FMC Corp (FMC) — Q1 2019 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to FMC Corporation's first quarter earnings call. Joining me today are Pierre Brondeau, Chief Executive Officer and Chairman; Mark Douglas, President and Chief Operating Officer; and Andrew Sandifer, Executive Vice President and Chief Financial Officer. Pierre will review FMC's first quarter performance and provide the outlook for 2019 and the second quarter. Andrew will provide an overview of select financial results, and then all three will address your questions. The slide presentation that accompanies our results, along with our earnings release and 2019 outlook statement, are available on our website and the prepared remarks from today's discussion will be made available after the call. Finally, 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 press 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 and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, and free cash flow, all of which are non-GAAP financial measures. Please note that earnings shall mean adjusted earnings and EBITDA shall mean adjusted EBITDA for all income statement 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 will now turn the call over to Pierre.

Thank you, Michael, and good morning, everyone. As you know, in our earnings release, FMC continued to outperform the market as we have for the past six quarters. We're especially pleased with the strong volume growth. This, in addition to a price increase in all regions, as well as cost control which led to strong top and bottom line results. Our outperformance relative to the market is driven by three key elements: balanced geographic exposure, the strength of our product portfolio, and finally a diverse crop exposure. Turning to Slide 3. FMC reported $1.2 billion in first quarter revenue, reflecting a year-over-year increase of 8% on a reported basis and 14% excluding FX headwinds. This is driven by strong commercial execution that enabled growth in every region. Adjusted EBITDA was $343 million, an increase of 4% compared to recast financials from the year-ago period, and $13 million above the midpoint of our guidance. Company EBITDA margins were nearly 29%, despite $95 million in combined headwinds from raw material costs and foreign currencies. Adjusted EPS was $1.72 in the quarter, an increase of 9% versus recast Q1 2018 and $0.09 above the midpoint of our guidance. The strong EPS was driven by higher volume, price increases, and product mix. Moving now to first quarter revenue analysis on slides 4. Q1 revenue grew by 8% with volume contributing 9% growth and price mix another 5% growth, for a total of 14% organic growth, which was partially offset by a 6% headwind from FX. Performance in the quarter was driven by strong commercial execution and demand for a product which led to above-market growth. The strongest growth came from Latin America at 30%, followed by North America at 7%, EMEA at 3%, and Asia at 1%. Excluding foreign currency headwinds, organic growth was even stronger with Latin America up over 40%, EMEA up 11%, and Asia up 8%. Although Q1 is a seasonally smaller quarter of the year in Latin America, the outperformance was broad-based. Overall, we saw increased acreage that drove strong demand in Brazil for various insecticides. Demand for herbicides and insecticides in sugarcane and robust demand for insecticides in soybean applications were also key contributors to the growth. Price increases in the region offset nearly all the impact of FX on both the top and bottom lines. Over the past three years, we have implemented a disciplined channel inventory management system in Brazil, enabling us to maintain visibility on inventory levels of FMC products throughout our distribution channels. The FMC sales team conducts monthly checks of all third-party warehouses, retailers, and growers and then captures the data in our inventory tracking system. This data indicates that channel inventories of FMC products are low and in line with levels typically expected during this time of the year, despite very strong growth in 2018 and in Q1 2019. In North America, despite the weather issues in the quarter that caused a late start to the season and an expected shift in acreage away from soybeans, demand for pre-emergent herbicides remained one of the growth drivers. I’m glad to say resistance continues to spread. We saw good customer uptake of our pre-emergent herbicides, especially Authority Supreme herbicide that was launched last year. We saw robust sales of other insect control for fruit and vegetable applications, including as core insect control for peanuts. Some herbicide and Topguard EQ fungicide also had strong sales. Also in North America in Q1, we launched the first new active ingredient from the legacy FMC R&D pipeline, a new central fungicide. It is gaining traction already in corn, soybean, and peanut applications and such a strong launch suggests we can reach sales of $30 million to $50 million sooner than we used to expect. Growth in EMEA was driven by favorable weather with very strong sales in Turkey and southwestern Europe, as well as new direct market access in Belgium and the Netherlands. Our diamide products, including Coragen, had robust demand across the region, and pricing actions helped offset a significant portion of the FX headwind. In Asia, we saw double-digit growth in Pakistan, China, Japan, and Southwest Asia. China's growth was led by diamide products, including Coragen. In India, we're seeing the benefits of a commercial restructuring from last year as we're gaining sales traction across more of the portfolio. In addition to reviewing regional business, I would like to highlight our Plant Health business, which is globally managed with financial results embedded in all the regions. It consists of biological, micronutrient, and seed treatment products and continues to grow over 20% per year. This part of our portfolio is approaching revenues of $200 million in 2019. Slide 5 shows the balance of revenue across geographies and crops. From a geographic standpoint, our revenue is spread nearly equally across four regions, which provides a natural edge against the effects of microeconomic and weather events in the region or country. These types of events impact our industry regularly. Our geographic diversity provides a certain amount of insulation from specific events, as we demonstrated during the recent flooding in parts of the US and the drought in Australia. As you can see on the right side of this line, the spread of FMC revenue in each region across the four quarters of the year is relatively balanced in North America and Asia. While the seasonality in EMEA and Latin America are complementary. This means we have a meaningful revenue contribution from three regions every quarter of the year, which also gives us some protection from adverse events in one region or country. When considering crop exposure, 60% of FMC revenue is from a wide variety of high-value crops, with the remainder of the revenue in raw crops. FMC does not rely too heavily on any one crop or any one region, making performance more predictable and sustainable. Turning now to Slide 6. First quarter EBITDA was $343 million, up 4% versus recast results from Q1 2018. Strong demand led to a year-over-year volume increase of $55 million of EBITDA. We achieved price increases in all regions, which contributed $53 million to year-over-year EBITDA growth with a stronger contribution from EMEA and Latin America. Volume and price together more than offset the headwinds from FX costs totaling $95 million in the quarter. Looking ahead to our 2019 outlook on Slide 7. Given the strong performance in Q1 and more clarity on the outlook for the year, we are raising our guidance for 2019 revenue, EBITDA, and EPS. We expect 2019 revenue for FMC to be in the range of $4.5 billion to $4.6 billion, up $50 million at midpoint versus previous guidance and reflecting 6% year-over-year growth at the midpoint versus 2018 recast sales. Excluding a forecasted 3% FX headwind, organic sales growth estimate is now 9% at the midpoint. We also expect total company EBITDA of $1.18 to $1.22 billion, up $15 million at the midpoint versus previous guidance, representing 8% growth versus 2018 recast results. As a reminder, in 2019 our EBITDA again is for the total company and includes all expenses. We are also raising our guidance for 2019 earnings per diluted share to a new range of $5.62 to $5.82, an increase of 7% at the midpoint compared to prior guidance. This represents growth of 9% at the midpoint, although recast 2018 only includes the impact of the $100 million in share repurchases completed in Q1. For the second quarter, we expect revenue to be in the range of $1.185 to $1.215 billion, which represents growth of 4% at the midpoint. Excluding an expected 4% FX headwind, organic sales estimate is an 8% growth at the midpoint. We are also focusing on EBITDA of $325 million to $345 million in Q2, which would be an increase of 5% year-over-year at the midpoint. This is despite significant FX and manufacturing cost headwinds. We expect second quarter EPS to be in the range of $1.60 to $1.70, up 10% at the midpoint versus recast results from Q2 2018. For 2019, we expect the overall crop protection market to be flat to up low single digits. We expect Latin America to grow in the mid to high single digits, while North America and Asia will be flat to up low single digits, and EMEA will be flat to down low single digits. All these estimates are in US dollar terms. In Latin America, continued strength in cotton in Brazil, recovering conditions in Argentina, and an expected strong soybean season across the region next fall will drive market growth. In North America, market growth will come from an increase in corn and wheat acreage, along with more normalized price pressure. In EMEA, we expect recovery in cereal acreage, but the strength of the US dollar related to the euro is likely to reduce the market growth rate in the region by 200 to 300 basis points. We expect growth in Asia to be driven by more normal weather conditions across the region. FX is expected to be a headwind in Asia, which is embedded in our outlook for the market. As you can see in the full year 2019 EBITDA bridge on Slide 8, the headwinds from FX and higher manufacturing costs are significant factors for 2019. The full year negative impact from FX is expected to be 7% at the EBITDA level, plus another 13% headwind from higher raw material costs, representing a total of about $220 million. We expect price increases to offset about $145 million of these combined headwinds for approximately 65% offset. As widely reported in late March, there was an explosion in an industrial park in China. One of the plants operated by one of FMC's contract manufacturing partners is located near the explosion. That plant has been shut down temporarily, as the government cracks down to investigate the root cause of the blast. It is important to note, however, that FMC's global manufacturing network provides us with significant supply chain flexibility. Due to the strength of our partnerships and our alternate sourcing options, we are confident that we can continue to secure a supply of the FMC active ingredients normally manufactured as needed. We have already included the impact of this situation in our guidance. Turning to Slide 9, the second quarter EBITDA bridge reflects a $55 million cost headwind similar to Q1, but lower FX headwinds of $20 million, representing a total of about $75 million in headwinds. We expect price increases in Q2 to offset $60 million or about 80% of these headwinds. I will now turn the call over to Andrew.

Thanks, Pierre. Let me start this morning with a few specific income statement items. Foreign exchange had a negative impact on revenue of approximately 6% in the first quarter. Offsetting this were strong volume growth of 9% and price increases of 5%. For the full year, we continue to expect foreign exchange to be approximately a 3% headwind to revenue. Interest expense was $1 million higher for the quarter than implied by our prior full year guidance, with higher commercial paper balances through the quarter due to the timing of share repurchases. Interest expense for the full year is now expected to be in the range of $137 million to $143 million, reflecting primarily changes in the mix of foreign versus domestic borrowing, as compared to our initial outlook for 2019. The higher levels of foreign borrowing will allow us to more cost-effectively manage currency risk in certain countries, particularly in Argentina. Adjusted effective tax rate for the quarter was 15%, in line with the midpoint of our guidance range. We are maintaining our full-year tax rate guidance of 14% to 16%. Moving onto the balance sheet and cash flow. Growth debt as of March 31 was $3.1 billion, up roughly $450 million from the end of 2018, reflecting the expected seasonal build in working capital and our decision to continue regularly purchasing FMC stock across the year rather than waiting for more cash-generating quarters later in the year. Gross debt-to-trailing 12-month EBITDA at quarter end was just below 2.8 times. This is above our targeted leverage of 2.5 times, again due to the seasonality of our cash flow and the timing of share repurchases. But we expect to rapidly return to leverage levels below 2.5 times in the second half of the year. Turning to Slide 10, adjusted cash from operations was negative in the first quarter as expected, reflecting a more normal seasonal build of working capital. Cash from operations was also substantially below the prior year period, although this comparison is misleading due to several non-recurring impacts that benefited working capital in the prior year period, including a step down in past due balances in Brazil which reduced cash used for receivables, lower cash used for inventory given inventory levels in the acquired business at the time of acquisition, and a significant increase in accounts payables associated with the ramp-up of the acquired business post-acquisition. Excluding these one-time items in the prior year period, the impact of working capital on cash from operations was generally consistent with the prior year and our expectations. Capital investment and spending on legacy and transformation efforts in the quarter were at a pace consistent with our full-year guidance for those uses of cash. As expected, free cash flow was negative for the quarter and well below the prior year period due to the factors I just mentioned impacting cash from operations, as well as two additional positive impacts to legacy and transformation spending in the prior year period. First, the prior year period results include proceeds from a required anti-trust divestiture. And second, the prior year period results reflect certain transactions through up payment receipt following the closing of the acquisition of the DuPont business. FMC continues to expect to generate adjusted cash from operations of $750 million to $850 million in 2019, with capital spending anticipated to be in the range of $140 million to $160 million for 2019, as well as legacy transformation spending in the range of $200 million to $250 million. We expect to generate free cash flow before financing of $375 million to $475 million for the full year. We have repurchased 1.88 million FMC shares year to date at an average price of $79.70 for a total of approximately $150 million, including $100 million of repurchases made early in the first quarter as discussed on our last call, along with $50 million of repurchases thus far in the second quarter. It is our intent to remain a regular purchaser of FMC shares throughout the year, purchasing a total of up to $500 million of FMC shares in 2019, inclusive of the $150 million already completed as of today. In summary, 2019 looks to be another year of exceptional financial performance for FMC, with increasing cash generation and improved cash conversion, 6% top line growth despite FX headwinds and tepid market growth, 8% EBITDA growth despite significant cost increases and FX impacts, 9% EPS growth with potential further upside from additional share repurchases and return on invested capital in the mid-teens percentage. And with that, I'll turn the call back to Pierre.

Thank you, Andrew. Following a very strong 2018, FMC delivered exceptional performance in Q1 and we expect this to continue for the foreseeable future. The growth rates and EBITDA margins are at the very top of the industry and sustainable. Additionally, we have a clear path to expand EBITDA margin another 200 to 300 basis points with improving mix from new product introduction, exiting certain products, and finishing the implementation of a new FMC system. Starting with our Q2 earnings call, we will provide an annual update on the R&D pipeline which includes six synthetic molecules in the development phase, fifteen synthetic molecules in the discovery phase, and six biological strains. We plan to do these every year on the call. I will now turn the call back to the operator for questions. Thank you for your attention.

Thank you. You did touch on this, but there has been a lot of noise on active ingredient procurement in China over the past two years. And as you accurately flagged, the recent accident has driven the conversation to flare up again. Can you just give us your perspectives on how FMC can overall insulate itself from these pressures and also offer some color on kind of where we were on the system a few years ago and where we are now? And then how you see this developing for the future for FMC, as well as the industry as a whole? Thank you.

Thank you, Chris. Yeah, it’s a very valid point and the situation in China is impacting many of the ag companies. Let me talk specifically about FMC. I think 2018 was a difficult year. You remember what happened in China. Our manufacturing and supply chain organization used 2018 not only to resolve the issues but to diversify further our sources of intermediates and active ingredients for the future. We developed a very broad network with multiple sources for critical intermediates and active ingredients. And we've done that through different methods. So I would say that what we are doing today, beyond 2018 and 2019, is focusing on the high-priority product intermediates and active ingredients, and we are already implementing solutions outside of China. For example, we are currently working on developing capacity in our European plants, mostly in Denmark, to produce some of these products. We are also contracting with some of our key partners in China to produce outside of China, especially in Europe. We're also outsourcing from Europe and India to partners for our own plants. So we are diversifying our network. It’s moving fast, but of course, there will still be a strong need for supplies from China for the next few years. For 2019, we believe today that we can face the situation of the shutdown, assuming it reopens within the timeframe we are expecting, which is a planned, very conservative forecast. There is a cost to it because we had to implement last-minute solutions, and we have factored that $30 million cost into our EBITDA forecast for the year. However, we do believe right now we are pretty secured from a supply standpoint to our customers as long as things do not get worse. So our production focus is ensuring we can act in a way that gives us what we need for 2019. But we’ve used the situation in 2018 and 2019 to broaden our supply of intermediates and active ingredients using Europe and India to produce outside of China.

Great. And just a quick follow-up. You previously laid out some framework to improve cash flow conversion at your Analyst Day. I fully understand it's a little bit early, but can you just update us on your progression, as well as your conviction to hit these targets? Just anything to help us conceptualize the opportunity here will be greatly appreciated and maybe just a quick point on updates on uses of cash? Thank you.

Sure. And Chris, it’s Andrew. Thanks for the question. I think certainly where we stand today, we continue to believe there's a strong trajectory for improving cash generation and cash conversion from FMC. The biggest driver in the step up over the next two years will be moving past the legacy and transformation spending, particularly the transformation efforts, the finishing of the DuPont integration, and the implementation of our SAP S/4 HANA system and the related spending. And as you can see in our slide today, that spending is about $200 million to $250 million this year. Of that, a certain portion—less than half of that, third to half—will continue as ongoing legacy spend. That's one of the biggest step changes we'll see in ’20 versus ’19 in cash conversion, combined with ongoing growth of the topline where we're expecting substantial 7% to 9% EBITDA growth over the mid-term horizon, which will directly translate to cash flow with a small headwind from working capital growth of about 20% to 30% of incremental sales. So we can very easily see a path from our guidance this year that would have free cash flow before financing at about 55% of net income. Within the next two to three years, I would expect that number to be in the upper 70s, if not the 80s percent, as we move past this significant lump of transformation expenses. So that's the story on cash generation and conversion. From a cash deployment perspective, we continue to be committed to fully funding the organic growth of the company. You know, we're guiding spending between $140 million and $160 million on capital expenses this year. Notably, this is not particularly heavy load—an aggregate, that's about 3.5% of our sales. And then with the other funds that are not committed to organic growth, we are strongly committed to continuing to return those to shareholders through dividends, which made a significant raise last year, and through share repurchases, which we have steadily progressed in this year, with $150 million completed so far.

Thank you.

Thank you. So two things. Investors seem to be particularly concerned about the potential for the molecules you've picked up from DuPont. So can you give us a sense of how that group performed in the quarter and whether your expectations have changed at all? You mentioned diamide specifically in Asia and EMEA. Can you tell us whether the growth that we're seeing in those sales is coming primarily from your FMC customers or is it coming from continued growth that was already in place before you bought the assets?

Yeah, Mark. To your first question, in terms of growth of the acquired assets, in the first quarter those growth rates were in the mid-teens for the acquired assets. It’s pretty broad-based, as we said in the press release and in the slides that you see. It's very difficult to parcel out exactly where that growth is coming from in terms of the synergy growth. What we are seeing is market expansions. From a geographic standpoint, we highlighted southwestern Europe, which is a very good area for us. That is coming from distribution where we've expanded our distribution networks over the last 18 months. Places like China, where again, we're gaining traction with major distributors and retailers. Latin America on some of the crops we mentioned, such as cotton. So it's very broad-based. I don't think our expectations have changed at all in terms of growth rates for these products. We were surprised last year at the amount of traction we got, and obviously we've continued that in Q1, and we expect that to continue for certainly the next few years.

Super. And just a question on late planting. Clearly, you haven't been hurt by it, but do you approach the selling season any differently when planting is delayed? I mean, obviously aside from the potential for acreage shifts, do you anticipate any significant differences in application that would affect the way you're rolling product into the market?

Not really, Mark. I think from our perspective, when things do get delayed, you better have product in the right place in the distribution channel because when planting does start, I think everybody knows it goes 24/7 and demand is very high. So for us, it’s very much about logistics and supply chain—working with our distribution partners and retail partners to ensure we've got the right products in the right place. Obviously, we talked about the pre-emergent side of our business; uptake has been very strong and I would say that uptake has been very strong in the high end of our pre-emergent. So products like Authority Supreme, which are extremely high performance, we've seen good demand there, getting ready for the market when it eventually gets here.

Super. Thank you very much.

Yes. Just wanted to follow up on the U.S. season, the pre-emergency products. So is the product actually going out to the grower, and are the pounds in the ground being applied, or is there a risk here that we could see a buildup in channel inventories of your pre-emergent products?

I think the pre-emergent now is—some of it is going on the ground. The market is delayed, so some of it is sitting waiting in distribution channels. That's normal. Obviously, the timing of application will be critical. We're getting into the period now where growth will come. We're very confident in terms of how much we expect from our pre-emergent business this year, and certainly we have the right products in the right places today.

Then a follow-up on Latin America. You had very strong 40% organic growth, but obviously this is your latest quarter of the year. How should we think about sustainable organic growth, you know, as the year progresses and for the year as a whole?

You know, we've talked about a market in Latin America that is obviously going to grow in that mid to high single digits. I think Brazil will be at the top end of that range. Q1, although a light quarter, we had very good performance in cotton, broad across the portfolio. Insecticides were strong, obviously increased acreage. All the trade issues that are working their way through today—Brazil is a major exporter of soy—we continue to expect soy acreage to increase in Brazil. And with that, we should expect to enjoy increased sales as well.

Yes, thank you. Just continuing that discussion about Brazil, you had very strong insecticide demand in Brazilian soybeans. Would you say that that is driven by the economic benefits that those growers are experiencing, given the trade disputes, or is this a reflection of insect populations that are effectively not controlled or have some waning efficacy issues?

Yeah, Steve, I think it's a combination of the two. I mean, obviously the Brazilian growers are looking to get the maximum yields they can, given the high demand they see from the export market, especially to China. So that's one factor that the whole industry is seeing. I think second for us is the growth in our insecticides in the quarter, we're really focused on the pest spectrum that is more related to a lot of the legacy FMC products— not necessarily the diamide products here. Although we are seeing slight leakage on leps, which is very strong for furthering an exit portfolio. So it's a bit of both, actually. It's the market growth, but also the specific pest that particularly responds to our portfolio, mainly from the legacy side of FMC's business.

And just also wanted to ask you a little bit about the diamides, particularly your efforts to create some new formulations that contain multiple modes of action, potentially giving a little longer patent estate there. Can you provide us with an update on those efforts?

Yeah, sure. I mean, let me take the opportunity to talk about that patent estate and how we see the world. We talked about that at the Investor Day. You know, our patent estate is very deep and broad and covers many years. For instance, we've talked about Rynaxypyr and some of the main patents coming off in 2022. Well, the reality is they don't expire until 2023 in Brazil and until 2024 in the European Union. So you can see there is a longer period of time. We have several activities underway within the portfolio, some of which relate to new formulations. Those activities are ongoing. We are applying for registration today as we speak in many countries across the world. So from a formulation capability standpoint, it’s steady as she goes. We are looking at other activities as well to defend these high-value franchises that we have. I'm not going to get into too much detail about what they are, but it is very broad. We're expecting that post-patent, you will see continued growth in the FMC portfolio from the diamide perspective.

I think India is something to consider. Contrary to what has been written in some reports regarding dates of patent expiration—which were actually wrong—there are composition patents which are protecting a product. But you know, everybody does that in that field. You do have a portfolio of patents protecting both the manufacturing and the composition and performance. All of that makes it very difficult for people to come and produce the product on the day of the expiration. So we have the composition which protects the product, plus the manufacturing patents that make it difficult for others to manufacture. Even when we arrive at a place where they can, from a patent standpoint, manufacture, they need to obtain registration and make capital investments for manufacturing, which in some cases is quite high. So you can see today even on some products, take an example—this molecule, which, by the way, has massive markets across the world, 600 million to 700 million—

It's probably more in the $350 million to $400 million range.

It's a molecule that we end up paying a lot for, the people who are selling the molecule because you need to have the capacity and the technology to do it. So it's not something where sales disappear on the day of the expiration of the composition items, which for us extend to 2022, 2023, and 2024.

Thank you.

Hi, good morning. You gave some good commentary that you expect that the crop protection market globally to grow, I think, flat, up low single digits. Obviously, your guidance is mid to high single digits, FX headwinds here. Can you walk through exactly why you're outperforming the market? Is it all just the diamides? Maybe break down a bit through the highest buckets here between the diamides and legacy products. What is really allowing you to outperform in that area?

Yeah, I mean, Joel, the diamides are growing. Obviously, we believe we're taking share in that market and we're also expanding in terms of crops and geographies. I would say on the other side of the carve, our herbicide portfolio continues to grow. We see growth in Latin America, in the U.S. and Canada, and we also see growth in India on new applications, such as sugarcane. Another area that we don't talk a lot about, however, is the herbicide portfolio that we acquired. We're seeing good growth there in Europe on cereals, and also new formulations being introduced into Europe. So that's another area of growth. Lastly, there are two other areas: the fungicides which will continue to expand with new formulations both in the U.S. and Europe, and we also have our plant health business that Pierre highlighted in his script, where we see growth in biologicals and micronutrients. So if you think of those categories, that is how I would describe it.

I want to follow up on one of the topics of biologicals. If I remember correctly from your Investor Day in early December, my memory was that biologicals are tough to develop efficacy and have to reproduce, and maybe this wasn’t going to be something that FMC would throw a lot of money into the R&D side. Can you talk about—can you give an R&D pipeline update in a few months and what some of the things in the pipeline for biologicals? Has there been a shift at FMC in the last five or six months about what you may be able to do down the road with biologicals?

No, actually Joel, maybe we didn't communicate in the right way. We've been investing heavily in biologicals since around 2013. We very much believe that biologicals are going to play an important part in the crop protection industry, either as standalone products or equally important with formulations with synthetic chemistry. We have six strains in our pipeline, both fungicides and bio stimulants. I can tell you now that the money we're putting into this has increased every year since 2013. For us, we see this as an important growth area, and as we said, the plant health business is growing at greater than 20% and is getting close to $200 million. So it's becoming a meaningful part of the portfolio. We do a lot of educating—not only internally on biologicals, but with our retailers, distribution, and growing network. Selling biologicals is different. They behave differently. They have different modes of action. So all of that has to be built up over time. But I can tell you now we're very committed to biologicals.

Yeah, it is going to be a miscommunication because since 2013, we've made acquisitions of research laboratories. We have been investing in R&D. We have actually built an R&D center in Denmark focused solely on biologicals, including fermentation capability. So it's one of the priorities we have for the company, and the spending has been growing year after year since 2013.

Thank you.

Yeah. Hi, good morning everyone. I just wanted to go to your 2019 EBITDA bridge. It looks like you have pricing mixing a $145 million benefit, but that's fully offset by costs. So I know it's a little bit early, but conceptually does that mean that you're going to continue to push price later this year and into 2020 to make up for some of these logistic challenges that you talked about? And you know, you've been raising prices for a while now, but farm economics are still maybe uneven globally. So how confident are you that these price initiatives will be able to come to fruition?

You know, I think a pricing situation continues to be thought through. We are definitely not increasing systematically across the board. We do it where the molecule can afford it, and these increases are very thorough and systematic. We also keep in mind the seasons; for example, if you increase price in Latin America in the third and fourth quarter of the year, you will do so at a different timing in North America. So it is spread over a long period, but it's not constant across the year for every region. We believe the price increases we have for the full year right now have a high level of confidence that they're sustainable and manageable. And like anything, price increases—our customers are smart and they understand what they are buying and what they are paying for. So it's going to be thought through very carefully and done where we believe it can be done, and that's what we've been doing. So I think we have a situation right now that is quite stable and a good outlook for early in 2019. The critical question—which should be asked because we don't have an answer—is how sticky those prices are when the headwinds are disappearing. So that is a 2020 situation, and we don't have an answer; as you can guess, we're going to try to hold on to those prices even in the face of fewer headwinds for as long as possible.

That was very helpful, thank you. And then on the inventory situation, I really appreciated the additional color you talked about in Brazil about how you're doing checks throughout the channel. Do you do a similar exercise in some of your other regions and what is that telling you about the channel inventories of FMC products? Thank you.

Yeah. We do not have to do it to the same extent in North America because there are data generated by the industry that allow us to have a pretty good overview of the inventory situation. So I would say North America is one of those places where we are concerned—not cost, but maybe a better phrasing would be that we're being vigilant. In Latin America, we have a more proactive measures put in place. But on a regular basis, yes, this is a process. We employ different methodologies, but we are very focused on inventory of products within the channel—Brazil and Latin America being places where we have developed our own system because that’s a place where things could get out of control rapidly.

Good morning. I appreciate the detail that you've provided on geographic trends on Slide 4. I was wondering if you could disaggregate the sales in a different way by product category: insecticides, herbicides, fungicides. Where have you seen the fastest growth globally and which category would have been the slowest?

Yes. Let me quickly think about that. So insecticides are the fastest growing segment broadly across the board, not any one particular product. I would say pockets in Asia—China, India are growing rapidly, as well as in Brazil depending on the crop. Obviously, we mentioned soy and cotton. Sugarcane is more balanced. In the U.S., there has also been strong demand in niche crops, fruits, and tree nuts. And then in Europe, for niche crops, we see growth in the southern parts. Next would be herbicides for us, followed by fungicides.

Hi, good morning.

Good morning, Mike.

The $30 million in higher raw material costs that are baked into your guidance— is that exclusively related to the plant explosion that you referenced, or are there other factors that are worsening in China? And also, just wondering about the timing of that $30 million impact—will that be more of a Q3 or Q4 phenomenon or is it something you're seeing right now?

So first, yes, the $30 million there is exclusively due to the plant explosion where we had to procure some products under different types of contracts. Regarding the impact, the highest impact of the $30 million will be in Q3, and then about even between Q2 and Q4.

Hey, guys. Nice start to the year. When I take a look at your 2018 outlook, getting to 6% revenue growth to 15% EBITDA growth is pretty impressive given how high your margins are. Is that kind of the right operating leverage to think about the business going forward? And are there any major changes between the regions in terms of volume growth to EBITDA growth?

I think the numbers you're talking about are reflective of the kind of leverage we were expecting. Of course, you could see worse or better leverage depending upon the position. Remember that we are facing significant adverse costs this year which we are managing against with price increases. But that's the kind of leverage we could expect globally. Looking forward, particularly with an eye on 2021, we hope to maintain leverage in our operations, plus exit of TSAs where you could have even higher translation of sales growth into higher EBITDA growth and margin. So all in all, we don't believe there is anything out of the ordinary in the numbers we are producing, especially considering the adverse conditions we are facing. From a profitability standpoint across regions, Mark, do you want to add some words?

Yeah, you know, Mike, if you think back five to seven years ago, we used to talk about the disparity of our profitability across the regions. I can tell you today that with the portfolio we have and the way it's balanced around the world, profitability for FMC across the regions is pretty balanced. So that growth rate around the world as we see it really flows through to the bottom line. So don't think of any one region having a very high margin or a comparatively lower margin—they're pretty much balanced around the world.

Good morning. I had a follow-up on the pricing discussion. I am just wondering if—given the strong pricing and pricing outlook, is there any way you could parse it out by how much of that is just related to the FX paradigm as opposed to the cost issues that you and the industry are incurring? And then also, are there instances where your procurement flexibility and agility has translated into some share gains for particular product lines, whereas maybe your competitors might have been more affected by their sourcing of active ingredients or intermediates?

The first question was about pricing, FX versus raw materials. There is only one place in the world where the selling methodologies are accepted from both the supply side and the customer side, where there is a link to pricing and FX, and that’s Brazil. In Brazil, there’s an almost standard practice of linking pricing to currency; everywhere else in the world, it’s a negotiation. So if we look at it from a commercial standpoint, we consider that, outside of Brazil, it's about understanding when we face costs, whether from raw materials or FX. We do what we can in the places where we can afford to do it—increase price to decrease costs. There aren’t differentiating effects from raw material or other costs. In terms of procurement, I think what we do and nothing should be compared to what our competitors are doing because, in general, we don't exactly know what they do. But in Europe we uncovered in 2018 that supply disruption or issues are not things that cannot be managed. There are multiple sources of products in the world that are available if we have a very active supply chain and procurement organization. And yes, we've been highly focused, not only at fixing long-term problems by diversifying away from Chinese supply, but also by creating partnerships in our procurement organization and supply chain that are almost standby partners ready to step in as soon as we have any issues.

Thank you. Good morning. In the case your tolling partner's plant in China doesn't restart in the time you expect, what are the consequences? How can you describe the ongoing elevated costs and also could you potentially face limited availability of active ingredients?

I want to be very careful on what I say, because in no case should we substitute our sales to the Chinese authorities, but we have no reason to believe today that the plant will not restart. It’s a question of when. We have factored in the $30 million headwind as a very conservative forecast, indicating we believe the plan we have outlined for you guys from a financial standpoint is very achievable. We’re closely monitoring the situation, but right now we have no reason to believe it won’t restart. We have a lot of contingencies in place.

That's all the time that 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.