quarter conference call of doing this midyear 2018, but now it looks like the initials move is going to be made in the second half of the year and then the full spinoff in the first quarter of 2019. Am I just misremembering or making too much of the changes in timing? Or is there something going on that you pushed back the timing?

Hi Dmitry, it's Paul. No, we have always planned for Q3. This is primarily due to the requirements for listing a public company, including SEC filings, the necessity for audited financials, and the need for quarterly financials. We are right where we said we would be internally when we first announced this almost a year ago. So, if we've indicated that the actual listing would happen in the summer, that might be incorrect as there has consistently been an expectation for a Q3 listing.

Hey guys, nice quarter.

Thank you.

You seem pretty positive or bullish on lithium demand through 2020 and 2025. If you think about what the Lithium business could earn in EBITDA by 2020 and 2025, any thoughts on the earnings power there? And how much capital cost to sort of get to that potential?

If it was early for Tom to predict 2019, then predicting 2025 is quite a stretch, Mike. I have a few points to make. The capital investment we've outlined for the expansion is quite clear. We allocated around $250 million to $300 million for a 20,000 ton expansion. As we expand further in Argentina, we anticipate a similar cost for the next phase, perhaps slightly less, but we are still working on that, so I don't want to finalize it yet. Regarding hydroxide, it really depends on where we position the units. There is a significant difference in capital costs in various regions, but typically, you also see a reverse relationship with operating costs in return. We will assess the optimum locations for these units based on demand and the supply of carbonate, but the capital commitment in this aspect is considerably lower. Currently, this business operates at an EBITDA margin of around 45%. We have been clear about our future pricing expectations and have a solid view of our projected LCE production. You all can likely estimate the business's earnings capacity based on those scenarios.

Yes. I want to go back to the cost synergy outlook for Ag Solutions. In the past, you've talked about $40 million to $80 million, and I know your cost synergies are different because it's a question of what costs you bring in. So, as you've had a chance to run the new business, and as the DuPont TSA rolls off, what's your current view on cost synergies for Ag?

You mentioned it, Don. There are no specific cost synergies. We have been discussing this as a way to model earnings per share for 2018 based on negotiations made during the acquisition. Currently, we have structured an organization capable of managing a business exceeding $4 billion, supported by a transitional service agreement that will last until the end of 2019 at an annual cost of about $50 million. We are not separating our functional organization; we have a structure that supports the entire business. Presently, we are operating with an expected minimum EBITDA margin of around 27% for this year. As we approach the end of 2019, we have initiated the process to implement a new SAP system, S/4HANA, and will be phasing out the TSA. We have not calculated potential savings yet, but it is reasonable to anticipate savings in the hundreds of millions by the time we transition from the TSA and have the new SAP in place. So, we are currently operating with a 27% EBITDA margin, and there is potential for improvement. We are adding resources carefully to run our business, and looking ahead two years, we could potentially cut costs by $100 million.

Good morning everyone. A couple more on Lithium. Sorry if I missed this, but did you comment on the hydroxide operating rate in the quarter? I think, previously, you had said that you were running above the nameplate capacity. So, I was wondering if you're able to sustain that. And then just secondly, you commented earlier about having conversations for 2019 and 2020 sales in the Lithium business. Would it be fair to say that you would lock in some contracts before you would build your further hydroxide expansion? Thanks.

Yes, we are demonstrating our ability. Initially, we believe the two units for lithium hydroxide in China should be able to produce 8,000 tons per year, and we are operating and have been able to operate throughout the quarter above that number. So, yes, expectation that will be at or north of 9,000 tons of lithium hydroxide potential with these two units is being confirmed. We are planning to add another unit in China of lithium hydroxide and then another couple of units, most likely in North America for at least one of them. And we will have the exact same process, which we move the securing contract before the French contracts. But with what we see of the demand today, discussion we have with customers, as it was the case for the first unit, we believe the unit will be sold out before we start operation.

Hi, good morning.

Good morning.

In the Ag business, your Latin America sales you mentioned for the full year were up 15%, but they were lighter than that in the legacy business, looked like only 3% this quarter. Is that just a matter of lapping some tougher comps? Or can you maybe give a little bit more color on kind of how the underlying market looked in Latin America and how it's been trending?

Yes, Mike. Taking Latin America overall, I think Pierre alluded to earlier that we think the Brazilian market is probably down 9% to 10% for the full year. When you look at our business in Brazil, we're up significantly. As you said, we had about a 3% growth in the fourth quarter. I think one of the things that you have to recognize is that's exactly how we planned it. If you remember, Q3 was a very large quarter for us. We knew that was the cadence that was going to happen, so we fully forecasted that type of growth rate. I think going around the rest of the region, Mexico is very good for us. Good growth in niche crops. Obviously, the newly acquired portfolio helps us there tremendously as well. In Argentina, the market was very tough weather-wise. We see continued expansion of the pre-emergent herbicides with our Authority brand. So, Argentina was good for us in the second half of the year and we expect that to continue as well. So, overall, Latin America performed very well for us.

Hi, this is Dan Rizzo on for Laurence. How are you?

Good morning.

Could you comment on what you're seeing in terms of pest pressures and channel inventories in North America just given the weather we've had in North America over the past couple of months? Has anything changed in terms of outlook for that?

Dan, no, not really. I mean, it obviously is very early to tell what the pest pressure is going to be like. I can tell you, though, from a herbicide perspective, our sales already for pre-emergent Authority for soy are very, very strong. So, clearly, retail and distribution are gearing up for a very strong soy season, which will benefit us. With channel inventories, I think different companies have different channel inventories. We've said it in the past for us; we think in-soil insecticides is a high for us. They will come down over the next season. But from a herbicide perspective, we're exactly where we want to be.

Great. Thanks. Just wanted to get a question in on Lithium here. Maybe you can just comment on your outlook for pricing given that effective capacity, on your slide, looks like it could be above demand through 2020. Thanks.

Yes, this is Tom. First, let me comment on the effective capacity being above demand. If you look at 2017, effective capacity results were above demand. It doesn't mean that the right products are getting to the customers. We saw 2017 demand limited by supply, and we saw prices up substantially in 2017. So, the same could occur even though effective capacity is above demand. Looking at what we see from 2017 to 2018, we've gotten price increases across all of our products. If you take the midpoint of the revenue and the LCEs, you can come pretty close to see that we got a revenue per LCE that is well above the market and that is driven by a mid-teens increase in our lithium hydroxide product line.

When we look at your Ag business and all the markets you're expanding into, how much work do you have left to do in terms of capital, people or partners to really build out the distribution you need to take full advantage of that? I'm talking about India and all the other new stuff.

I think the integration is moving forward quite well. The supply chain between the two businesses is being integrated. And we do have capacity without manufacturers, which is well in place. If I would say we have work to do and Mark's organization is doing a lot of work, I believe once the synergies are going to be in place that we do have upside to any numbers we are now seeing. So, where we do have work to do today is finding capacity increase in our own acquired business manufacturing network. That's where we want to add capacity as fast as we can because we have, as you can see, extreme synergies, we have a 6% to 10% growth, and we see that being the case for the future. So, that's where we are working at forecasting for the future. Mark, do you have any additional comments?

Yes, the only thing I would add to that is from the legacy FMC pipeline that's coming out of research, we now have products that are getting close enough that we're thinking about brand-new capacity for those new active ingredients. So, that's part of that overall capacity view of our supply chain. So, we would expect to be making those investments outside the next 12-month period, but it's coming quickly.

And it is more of a, I would say, a normal course of business planning in a situation where we believe we're going to have very interesting growth rates for this business versus the market than an integration challenge.

Thank you. That's all the time we have for the call today. As always, I'm available following the call to address any additional questions you may have. Thank you and have a good day.