FMC Corp (FMC) — Q3 2021 Earnings Call Transcript

Thank you, Chad, and good morning, everyone. Welcome to FMC Corporation's Third Quarter Earnings Call. Joining me today are Mark Douglas, President and Chief Executive Officer, and Andrew Sandifer, Executive Vice President and Chief Financial Officer. Mark will review our third quarter performance and provide an outlook for the rest of the year, as well as an initial view of 2022. Andrew will provide an overview of select financial results. Following the prepared remarks, we will take questions. Our earnings release, and today's slide presentation are available on our website and the prepared remarks from today's discussion will be made available after the call. Let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our earnings release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based upon these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, free cash flow, and organic revenue growth, all of which are non-GAAP financial measures. Please note that as used in today's discussion, earnings mean adjusted earnings and EBITDA means adjusted EBITDA. A reconciliation and definition of these terms, as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website. With that, I will now turn the call over to Mark.

Thank you, Zack. And good morning, everyone. FMC delivered record third quarter results. We grew our revenue by 10%, EBITDA by 12%, EPS by 17%, and importantly, expanded our EBITDA margins despite continuing cost pressures. Performance in the quarter was driven by broad-based volume growth and price increases. New products introduced in the last 12 months continued to gain momentum. And we are now forecasting sales from these products to account for more than one third of our revenue growth this year. In addition, FMC's plant health business had an excellent quarter with 40% year-over-year growth led by biologicals. Looking ahead, we continue to expect a strong finish to the year driven by high-margin volume gains and accelerated pricing actions, as well as a robust global market backdrop. I'd like to take a moment to acknowledge our operations and procurement teams for their contribution to our third quarter performance. The supply chain and logistics challenges highlighted in our last earnings call continued to disrupt AgChem and other industries around the world. FMC was able to meet the strong grower demand for our products in a timely manner, thanks to the work of these teams. Let me also briefly comment on COVID-19's impact on FMC. All our manufacturing facilities and distribution warehouses remain operational and properly staffed. Our research laboratories and greenhouses continue to be fully active. And we have resumed in-office operations in many parts of the world. FMC continues to follow all guidance given by local authorities. Turning to our Q3 results on slide 3, we reported $1.2 billion in Third Quarter revenue, which reflects a 10% increase on a reported basis, and a 9% increase organically. Growth was broad-based with 11 of our top 20 countries posting double-digit growth in the quarter. We had strong growth in all product categories led by greater than 20% growth in herbicides. This was partially offset by registration losses in EMEA and Latin America. Adjusted EBITDA was $293 million, an increase of 12% compared to the prior year period, and $18 million above the midpoint of our guidance range. EBITDA margins were 24.6%, an increase of basis points compared to the prior year, driven by mix improvement, as well as operational discipline and price increases in all regions. Adjusted earnings were $1.43 per diluted share in the quarter, an increase of 17% versus Q3 2020. The year-over-year increase was primarily driven by an increase in EBITDA with the benefit of share repurchases and lower interest expenses, largely offset by other factors. Relative to our Q3 guidance, the $0.12 beat was driven almost entirely by EBITDA. Moving now to slide 4. Sales in Asia increased 20% year-over-year and 19% organically driven by strong diamines sales across the region, as well as pricing actions. In Australia, we had a successful launch of VANTACOR insect control, which is the new higher concentration formulation of Rynaxypyr active. VANTACOR is applied to specialty crops such as chickpeas. The Australian market also benefited from positive grower sentiment, favorable weather conditions, and strong insect pressure. India had another growth quarter, despite an erratic monsoon, which resulted in dry spells in parts of the country. India's growth was driven by dynamite sales in rice, as well as continued expansion of the rest of our portfolio, leveraging our strong market presence. In Latin America, sales increased 11% year-over-year and 9% organically, driven by double-digit growth of insecticides in Brazil and Argentina, as well as pricing actions across the region. Corn, soy, and cotton were the key crops driving growth in the quarter. This is a direct result of our strategy to improve market access and increased penetration of our technologies, particularly in the Brazilian soybean market. July is another good example of this. Sales nearly doubled compared to this time last year as we leveraged our enhanced market presence. Health products grew approximately 50% in the region, led by biologicals and seed treatment. Latin America was impacted partially by registration cancellations and rationalizations of products in the quarter. EMEA grew revenue 12% and 10% organically, driven by strong demand for our herbicides and diamines across the whole region, despite headwinds from registration cancellations. Among others, Russia, France, Germany, and the UK grew double-digits in the quarter. Demand was especially strong for herbicide applications in cereals and oilseed rape. South Africa saw double-digit sales in the period compared to the previous year, driven by the continued penetration of diamines, mainly on citrus and top fruits. This is a great demonstration of the untapped potential in new markets for our diamines. Our U.S. and Canada branded business grew greater than 20% driven by strong demand for our diamines and fold herbicide applications, as well as pricing actions. VANTACOR had a successful introduction in the U.S. where it is used to target one pest in a range of crops, including soybean, corn, and cotton. The VANTACOR launch was timely and welcomed by growers who are battling extended fall armyworm pressure from the southern markets up through the middle of the country. Overall, North America sales decreased 6% year-over-year and 6% organically due to the continued shift of diamine global partner sales in the quarter from North America to other regions, as we have described in previous calls. Moving to slide 5, despite continuing supply issues across the industry, FMC's third quarter revenue increased by 10% versus prior year, driven by a 9% contribution from volume. Gross prices increased 1% in the quarter as our most recent pricing actions went into effect. EBITDA in the third quarter was up 12% year-over-year, primarily due to broad-based volume gains. We also had a $12 million contribution in the quarter from price increases as invoiced to customers. The benefit of our pricing action was masked in the quarter by some favorable rebate and other adjustments in the prior-year period that did not repeat this quarter. Costs continued to be a headwind; however, the total amount incurred in the third quarter was less pronounced than previously projected, mainly due to timing. We still expect second-half costs to be consistent with previous guidance. And FX was a $10 million tailwind in the quarter. Turning to slide 6, before I review FMC's full-year 2021 and Q4 earnings outlook, let me share our view of the overall market conditions. We continue to expect the global crop protection market will be up mid-single-digits this year on a U.S. dollar basis. Breaking this down by region, we continue to anticipate high single-digit growth in the Latin American market, mid-single-digit growth in the EMEA market, low to mid-single-digit growth in the Asian market, and low-single-digit growth in the North American market. We are raising FMC's full-year 2021 earnings guidance to the range of $6.59 to $6.99 per diluted share, a year-over-year increase of 10% at the midpoint, reflecting the impact of share repurchases completed year-to-date. Our 2021 revenue forecast remains in the range of $4.9 billion to $5.1 billion, an increase of 8% at the midpoint versus 2020. EBITDA remains in the range of $1.29 billion to $1.35 billion, representing 6% year-over-year growth at the midpoint. Guidance for Q4 implies year-over-year revenue growth of 19% at the midpoint on a reported basis, with no FX impact anticipated. We forecast EBITDA growth of 29% at the midpoint versus Q4 2020. EPS is forecasted to be up 41% year-over-year. Approximately three-quarters of the EBITDA growth is driven by the return of business missed in Q4 2020 due to supply chain disruptions in North America and weather impacts in Latin America. Turning to slide 7, and full-year EBITDA and revenue drivers. Revenue is expected to benefit from 6% volume growth, a 1% price contribution from higher prices, and a 1% benefit from FX. We anticipate continued strong volume growth led by Latin America, North America, and Asia. We have increased our forecast again for revenue from products launched in 2021. These sales are now expected to contribute $140 million in year-over-year growth, up from our last forecast of $130 million and our initial view of $100 million. Pricing actions in Q3 will continue to accelerate in Q4. We will continue to raise prices across all regions going into next year. Despite the shift of costs from Q3 to Q4, estimates for full-year cost headwinds have not changed since our detailed comments in the last call. This is why our full-year outlook remains unchanged. Moving to slide eight, and our full-quarter drivers. Revenue is expected to benefit from strong volume gains. In Brazil, the strength of soft commodity prices to projected increases in planted areas, as well as good weather conditions, are all leading to a good cadence of incoming orders and give us confidence in our expectations for a strong fourth quarter. In the U.S., channel inventories are normal for this time of year. Our new product launches are gaining significant traction and market sentiment supports our expectations for a robust fourth quarter. As I noted earlier, we have also moved on price increases with higher prices already in effect in the Brazilian and U.S. markets. Similar actions are underway in other countries across the globe, such as Australia, Russia, France, Mexico, and Argentina. And you should expect us to continue raising prices through the year-end and well into next year. Cost increases are consistent with our guidance for the second half. We continue to pursue cost improvement opportunities and remain vigilant with our cost controls, all without impacting our R&D pipeline or growth trajectory. I will now turn the call over to Andrew.

Thanks, Mark. Let me start this morning with a few highlights from the income statement. FX was a modest tailwind to revenue growth in the quarter as expected, with the U.S. dollar weaker against many key currencies, most significantly in Latin America with the strengthening of the Brazilian reais and the Mexican peso. Interest expense for the quarter was $33.1 million, down $2.4 million from the prior-year period, driven by the benefit of lower debt balances and lower LIBOR rates. We continue to expect interest expense to be between $130 and $135 million for the full year. Our effective tax rate on adjusted earnings for the third quarter was 13.5% as anticipated and in line with our expectation for a full-year tax rate between 13% and 14%. Moving next to the balance sheet and liquidity, gross debt at quarter-end was $3.4 billion, down roughly $400 million in the prior quarter. Gross debt to trailing 12-month EBITDA was 2.7 times at the end of the third quarter, while net debt to EBITDA was 2.5 times. Both metrics improved sequentially. Though still slightly above our targeted full-year average leverage levels, we expect to be at target leverage levels at year-end. Moving on to slide 9 in cash flow and cash deployment. Free cash flow for the third quarter was $300 million. Adjusted cash from operations was lower than the prior-year period, largely due to our decision to build inventory to help manage continued supply chain volatility and to be prepared to fulfill strong demand in the fourth quarter and in early 2022. Capital additions were somewhat higher as we continue to ramp up spending, following the deferral of projects last year due to COVID. Nearly 50% of this year's capital addition supports capacity expansion. Legacy and transformation spending was down substantially with the benefit of the completion of our SAP program and lower legacy spending. We are maintaining our expectation for free cash flow in a range of $480 million to $570 million with continued expectations for seasonally strong cash flow in the fourth quarter. We returned $262 million to shareholders in the quarter via $62 million in dividends and $200 million of share repurchases, buying back 2.1 million shares in the quarter at an average price of $95.26 per share. We have now repurchased just over 3 million shares this year, reducing our share count by nearly 2.5% since the beginning of the year. Year-to-date, we have returned $486 million to shareholders through dividends and repurchases. For the full year, we continue to anticipate paying dividends of roughly $250 million and to repurchase $350 million to $450 million of FMC shares. And with that, I'll turn the call back over to Mark.

Turning to slide 10, I want to provide an early look at the key dynamics underpinning our planning process for next year. We view 2022 as another year with a good micro environment, obviously, notwithstanding the impact weather can have on any single quarter. We expect the soft commodity pricing momentum will carry into next year with global demand for crops remaining healthy. As a result, we are assuming the overall crop protection market will grow in the low to mid-single-digit range next year on a U.S. dollar basis. FMC's growth will be driven by broad-based volume gains across our portfolio, pricing actions reflective of cost increases, continued expansion of diamine volumes in existing and new markets and further penetration of new products and expansion of our market access in underserved geographies. We expect cost pressures this year will persist well into 2022 as the industry grapples with global supply-demand imbalances, structural changes in China's industrial policy and energy supply, tight ocean freight capacity, and labor cost inflation. Taking all this into consideration, our current early thinking would suggest year-over-year revenue growth of 5% to 7%, EBITDA growth of 7% to 9%, and EPS growth at over 10%. In line with our long-range plan. We will share more detailed guidance for 2022 in our February call. To conclude our prepared remarks, the second half of the year is playing out as we forecasted. We executed very well in the quarter, not only from an external perspective in driving demand and pricing across all regions, but also importantly, internally by fulfilling that demand with products in a timely manner under challenging supply chain conditions. The only change in the second half is a timing shift of costs. And hence we're not changing our full-year guidance. The overall crop protection market fundamentals are positive and we remain confident in our ability to deliver our fourth quarter forecast. I'll now turn the call back to the Operator for questions.

Great. Thank you. So, given all the challenges FMC and everybody else in the industry is facing, on both raw material, supply chains and now transportation logistics, here today, where we stand, can you just give us an update on the market as the market adds into 2022 regional price initiatives and how you're ultimately poised to combat these challenges. Thank you.

Thanks, Chris. To unpack that. When we look at the market today and some of the dynamics that we've outlined in studies as we look forward to 2022. Why don't I take a look at the cost elements first and just what are we seeing? I think from a raw material perspective, raw materials are still staying high. But more importantly, it's not just the cost here that is causing, I would say the most sleepless nights as we go through the end of the year. I think we're starting to see some of the very large commodities come back a little bit, such as propylene and ethylene, which we believe will help the pricing and packaging because we've seen tremendous accelerations in packaging costs. I don't think that's necessarily going to help with the supply side in terms of how long it takes to get packaging that has been a big problem for us and many other people this year. I think the specialty chemicals continue to be disrupted. We are obviously seeing much higher prices in that area, but we're also seeing continued disruptions out of China.

A lot of people hear the latest news around the energy controls that we've seen in many of the major producing provinces. We don't see that going away particularly quickly. There are now diesel constraints in China related to the amount of fuel they have. So that's potentially going to constrict the movement of goods within China that could cause us problems as we go into next year. And then I think the last one really is freight. We continue to see tightness in ocean freight. I noticed a couple of the big ocean freight companies have released earnings and said, don’t expect that to change as we go through mid-year, next year into the second half of next year, we would agree with that. We think ocean freight is going to remain tight and availability will be somewhat spotty. So, I think the environment is pretty much what we expected with the exception of the potential for further disruption in China in Q1, as we go through Chinese New Year, and through the Winter Olympic shutdowns, we are planning for all of that, obviously. We've known about that for some time, but that doesn't mean to say there won't be disruptions. I think my view has changed from our August call where we talked about the potential softening of raw material prices and availability in the second half of the year.

I'm somewhat less confident of that now given how we're seeing things develop, so I'm taking a little more of a conservative view on raw materials and costs and availability as we go through our planning process. What does that mean for us from a demand perspective? Well, as I said in the script, demand is good. No mistake, Ag is pretty robust around the world. Our growth was very consistent across all regions. I think we'll see that continue next year. Soft commodity prices are robust; we see good demand for fruit, vegetables, and specialty crops around the world, which frankly is the vast majority of our portfolio. On the pricing front, we have been much more aggressive in moving prices in the second half of the year that's starting to bear fruit now. I think you've got to remember that the agricultural industry is a specialty chemical industry in general, and we certainly sell on value. This is not selling propylene or ethylene where prices move quickly. Now there are parts of the industry like the non-selective herbicides that do move quickly; they tend to be more formulaic, more generic. We don't participate in those markets. However, having said that, we have put mid-single-digit price increases into many countries in the world. They have been accepted and the orders are flowing at the new levels. We will take a look in Q1 of pricing again, see where raw materials are, and we will continue to move price in tandem to regain the cost impacts that we've seen over the last 12 months.

I apologize, but I appreciate the color. Thank you very much.

Hi, good morning. I would like to clarify something, Mark. I think I heard you mention that you expect a 10% EPS growth in 2022. Typically, your EPS doesn’t account for share buybacks. So, is that based on a $6.79 midpoint for this year, excluding buybacks, and does that require buybacks in the second half of this year and next year to achieve the 10% growth? Also, following up on Chris's question, if we look at the first half of the year, including Q1, you've noted some margin expansion in the third quarter and you’re anticipating a bit of margin expansion in the fourth quarter. Should we expect margin expansion in Q1 as well during the first half of the year?

Sure, Joel, I'll address the second part of your question first, and then Andrew can respond to the share account inquiry. When we examine our margins, you are correct that we have been improving them in the second half of the year, and this trend has been ongoing for the last three years. We anticipate higher raw material costs in the first half of next year, but we are implementing price increases. Additionally, we have the effects of new products we are launching. This year, we expect to generate about $140 million from these new product launches, which usually carry higher margins and will help enhance our overall margin. The first quarter this year was a low point for us, but I expect Q1 margins to be better than those from Q1 2020 and to continue on our typical upward trajectory for margins as we progress through the year. Of course, this is contingent on the fluctuations in raw material prices and our pricing strategy throughout the year. Andrew, would you like to share your thoughts on the share count and EPS?

I think Joel's absolutely right. When we give indications of EPS growth, that does not include any benefit from share repurchases. We haven't yet completed it. So, we're assuming and looking forward for next year of 10% EPS growth, that's just reflecting aggressive EBITDA change in items between EBITDA and Net Income and the benefit of the share repurchases that we are doing in 2021. We've done $300 million to date. Not all of which do you get that benefit in share count in the year that you do it. That feathers in over time in the weighted average share count calculations. So again, that 10% EPS outlook for next year, and look, we're still working to budget is not firm, but we certainly know nothing is built into that assuming benefit of any additional share repurchases in '22 as is consistent with the way we've provided guidance in the past.

Thank you.

You guys, thank you. Mark, can you talk through how you distribute your products in the distribution channels in Brazil? I ask because we understand there have been some changes in that channel. We have the formation on some big farmer buying groups, all of Syngenta selling through their own stores and some consolidation at the independent. So, is any of that making it more challenging to get price? And or is that comment you made a quarter ago about going after volume over price, has that changed now?

Yes, Steve, let me discuss Brazil and address your last comment. I mentioned that we see opportunities to increase volume globally with our high-profit products, which we have been doing. We were raising prices and not sacrificing price for volume. I want to clarify that. This can be seen in Q3, Q4, and it will be evident next year. Pricing is a crucial strategy for managing costs and foreign exchange, and we continue to leverage it, but volume is also significant for us. Regarding Brazil, there are three primary distribution channels: co-ops, which dominate the south as large farmer-owned entities; distribution and retail in the north and mid-regions; and direct sales to large growers, especially those focused on soy, corn, and cotton. These are well-defined channels. You're correct that changes are happening in the Brazilian distribution market, but we do not believe this will alter our perspective on the market. We sell through all three channels: direct to growers, distribution and retail, and co-ops. We expect this to remain steady in the mid-term due to the market's size and fragmentation, particularly in distribution and retail, and we don't anticipate these changes affecting our ability to either expand our portfolio with new products or maintain pricing in Brazil.

Thank you.

Thanks, and nice quarter. It looks like you're expecting 4% price in the fourth quarter in prices accelerating upward, I think so. How do I square that with the 5% to 7%, 2022 revenue growth? Will revenue growth be primarily price in 2022?

It will be a mixture, John. Obviously, you see where we are in terms of the mid-single digits. We do continue to see volume expansion as we go through next year. I think the 5 to 7 is a rough number today. As we said, once we get through all our analysis of where the volume flows out, we'll see where that sits. And then we will see what price ends up at the end of the fourth quarter and how that plays out for either future price increases in Q1 and Q2 as we go through the year. But it's too early to make that delineation between what's exactly price, what's exactly volume, and exactly how much of the top line is going to grow 5 to 7.

Yes, thank you. Good morning, everyone. Mark, I wanted to revisit a topic that Steve touched on regarding the volume growth of your higher-margin products. The discussion seemed to focus on emerging markets in Asia, particularly India. Can you provide any insights or updates on how you're progressing in terms of gaining market share for those active ingredients? Additionally, you mentioned several countries where you're implementing price changes in the fourth quarter, but I didn't see India included in that list. Could you clarify that or offer any comments?

No, I think when you have a 9% to 10% top-line growth, you're clearly succeeding in the marketplace, whether that's through pricing strategies or increasing market share in specific regions. Both of these factors are evident. India performed well for us this quarter, even though the monsoon conditions were inconsistent. Some areas, especially in the soy market, experienced very dry weather. We are implementing price changes across Asia, including India. The specialty markets in India are thriving for us. Our diamine portfolio continues to grow, capturing market share from older products that we discussed last time. Additionally, Southeast Asia is also performing strongly. Australia has proven to be a successful market as well, especially with the introduction of our new Isoflex Herbicide and the VANTACOR insecticide, which made its debut there. We've been adjusting prices in nearly every country globally as we transition from the third quarter to the fourth quarter, and you should begin to see the advantages of these changes as we head into early next year.

I appreciate the clarification. Thank you.

Good morning. Mark, I was wondering if you could speak to the cost shift from the third quarter to the fourth quarter. If I look in slide five, it appears as though costs came in $23 million lower than you had previously anticipated, and you'll have to back half unchanged. So, $81 million is the expectation apparently for 4Q. Maybe you just kind of help us understand what is going on there, and if the $81 million perhaps conservative given the experience in the third quarter?

Yes, thanks, Kevin. The situation with costs is relatively straightforward. There are two main factors I want to highlight. Initially, we expected some SG&A and R&D expenses to occur in the third quarter, but they are now anticipated to happen in the fourth quarter. This means that approximately half of the change is attributed to some ongoing R&D projects and additional SG&A expenses that we had planned for the third quarter. The second factor involves how some costs are reflected in our income statement. Andrew, would you like to elaborate on that from a procurement standpoint?

Sure. I believe, as Mark mentioned, it's a matter of balancing the timing of SG&A spending with COGS increases. Essentially, it’s a cost mix issue regarding what was sold and what came out of inventory this quarter compared to our initial guidance. The costs we are observing in our inventory, particularly with the increase in inventory, are evident year-over-year and sequentially on our balance sheet. However, these higher costs are flowing through the profit and loss statement more gradually than we had expected. The $81 million headwind for the second half seems accurate for us. We are investing in R&D and various field trials to support our long-term development pipeline, while SG&A spending is also critical for driving sales growth. The COGS is currently in inventory and hasn’t yet impacted the profit and loss statement. With strong volume growth anticipated in Q4, we expect to see that change.

Perfect. Thanks very much.

Thank you. Good morning, everyone. Maybe Mark, you could discuss or compare and contrast the South America and operating environment looks a lot healthier this year versus last year, just given the much better start to the planting season, which generally pretends to good news for the second crop and so forth. So, we also have higher coffee and sugar prices. So are you seeing better demand than maybe anticipated a few months ago when we didn't know how that was going to play out? And are you more optimistic about 1Q or sort of 4Q, 1Q as a result?

Yes, thanks, Vincent. Listen, Latin America, you're right. I mean, the planting season is underway. It's much better than it was last year. The rains came at the right time. Last year, we had very dry drought weather which impacted the industry. This year we're not seeing any of that. I think on the back half as you just said, very good commodity prices and a lot of people concentrate on soy and corn. But you highlighted sugar is very high at $0.19, which is a good number for sugar. Coffee is high. More importantly for us, cotton is high as well. And if you remember, early in the year we talked about how we were thinking about the cotton business acreage declining in the '21 to '20 season by about 15%. We're expecting and we're seeing that coming back as we said earlier in the year, so the '22, '21 season will be very robust; price is high, demand is coming back after COVID. So, all of that is very positive. I would say, don't focus just on Brazil. Argentina is also a very important market for us now. It is well in excess of $200 billion. I think it's our fourth largest country now in the world. We have a good portfolio on soy and cereals in Argentina. Denmark, it is also moving in the right direction better than it did last year. And then the rest of the region not to be missed for us is Mexico. Mexico is a very important country for our specialty products on specialty crops. We do a lot of business on corn, on fruit and vegetables. There is tremendous business for us on avocados, those types of high-value commodities. Mexico is growing well, season is going well there, the weather conditions have been good. So yes, I would say overall, Latin America feels much more robust than it did this time last year, and that's how we felt it would play out, and so far, so good.

Good morning, everyone. Can you discuss the outlook for diamines in 2022? What kind of growth are you anticipating, especially with the new products? Additionally, how much of that growth might stem from the licensing agreements you have established over the past few years?

Thanks, Mike. Yes, diamine, so we've talked in the past about our growth algorithm and how we're in the 9-high single-digits, low double-digits range, year-in-year-out. I would expect that type of number next year as well. We are seeing traction with all the agreements that we put in place. We're not going to split out on a regular basis what we're selling to the partners versus what we sell ourselves. But periodically, we'll give an update on how that's playing out, but the growth is good. I think you highlighted one area which is the new formulations, the VANTACOR launch that we put in place. This is a very, very novel formulation. It is much higher concentration. Therefore, it's easier to use. It's very easy to disperse in other mixers as growers use it. We've already seen tremendous traction in the two countries we've launched. There'll be more countries launched next year on VANTACOR. We expect that new formulation to cannibalize and grow the market for us. So, some of the old Rynaxypyr formulations will disappear, and VANTACOR will continue to take that business, but also grow the overall market share. And then there's some other things we have planned next year for product launches. So, diamines continue to be successful. I think a lot of people who think about the diamine is focused on Rynaxypyr. We're also seeing a lot of growth on Cyazypyr. It was launched slightly behind Rynaxypyr. It has a slightly different mode of action. It covers a different crop spectrum. And we're now starting to see that product really move on the specialty crops. We're seeing significant growth in Europe, parts of Asia, really the two markets we're focused on. So, we like the prospects for Cyazypyr. It's not to say that for Rynaxypyr doesn't continue to grow; it does and it will do. But I think Cyazypyr over the next couple of years will come into its own.

Got it. Thank you.

Hi, good morning. You noted that the North American business would have been up around 20% or more if we adjusted for the diamine partner sales. Can you talk about some of the underlying drivers in that North American business for the second half, if there's some inventory restocking going on from share gains, or are we really just lapping some of the disruption that we saw in the prior year? It seems like there are a lot of moving pieces, and I was hoping you could help us parse those out. Thank you.

Yes. Certainly, you won't see us fully recover until we complete Q4. Last year's Q4 in North America was not strong, so you'll see that recovery happening then. The real momentum in our North American business comes from how we are evolving our product portfolio. We've previously discussed our preemergent herbicides, particularly the authority brands, which have historically supported our growth in this region. Although our preemergent business is still growing, it is becoming a smaller part of our overall offerings. Our growth is being fueled by the introduction of new products. Last year, we launched Lucento, a more specialized fungicide, and Xyway, an innovative in-ground fungicide for corn, a segment where we had not previously operated. This is a significant market opportunity, and Xyway has already surpassed our expectations in its first year. We have ambitious growth plans for the 2022 season. Additionally, we've introduced insecticides like Elevest and VANTACOR in the U.S. that cater to specialty crops. The growth we're experiencing in North America is not driven by inventory restocking but is instead a result of our shifting portfolio and the introduction of new products. We remain optimistic about our prospects in North America next year, as the market is strong. When launching products in a thriving market, we anticipate continued growth, which we are currently observing.

Good morning. Thank you. I'd like to delve deeper into the challenges related to sourcing raw materials and packaging. Despite the heightened focus on these issues across the industrial sector, and the increase in costs you are experiencing, it appears you still achieved commendable organic growth in the third quarter, and the projected organic growth for the fourth quarter remains consistent. This suggests that your volumes haven't been significantly constrained by disruptions. Is that an accurate assessment? Additionally, could you provide more insight? Do you believe you're outperforming others in the industry, or does your more balanced geographic presence play a role, particularly since challenges seem to be more pronounced in North America? I would appreciate more details on this before my follow-up question.

Yeah, listen up. I don't want to make it sound like it's easy because it is not. And every company in this pace is going through the same things, we face similar disruptions. It may be in different parts of the portfolio for different people. But I think we all have inherently the same fundamental issues that we're dealing with. Now, we do have a pretty good network around the world. Our reliance on China has dropped dramatically over the last 5 to 7 years. I think today we're at about 45% reliance on all intermediates, fine chemicals, and active ingredients. That's way lower than it used to be for the traditional FMC AG business when I joined way back in 2012. So, I think that's one aspect. We have lost sales over the last 6 months in terms of looking at the portfolio and where we couldn't deliver, but I think with a strong portfolio, we did correct our inventories as we went through this year. We have built inventories, and Andrew can talk about the impact on working capital there. But I think we've tended to weather it rather well, but make no mistake, I think we've left revenue out there that somebody else has probably picked up. It's not significant; it's in the tens of millions of dollars, but it's still business that we could've had that we've missed. So, we're not immune to this by any means, and I expect that to continue as we go into next year.

Sorry?

You mentioned that you're reliant on China, which is down by 45%. It seems like you may have gotten a head start compared to the broader industry, possibly due to some prior rolling blackouts and the proximity of your active ingredient plant to an explosion a few years ago. I'm curious about your strategy for diversifying your supply chain moving forward. Should we anticipate further diversification on your part? What are your thoughts on this in relation to your strategic growth goals? Thank you.

We have been focused on a strategy for nearly six years since acquiring the Cheminova assets in 2015, aimed at diversifying our supply chain and manufacturing footprint. This effort continues with the capacity we are adding for new molecules in Denmark and India. We will keep expanding our active ingredient production capabilities through our own operations, with manufacturing already established in the U.S., Puerto Rico, Denmark, and India. Six years ago, we had little to none of this. Our strategy has evolved to become more diverse with additional manufacturing points. On the registration front, which is a significant aspect of our operations, we ensure we have two or three different manufacturing sources for new products, allowing us to adjust our manufacturing locations as needed based on registrations. While some companies are more reliant on China than others, I feel confident about our current standing. I believe it is unrealistic to expect complete independence from China due to the scale of its specialty chemicals industry. The key strategic challenge, particularly for us, is to minimize reliance on this dependency to improve our comfort level. We are making progress and expect to advance further in the next couple of years, and I believe we are on the right path, which has certainly been beneficial for us.

Thanks for the color.

Great. Thanks for taking my question. Congrats on a nice quarter there. I guess the first question is just on COVID. Last year you had some impact, North American Logistics in Q4. I would imagine that potentially there had been some impact as well in Asia more recently. Could you verify if that's the case and then also maybe in Latin America, what you're experiencing as it relates to COVID down there. Thanks.

Thank you, Arun. There are two main impacts to consider. First, the supply side, and second, the demand side. Regarding supply, we've become accustomed to operating in emergency conditions over the past three to four years. As mentioned earlier, we've dealt with explosions in China, changes in environmental policies there, and the effects of COVID along with associated freight and manufacturing challenges. In the last six months since our last call, nothing has fundamentally changed in terms of supply. There are still issues, such as the energy power situation in China, which is causing disruptions, and we will see how that unfolds as we approach winter. From the demand perspective, we don’t frequently discuss this, but I would note that during the third quarter, and perhaps late in the second quarter, the only region where we encountered demand issues was Southeast Asia. There have been more lockdowns in countries like Vietnam, parts of Indonesia, the Philippines, Malaysia, and Thailand than in any other regions, which made market access challenging, resulting in some demand reduction, though not significantly. In Brazil, we did not experience similar issues. Many growers are well-prepared for this growing season, with a substantial workforce present and vaccination rates in Brazil are high and steadily increasing. We are more optimistic about Brazil from a COVID standpoint heading into the 2022 season compared to the 2021 season. While there were disruptions, they are manageable, and we will continue to address them as needed.

Okay. Thanks for that. And as a follow-up, maybe I can just ask about cash flow. So, as you move into '22, what are some of the buckets that you would envision that could push that 525 or so, midpoint for free cash flow, but higher, is working capital a potential leverage just given the cost inflation that you've experienced this year? Thanks.

Thanks, Arun, it's Andrew. I believe you're touching on some of the discussions we're currently having during our budgeting process. For free cash flow growth in 2022 compared to 2021, the primary driver will be the increased profitability of the business, with EBITDA growth being a significant factor. Regarding working capital, our long-term goal is to enhance working capital efficiency, although for 2022, we plan to maintain some safety stock due to the volatility in the supply chain. As you've noted, our Balance Sheet shows a considerable year-on-year increase in inventory, which is affected by cost inflation and strategic choices to hold extra inventory for certain product lines experiencing supply chain fluctuations. At this time, we haven't fully assessed the working capital implications for 2022, but our long-term aim remains to improve working capital to boost free cash flow growth. As for capital expenditures, we anticipate maintaining an investment pace of about $150 to $200 million annually, primarily for capacity expansion to accommodate new products, as well as for diversifying our production base and relocating certain ingredient manufacturing outside of China. Concerning legacy and transformation, we've mostly completed our transformation efforts, including finishing our SAP implementation at the end of last year, with only minor cleanup needed early this year. We do not foresee significant future transformation spending or growth in legacy expenditures, although we may experience year-to-year variability in spending. These are the main points. It may be too early to provide detailed insights into potential free cash flow, but we are committed to driving its growth and improving cash conversion as we progress. Thanks.

Good morning. Just a question in terms of the buying behavior of your customers. Are you seeing a change in their attitudes towards wanting to procure more inventory and being a little bit less price-sensitive in this type of environment? And then secondarily, if you do have customers that are looking to make purchases, are you willing to extend more credit for them to get inventory in place or how are you handling if there are any timing shifts? Thanks.

Listen, I don't think we're seeing a fundamental shift of how distribution retail or direct growers buy. I think there is an acknowledgment out there in the marketplace that in some cases for products that are absolutely needed. It's not just the price, it's availability. So, there's certainly a desire for people to make sure that as they enter their season, that they have material available. Doesn't mean to say that we, FMC, we're not seeing a tremendous amount of what I would say forward buying in Q3. All the growth was related to products that went on the ground in that quarter. So, think about full herbicide applications in Europe on cereals same thing in North America, insect pressure in North America early in the quarter was strong. So those types of things are what are driving the growth. It'll be interesting to see how the market evolves for the U.S. as we go into the buying season, which is effectively now getting ready for the season. I do think that recognition is strong that some materials are not going to be available in the quantities that are needed. And some people are going to miss out on that. So, price in certain areas is always important, but in others where it's high value and you absolutely need to protect those crops, then yes, I do see people buying to make sure that they've got product in that channel, in their warehouse when they needed. But we'll see how that develops through the fourth quarter into the first quarter. We may see similar behavior as we go into the European season, which really kicks off in Q1.

Alright, thank you. Thank you for that, Mark. That is all the time that we have for the call today. Thank you. And have a good day.