FMC Corp (FMC) — Q2 2023 Earnings Call Transcript

Thank you, Glenn, and good morning, everyone. Welcome to FMC Corporation's second 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 second quarter performance as well as provide an outlook for the rest of the year. 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 certain 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, net debt and organic revenue growth, all of which are non-GAAP financial measures. Please note that, as used in today's discussion, earnings means adjusted earnings and EBITDA means adjusted EBITDA. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website. With that, I will now turn the call over to Mark.

Thank you, Zack, and good morning, everyone. Our second-quarter results are detailed on slides 3, 4 and 5. Sales in the quarter were significantly impacted by a substantial decline in volumes across all four regions. During our first-quarter earnings call, we had already reduced our outlook for the crop protection market and thought that it would decline by low single digits this year. We now believe this is no longer a valid assumption. Considering the abrupt and intense destocking by growers in the distribution channel in the second quarter, we now expect the global crop protection market to contract by high single digits to low double digits. Even as on-the-ground consumption by growers remains at levels similar to last year and planted acres continue to grow in key geographies. Channel feedback indicates that the destocking actions are a result of three factors: first, higher interest rates have increased the carrying cost of inventory; second, there is increased confidence in product availability as the supply chain disruptions of the past few years have eased; and third, price reductions in fertilizers and nonselective herbicides have led to a wait-and-see approach to ordering. As a result, growers in the distribution channel are placing orders as close to application as possible. For FMC, the reduced volume led to second-quarter revenue that was 30% lower than the prior year and 28% lower, excluding FX. Despite the challenging market conditions, sales of new products introduced in the last five years remained resilient and were at levels similar to last year, which aided product mix and illustrates the value of our innovative portfolio. Branded diamides also outperformed the rest of the portfolio. Price increases were broadly implemented in the quarter with an average gain of 3%. While our newer products generally perform better on a relative basis, nearly every country reported lower volume compared to the prior year period, which illustrates the widespread nature of current channel dynamics. Turning to the regions. North American sales declined 25%, 24% excluding FX versus the second quarter prior year. Overall, volumes were down. However, new products introduced in the last five years grew 43% and comprised 28% of total revenue, a record for the region. Branded diamides, including Coragen MaX, also showed strong growth, primarily due to elevated insect pressure in Canada. Sales in EMEA declined 26% year-over-year and were down 24%, excluding FX. Stronger pricing in the quarter was more than offset by lower volume as destocking was compounded by adverse weather across Europe. Shifting to Latin America. Revenue declined 38% versus the prior year period as the region faced additional headwinds to volume from a historic drought in Southern Brazil and Argentina. In Asia, sales declined 29% and were down 23% organically. In India, excess rain in the North and delayed monsoon season in the South added to volume challenges from continued high channel inventory. Australia and parts of ASEAN were also impacted by adverse weather. Overall, EBITDA was $188 million in the quarter, down 48% compared to the prior year period, primarily due to the volume decline. Pricing momentum continued in the quarter. Costs became a year-over-year tailwind for the first time since 2020 as input costs continued to decline, and we closely managed spending. FX was a headwind to EBITDA in the quarter. Moving to the outlook for the rest of the year. Slide 6 shows our expectations for the second half. Overall, our second-half EBITDA guidance is in line with the guidance provided during our first-quarter earnings call as we expect the negative impacts from lower volumes to be modestly offset by lower costs. We expect second-half revenue to be slightly below the prior year period at the midpoint and are assuming that the channel's active inventory management will continue, especially in Q3. However, we expect destocking headwinds to be partially offset by new product launches and higher volume in Latin America in the fourth quarter. We are assuming growers will continue to order products closer to the planting season. Business fundamentals remain solid as grower consumption and product applications are expected to remain steady and planted acreage is projected to increase. We are expecting a low single-digit pricing benefit in the second half, with the majority of pricing actions already in place. FX impact is forecasted to be minimal. We are guiding EBITDA for the second half of the year to be $801 million at the midpoint, which is 16% higher than prior year results. The main drivers are expected tailwinds from lower input costs, improved mix from new products and a modest pricing tailwind, partially offset by volume headwinds. This is expected to result in EBITDA growth and healthy margin expansion. Slide 7 provides the quarterly guidance for the second half of the year. Volumes are forecasted to be more heavily weighted towards the fourth quarter as the recent hand-to-mouth inventory management is expected to result in growers and the distribution channel making purchases closer to the timing of applications, especially during the start of the planting season in South America. Our third-quarter revenue guidance at the midpoint is 11% lower than the prior year as destocking is expected to continue, resulting in a volume decline in the low-teens percentage. However, we are still projecting slight EBITDA growth at the midpoint as favorable input costs are anticipated to offset the revenue headwind from the volume decline. Fourth-quarter revenue is expected to be 6% higher at the midpoint versus the prior year, driven by the timing of orders shifting from the third quarter, product launches and additional acreage in Latin America. EBITDA and earnings per share are both expected to be 24% higher than the prior year at the midpoint, primarily from higher volumes and the positive mix impact from new products. Slide 8 provides the second-half assumptions for the outcomes at each end of our guidance range. The largest variable in the range is volume, which is closely tied to the duration of channel destocking. We are assuming a high single-digit volume decline and a low single-digit price benefit. Across the guidance range, we are confident in our cost discipline, and we still expect input cost tailwinds. However, we are aggressively managing our working capital in response to the current trend of order patterns, including adjusting production levels across our manufacturing lines. Many of our lines are currently not operating, which will result in some unabsorbed fixed costs. I will now turn it over to Andrew to cover cash flow and other financial items.

Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a 2% headwind to revenue growth in the second quarter, with the most significant headwinds coming from the Indian rupee, the Pakistani rupee, the Canadian dollar, and the Turkish lira. Looking ahead through the rest of 2023, we see modest FX headwinds in the third quarter with diminished impact in the fourth quarter. Third-quarter headwinds stemmed primarily from Asian currencies, particularly the Indian rupee and Pakistani rupee. EBITDA margin of 18.5% in the quarter was down more than 600 basis points versus the prior year period. Gross margin percent was up 200 basis points year-on-year due to input cost tailwinds, higher prices and favorable mix, but the steep drop in revenue and moderately higher operating spend resulted in a lower EBITDA margin. We are anticipating strong expansion of EBITDA margins in the second half with continued input cost tailwinds, mix improvement, pricing and operating expense discipline. EBITDA margins are expected to be up roughly 270 basis points in Q3 and 460 basis points in Q4, with full year 2023 EBITDA margin forecasted to increase by roughly 120 basis points despite the tough first half of the year. Interest expense for the second quarter was $64.5 million, up $29.2 million versus the prior year period. Substantially higher U.S. interest rates were the primary driver of higher interest expense in the quarter, along with higher overall debt levels resulting from elevated working capital. We now expect full year interest expense to be in the range of $220 million to $230 million, an increase of $15 million at the midpoint compared to our prior guidance. This increase is driven by higher debt balances due to elevated working capital levels. Our effective tax rate on adjusted earnings for the second quarter was 15%, in line with the midpoint of our full year expectation for a tax rate of 14% to 16%. Moving next to the balance sheet and liquidity. On May 15th, we issued $1.5 billion in senior unsecured notes in equal tranches of 3-year, 10-year, and 30-year maturities. Proceeds from this offering were used to retire the 2021 term loan and pay down commercial paper balances. After these financing actions and reflecting the results of the Company in the second quarter, gross debt was $4.7 billion at June 30th, up $470 million from the prior quarter. Gross debt to trailing 12-month EBITDA was 3.8 times, while net debt-to-EBITDA was 3.0 times. During June, as the magnitude of the channel inventory reset and its implications on our business started to become apparent, we entered into discussions with our bank group to amend the leverage covenant on our revolving credit agreement. We signed the final amendment on June 30th, which raises our leverage ratio covenant to 4.0 times through March 31, 2024, and 3.75 times thereafter. We believe this amendment provides us ample room to navigate through the current disruptions. Moving on to cash flow generation and deployment on slide 10. FMC generated free cash flow of $93 million in the second quarter, down $72 million versus the prior year. Cash from operations declined $64 million as a substantially lower use of cash for receivables was more than offset by negative cash flow impact on nearly every other line. Capital additions and other investing activity spending was up while legacy spending was down. With this result, year-to-date free cash flow at June 30th was negative $822 million, more than $300 million lower than the prior year period. This reflects the year-on-year drop in EBITDA as well as the impact on working capital of the current channel inventory reset. We returned $123 million to shareholders in the quarter in a combination of $73 million in dividends and $50 million in share repurchases. Between May 10th and May 17th, we purchased approximately 457,000 FMC shares at an average cost of $109.35. With these purchases, we now expect weighted average diluted shares outstanding to be approximately 125.8 million shares for the remainder of 2023. We reduced our free cash flow guidance to zero at the midpoint for 2023. This is a result of the decline in EBITDA, lower first half sales resulting in lower cash collection, and an expected pronounced decline in accounts payable in the second half of the year as we adjust production to balance inventory with demand. Adjusted cash from operations is now expected to be between $40 million and $370 million, down substantially versus the prior year. We slightly lowered our plans for capital additions and now expect to spend $125 million to $135 million as we continue to invest to support new product introductions. Legacy and transformation cash spending is expected to remain basically flat at the midpoint after adjusting for the benefit from the disposal of an inactive site in 2022. This guidance implies a rolling three-year average free cash flow conversion of 47%, well below our targeted 70-plus percent due entirely to the cash flow impacts of the channel inventory reset. While it's too early to comment in detail, we do expect cash flow to rebound as we move past the current disruptions. With the current year free cash flow outlook, near-term cash deployment priorities have changed. Free cash flow generated in the second half will first be used to pay the dividend, with remaining cash used to reduce short-term borrowings. We do not plan any further share repurchases this year. We will evaluate restarting share repurchases in 2024 as leverage levels return to targets. And with that, I'll hand the call back to Mark.

Thank you, Andrew. Before we open it up to Q&A, I want to remind everyone that we will be holding our Investor Day at our headquarters here in Philadelphia on Thursday, November 16th. In addition to interacting with our executive team and leaders, attendees will be updated on our new strategy going forward. To close, it is very clear that the market is performing in a fundamentally different way than we had forecasted at the beginning of the year. We are adapting to control tightly what is critical at this time, namely lowering our inventories of raw materials and finished goods to match the short-term demand, managing our internal costs, while at the same time, investing in our R&D pipeline for the future and finally, focusing on selling our newly launched products, which add real value to our overall profitability, as well as new products we have coming in Q4, especially in Latin America for soy applications. While we have not seen this magnitude of volume change across multiple regions simultaneously before, we have successfully managed through demand shocks in the past and have always emerged as a stronger, more profitable business. I am confident this will happen again, especially as we have the benefit of good grower demand for our products around the world. I'll now turn the call back to the operator for questions.

I'd like to revisit the changes since the May outlook. Mark, you noted that the volumes have shifted from low single digits to low double digits, despite overall consumption remaining flat. Has this affected your view on how much product was put into the market last year? Do you anticipate that channel inventories will be unusually low this year? Essentially, are there prospects for a significant volume rebound in 2024? Thank you.

Yes. Thanks, Laurent. Well, first of all, you can tell by the comments we made as we went through the quarter and especially from the end of May onwards, we really started to see a very aggressive deceleration of orders from around the world. Basically, any country that was in season was really reducing volumes. And this came, I think, through basically starting at the grower level. What we suspect now is that growers were holding inventory to levels that we have not seen before. And let's be clear, it's not normal for growers to hold inventory. It's not something they usually spend their cash on. So, our analysis today indicates that growers were holding excessive inventory. When retail went to sell to growers, growers basically said, 'Well, we don't need anything right now,' and of course, that starts to back up through a pretty complex supply chain until it comes to us. And we've seen this around the world. We've seen it through other players in the industry with their public announcements. You can tell that this is fundamentally a global reset of inventories. What we think happened over the last couple of years is that as supply disruptions made people nervous, inventory was being built through all these different nodes in the supply chain, and that has now been unwound. Now going forward, what do we expect? We do see that this phenomenon will continue in Q3, as we've said. And we're indicating we expect our own volumes to be down in the low-teen range across the world. We expect that to continue through Q3. Our assumption is that this will evolve as the seasons evolve. For instance, we do expect the growers in Latin America and South America, in particular, Brazil and Argentina, to begin placing orders, but they're going to be much closer to the planting season. That doesn't normally occur. We've talked about in the past that at this time of year, we have a certain percentage of orders on hand. That's not the same this year at all. We're expecting those orders to flow as we go through late Q3 and into Q4. Now, that's in Latin America. We expect the North American season, as people start to buy in Q4, the end of Q4 into the beginning of Q1, we'll start to see the same phenomenon. We won't see that in Europe until Q1 and into Q2 just because of the way the seasons flow. Asia is a little more balanced because we have both Northern and Southern Hemisphere. It's going to be a case of we expect inventories to start normalizing as we go into Q4 and order patterns to start normalizing. I have never seen this before. I've been in this industry for 12 years. I've seen pockets of this in Brazil in 2015, which was a totally different circumstance, but still a reduction in volume. This is everywhere. I think we only had two or three countries in the world where we saw increased revenue year-on-year; everywhere else was down. That tells you the magnitude of what we're dealing with.

Thank you. And you also mentioned the price declines in fertilizers and nonselectives as the reason, I guess, for growers to change behavior. In that context, what gives you confidence that you can avoid price cuts into the second half and into next year, in particular, given the context of variable cost deflation? I'm not aware of such a strong pricing discipline in the industry, but maybe especially for diamides, it might be a different story.

Yes. Listen, I think given the strength of the portfolio, and I just alluded to the fact that our products launched in the last five years were very robust in the quarter and have been so far this year. That's largely due to the type of products we're bringing that are differentiated. And with differentiation, you have the ability to hold price, which is what we're discussing now. Price in the second half of the year and in particular, into Q4, we pretty much already have in place the prices. Now it's a matter of managing through the disruptions and holding prices as we go forward, which we are confident in doing. Given the size of the new product introductions today, to put it in perspective, for you, in Q2, about 14% of our revenue came from products launched in the last five years. That was up from 10% in Q2 2022. It continues to grow rapidly. And when you look at the full year, as we think about the new products rolling into Q4, that number gets up to about $720 million year-on-year versus about $620 million the year before. So almost a 20% increase. That's the heart of the Company today. It is the new products we're introducing and the value they bring. Now, I did talk about new products in Q4 going forward. Very important in Latin America, we have two brand-new products that we're launching right now. One is an insecticide for soybeans; the other is a brand-new fungicide that will be traditionally launched on cotton first. Those are expected to be very valuable and large volume players as we go into Q4. So, it's not just price; it is the portfolio. We also talked about the diamides. Our branded sales of diamides performed well versus the rest of the portfolio. I think they declined something like high single digits versus our overall reduction of about 30%. That can't be said for our partners in the diamides, those we sell technical diamides to. We've talked about these partners before. They have been doing the same thing as everybody else in the industry, which is drawing down their inventories, which impacts our sales to them. That will come back next year; we have no doubt about that. We've talked to them, and they’re just managing their inventories like we are. You've seen a confluence of events playing out right now that will unwind as we go into 2024.

Mark, just given everything that's going on and I'd say the lack of urgency of wholesaler and co-op behaviors relative to the past few years, what do you think the probability is that some of your retail channels kind of overshoot to the downside in terms of inventories, just given healthy end market demand? I know perhaps that's not kind of the key focus right now, but just given how strong volumes are and once again, what's actually being sprayed, what are your thoughts on that within various geographies, but I'm asking specifically on North America. Thank you.

Yes. Chris, listen, I think you're going to see pockets of people overshooting inventory reduction. It's such a big industry. There are many different nodes to these channels. You could tell that the industry's ability to forecast what was coming, as we went down this curve, it's probably the same as we come out of this curve. I do expect to see places where inventory has been run down too much and will come back at a faster pace. There are other places where inventory was high and is being drawn down to what we would call more normal levels. It's such a large industry and complex supply chains that it would not surprise me to see that. I think you'll see it in North America just as much as you'll see it anywhere else. I don't think North America is in any particularly different shape. I would say Latin America, we expect to see the same phenomenon and certainly in Europe as well. We have seen public comments by major distributors in the U.S. about how they see their inventory levels reducing and how they expect to see that come back as we go through the next season. Overall, I think you're going to see both impacts: some people will overshoot, and some people won't.

Very helpful. Just as a quick follow-up, I know it's a bit early, but there will certainly be a lot of attention on free cash flow generation. Many investors are considering your rolling three-year averages, and how 2023 presents a slight setback in those longer-term trends. Perhaps either you or Andrew could discuss the key factors as we approach the end of 2023, keeping in mind that there can often be significant changes between the fourth and first quarters. How should investors generally view the longer-term outlook, especially in relation to anticipated improvements in 2024? Thank you.

Sure. It's Andrew. Thanks. The situation regarding free cash flow in 2023 is quite straightforward, even though it may be challenging and disappointing in the short term. We are experiencing a significant decrease in EBITDA guidance for the year, which directly impacts cash flow. Sales growth is expected in the second half, and since most of our sales occur during that period, we will not see collections for those sales this year, resulting in lower collections. As Mark mentioned in our prepared remarks, we are currently adjusting production levels across our operating lines. This means we are not making any purchases because we are not producing much; our inventory is sufficient at this time. Therefore, we anticipate a decrease of over $400 million in accounts payable by year-end. The reduction in EBITDA guidance by $180 million, combined with the $400 million decline in accounts payable, effectively eliminates the free cash flow we had projected for this year. Free cash flow can be volatile, and fluctuations between periods can happen quickly. However, we expect that as we transition to more stable conditions in 2024, free cash flow will rebound. We anticipate an increase in payables, a decrease in inventory, and a return to a normal collection cycle, leading to a better balance between the halves of the year. We remain confident in our long-term goal of generating over 70% rolling average free cash flow from this business. The rapid adjustments needed for this channel inventory reset this year have been too significant to manage within the six-month timeframe, but we are optimistic about the cash-generating potential of this business in the long run, and we expect to see a recovery as things stabilize.

I would like to understand that you mentioned farmer applications appear to be stable year-on-year. Can you elaborate on how you assess farmers' activities and your level of confidence in this? It’s important to understand farmers' actions, as that is crucial for determining how much of the volume decline is related to actual demand versus inventory reduction.

Yes, sure. I mean, there are different methodologies for us to gain insight into what is happening at the grower level. First of all is acreage that gets planted. Obviously, when you plant, you're using crop protection products. So, that's something we monitor around the world, and it's well documented. Many independent consultants track that. The second is there are other independent sources that we contribute information to, and the rest of the industry puts similar information in, and then you get an aggregate output which tells you what the market is doing. That's particularly strong in Brazil; it's particularly strong in the U.S., less so in Europe and less so in Asia. So, it's a couple of things: our understanding on the ground of what's getting planted and then what is being applied, along with third-party independent sources which are accessible to everybody.

Great. Thank you. And my follow-up is a little bit on trying to understand what's happening with your diamide partners. So firstly, you're talking about the destocking. So essentially, in your view and your understanding, is that diamide demand, whether it's branded products or from your partners, is holding up, but your partners like UPL are going above and beyond to lower their AI purchases firstly. And secondly, I think UPL specifically entered the U.S. market with its Shenzi product a few months ago. What is the impact for this to your own branded business in the U.S.?

Well, a couple of things. First of all, when we talk about supply and technical grade diamides to our partners, think of us as essentially a raw material supplier. So, they're treating us as a raw material supplier, the same way we're treating our raw material suppliers. It's a simple case that they obviously have demands on their inventories that they're having to reduce, and we are a part of that. We do that with our own suppliers and are doing it right now. You see that. From a demand perspective, we don't think their demand is slowing down at all, nor is ours, as we just commented on. To the second part of your question regarding competition in the U.S., we've seen competition for some time in many parts of the world with the diamides. What we do know is that our branded products and the new introductions that we’re making with new formulations are moving the needle. In other words, we're not selling the same products that we were selling five years ago. We're selling more sophisticated, higher concentration formulations to our current customers. So, where generics are coming in with a certain type of product, we're not selling those products anymore. We're offering something completely different. It's a case of our product life cycle management that we've been going through and has been bearing fruit in terms of how our product mix is changing for our branded diamides.

I'm wondering if we could talk a little bit just about raw material costs. Obviously, that was a good news story, supposedly start in the second half of this year and into next year. Just wondering, with the reduction in production on your end, and presumably others will have to do the same thing, should we be expecting more deflation, obviously, maybe not immediately, but as we move into 2024?

Yes, Vincent, good question. Let me just start it off, and then Andrew, if you want to talk a little more granularity on the cost side. Certainly, we've been anticipating and we expected lower costs as we go through the second half of the year. We started to see that in Q2, and we've talked about an order of magnitude difference in Q3, which we know is there. I would say generally in the industry, prices have come down and continue to come down. I think we're looking at perhaps a little better scenario than we thought at the beginning of the year. A lot depends on what China does. We're seeing a lot of shutdowns in China after they've been selling products at what we believe has been below costs. Obviously, you can't keep that going for very long. It will be interesting to see what happens to many of the Chinese producers who are probably in some significant financial issues right now. We expect that we will see the current level of lower raw materials and intermediate costs roll through into 2024. But Andrew, do you want to comment further on that?

Yes, certainly. I think, Vincent, you're spot on in that we are seeing improvement in costs as the pressures of the destocking hit every stage in the value chain. Despite the weak volume outlook for Q3, we still have substantial cost tailwinds in the quarter. In fact, the cost tailwinds are stronger now than what we anticipated three months ago. Some of the things that move more quickly through our inventory and into cost like packaging materials, for example, have improved. So, we actually are seeing improved costs. We saw better than expected costs in Q2. We're expecting stronger than what we had initially expected in Q3. I believe you will see continued benefits in Q4. So, these dynamics pushing back into the chain set up a very favorable cost position going into 2024. It’s a bit hard to look too far out to 2024 just yet, but from what we can see, we should start the year in a very favorable input cost situation.

Okay. And as a follow-up, I know with the reduced guidance when you pre-announced, it came with some incremental cost-out efforts that you were going to do. I would just like to get a better sense of what it is that you're doing and how you're sort of balancing the desire to improve your near-term earnings situation through this challenge and then obviously look for cash flow versus the last year or two; we've been talking about the very successful investments you've made in opening up new markets and doing things like that. How are you trying to balance? It's a very challenging period of time right now with ensuring that you're continuing to do the right things to invest in the growth of the business over the medium to long term.

Yes, Vincent, it's a very good point. I mean, we run this company for the long term. The Company is built that way in terms of our R&D and the longevity of that R&D pipeline. We're not cutting back on our R&D; it's very important to us. We believe the strength of that pipeline will drive the overall valuation of the Company over the long haul. So, we're doing everything we can not to slow down the projects in R&D. That doesn't mean we can't save costs in R&D from an operating standpoint, but we're not slowing down the main projects. That’s the important message. On the rest of the Company, we're really focused on the front end, the very pointy end of the Company, which is all our commercial groups and marketing groups that drive revenue demand. There are many things that we look at in terms of line items from a sales and general administrative perspective. That's where we're cutting back. So, we're cutting back in the short term on things that we know will not impact our customer intimacy and won’t stop us from getting volume or demand that's out there. We're really focusing on the customers. Everything from the customer back, we're doing everything we can to reduce that spend. Andrew, do you want to add anything?

Yes. I would just emphasize that we are controlling spending. We are going to be spending more dollars in R&D this year than we did last year. We're just not growing quite as fast. Similarly with SG&A. As Mark pointed out, we're not making any compromises on investing in the commercial operations of the Company and in expanding market access and building that closer intimacy with the customer. We are being very careful in metering our spending in other areas. This is something that we’ve demonstrated over the past couple of disruptions that have occurred over the last 12 to 15 years. We will be spending well below what we started the year planning to spend, but we'll continue to make investments that will drive the long-term future of the Company. Nothing that we're doing has any structural impact on the Company's ability to grow.

This is Lucas Beaumont on Josh. I just wanted to get back to the volumes, if we could. So if sort of I understood your comments earlier correctly, a chunk of the volume growth over the last two years was driven by customers ordering and it's basically going into inventory versus the underlying demand. If we kind of look then at your trends for this year in the last two over a kind of three-year period, you're basically in line with that sort of long-term low single-digit kind of volume growth rate. As we think about the setup for next year, does that mean that we should basically return to trend growth from this lower level and not really expect more of a rebound? How should we think about that? Thanks.

Yes, good question. I think your thesis is pretty close to how we think about it. Going forward, it's early August, and it's nearly impossible for us to think through to 2024 right now. We haven't even really started our budget process. But if I step back and think about the fundamentals of the market we're talking about, what do we see? We see soft commodities and grains at very good prices in the marketplace. They're not quite at the peak they were about a year, 18 months ago, but not far off and certainly well above the long-term average for these products. You look at the stock-to-use ratios; those have been trending down. Why? Because we've had yield issues around the world. Climate change is impacting agriculture, as demonstrated by what happened in Latin America last year with unprecedented drought in the South of Brazil and Argentina. We've had flooding in the North of India. We've got dry conditions currently in the Midwest U.S. and heat in Europe. All of these factors contribute to higher commodity prices and lower yields. That's a solid backdrop for someone to sell into. Fundamentally, we know there is demand. We recognize we have to increase productivity by about 3% a year to keep hunger at bay around the world. I think the backdrop is solid. We see acreage increases anticipated, especially in Brazil and other parts of Latin America as we go into the next season. So for me, it's hard to see what would change that positive outlook. It's a bit early to specify what our growth rates for next year would be, but I am expecting a positive backdrop as we roll through 2024.

Great. Thanks. And then just on the fourth quarter specifically, could you walk us through your margin assumptions that are getting to your Q4 guide? How much of that is from volume catch-up versus more normal trends? And how much do you expect raw materials to help there in the fourth quarter? Thanks.

It's Andrew here, discussing margins in the fourth quarter. Look, I think it's all of the above. We do have positive volume contribution. But remember, when we discuss volume, we include both mix and volume. It's a strong quarter for us for new product introduction. Mark mentioned two specific products for Brazil that we have very high expectations for. It’s a broad portfolio of newer products that will contribute to a more positive mix. We do have cost tailwinds. We have favorable input cost momentum that we expect to sustain in Q4. We also anticipate some modest continued pricing benefits. Now, it's not necessarily new price increases, but the year-on-year comparison from where we've raised prices to this point still applies versus the prior year. It’s a broad-based combination that really allows us to deliver what will be one of the strongest margin quarters in quite some time for FMC. But it is a combination of all these factors in the fourth quarter: input costs, volumes, operating expense discipline, and continued pricing benefits from actions we've already taken; all of these factors.

This is Dan Rizzo on for Laurence. Thank you for taking my question. I thought I remembered in 2015, 2016 that channel inventory destocking became a multi-season issue. I was wondering how things are different now and if that is somewhat of a risk to happen again.

Yes. In 2015, you might recall that was a particular event in Brazil. It involved both inventory issues, currency impact, and a scarcity of products leading into that. I think this is different in the sense that it's broader and it's happening much faster. The decreases we're seeing on a quarterly basis right now are much more extreme than they were before. The situation is different for us particularly because, while many people were impacted by the Brazilian event, there was a new seed trait introduced for soybeans in Brazil which impacted insecticides within a reasonably short time frame. That situation is certainly not present today in any way, shape, or form. I don't necessarily look back on Brazil as a proxy for what is happening today.

All right. Thank you. That's helpful. And then, have you guys kind of quantified what a headwind unfavorable cost absorption will be given the lower production levels you talked about in the second half of the year?

Yes. We haven't quantified that yet, partly because it's a changing situation. Based on our current operating levels, we expect some modest fixed cost absorption challenges in Q4. This is included in our guidance to be clear. It slightly offsets the input cost advantages we anticipate in Q4. However, it's too soon to determine how this might carry over into next year as it depends on our performance for the remainder of the year. We are carefully managing our inventories to align with current demand while also positioning ourselves to take advantage of any eventual market recovery. The situation remains fluid. Nonetheless, both our Q3 and Q4 guidance takes into account our expectations for any effects of unabsorbed fixed costs in these periods. For next year, it will greatly depend on how the rest of the year unfolds.

I wanted to clarify the differences in the second quarter sales decline and the trends you're observing in orders from your customers, where you supply diamides to other crop chemistry manufacturers versus sales directly into the channel. Are there any notable differences in the sales trends and the extent of the decline that we can identify, especially considering the changes in activity levels? This situation is unprecedented globally in terms of magnitude, and I'm curious if you're now a larger supplier to other manufacturers compared to the past. Has there been any significant change in the distinction between these two sales trends?

Yes. Listen, I think we just noted earlier that the branded diamides we were selling ourselves into the marketplace performed significantly better than the overall portfolio. That's a subset of new product introduction. In other words, the new branded diamides we are selling are very differentiated, which is what the market seeks. The sales to our partners, who utilize diamides for a myriad of applications, experience their own management of inventory as they see fit. There's no indication, as I said earlier, that their volumes to the end users are falling off. It's merely an inventory management perspective. I do want to emphasize that our own diamide sales, our own branded products are doing fantastically well, especially the recently launched products.

This is Paul on for Aleksey. Can you walk us through some of the adverse weather conditions you are seeing and where inventory levels stand in those regions? Thanks so much.

Yes. Listen, I just made a comment earlier about weather. In the first half of the year, we've experienced very difficult conditions in the South of Brazil and Argentina due to drought. Currently, we're seeing dry conditions in the Midwest of the U.S., with very dry conditions in Southern Europe as you go through Spain, France, Italy, Greece, and Turkey. We also have seen flooding in China, flooding in the North of India, dryness in the South of India, and dryness in Australia. The list goes on and on. We're facing more weather volatility than we've seen over the last year. All of these factors, however, are things we need to manage since mother nature does not align with our financial quarters. But it's certainly real, and in some countries, it is quite impactful.

Great. And as a follow-up, as raw materials and the logistics environment start to normalize, do you see the supply of more competitive products entering the market?

I guess, you mean from a generic standpoint. Can you elaborate a bit more on what you mean?

Yes, yes, from a generic standpoint.

Listen, generics play a major role in the marketplace. They have been around and are part of our reality. We don't necessarily compete directly in a lot of those markets. It's not to say the markets they occupy are not valuable; they are. However, we don't experience much generic pressure in a number of our product lines, primarily due to how we differentiate our offerings through either new active ingredients or new formulations. I expect the generic market to become more competitive, but we don't play in that space.

Great. Thanks. My question is, just from a bigger picture, you mentioned that the macro environment has changed the way your customers have been managing inventories. Has there been any change in terms of what you think about in terms of what the mid-cycle sort of earnings generation of the business is? Should we look at $1.4 billion as a good base to move from going forward?

Yes, this is a very good question. In November, we're going to give you a view of our world going forward for the next three years and then a longer-term aspiration. However, we've been clicking along at a fair rate of 5% to 7% top line, and 7% to 9% bottom line. We just performed a look back and we've outgrown the market anywhere from one-and-a-half times to two-and-a-half times over the last 20 years. We know we have a model and a portfolio that can deliver that type of growth. I do think that considering this year as a reset is a good framework, and then looking at how to bring the next generation of growth to the Company. I don't see it as a massive rebound next year; I don't think that's going to happen. I think the channel is learning the lesson on carrying the right amount of inventory. So, I think we'll reset this year and then move forward. We'll share with you in November what we think that potential new algorithm will look like in terms of top line, EBITDA, and EPS growth going forward.

Okay, great. And just as a follow-up, how has the biological business impacted the change in the market environment? Do you still see 7% to 8% CAGR growth for the next few years? I know we get an update in November, but any thoughts on that right now would be great. Thank you.

Yes. I mean, listen, I do not think there's a single piece of this crop protection market that hasn't been impacted in the same way, whether they are biologicals, micronutrients, or any product you are bringing to market. Everything has been influenced by this significant reset we are observing. Regardless, we still have expectations that our plant health business will grow above 20%. Our biologicals will continue to grow even faster. We'll keep seeing this acceleration as we invest more, particularly in R&D. We're seeing that continue. It's not something we feel has been adversely affected long term by this recent reset. If anything, it instructs us that having a broader portfolio will help us in terms of value moving forward. We do see plant health as a key focus going forward, and the biologicals should continue to outpace the rest of the Company by some degree.

This is Joseph on for Joel. To help get volumes moving again, would FMC consider increasing rebate programs in the second half to help pull forward some volumes from the first half of 2023?

Good question. There's always a commercial package to put together. Rebates in some parts of the world are a meaningful way we go to market, like in the U.S., but rebates aren't used universally. We consider all the tools we possess to ensure we're delivering value to the growers while also receiving appropriate value for FMC. If changes to rebate structures are warranted, we'll induce them, but these decisions will be made in the context of the value we're bringing.

Coming back to Q4, in terms of costs, are they essentially all locked in now, and how much of Q4 volume and price expectations are at risk, would you say?

Andrew, do you want to…

I'll chime in on at least the first part of that question. I believe the costs for Q4 are largely locked. There are items that move more quickly through our cost structure, particularly packaging items and logistics that we can continue to adjust as we move into the fourth quarter. Final mix actually does matter because the cost reductions we're seeing aren't uniform across every input or product we have. I have a high confidence in the levels of cost tailwind we're expecting in Q4, and most of that is pretty much locked in, just not quite all of it yet. As for price and volume in the fourth quarter, Mark, perhaps you want to expand on that?

Yes. Listen, price and volume will be as we’ve oft repeated, close to the quarter or during the quarter. It’s a bit early to dictate specifics at this point, but as we approach that time frame, we will know exactly how we’re operating and how the market moves. We certainly anticipate, as I’ve mentioned numerous times, that we expect orders to be placed very similarly to the planting season and that’s what we’re preparing for.

All right. No, that's it. Glenn, thank you very much. That's all the time that we have for the call today. Thank you, and have a good day.