Good morning, and welcome to the Second Quarter 2021 Earnings Call for FMC Corporation. This event is being recorded, and all participants are in listen-only mode. [Operator Instructions] After today's prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mr. Michael Wherley, Director of Investor Relations for FMC Corporation. Please go ahead.

Thank you, and good morning, everyone. Welcome to FMC Corporation’s second quarter earnings call. Joining me today are Mark Douglas, President and Chief Executive Officer; Andrew Sandifer, Executive Vice President and Chief Financial Officer; and Zack Zaki, FMC’s new Director of Investor Relations. Mark will review our second quarter results, provide our outlook for 2021 and discuss our diamides business. Andrew will provide an overview of select financial items. Following their 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 SEC. 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 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 you 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, Michael and good morning, everyone. Our second quarter results, revenue up 8%, EBITDA are up 2% and EPS up 5% year-over-year, or slightly ahead of our guidance. These results were fundamentally driven by volume, reflecting robust demand for FMC products around the world. Innovation continues to be a catalyst for growth. New products introduced in the last 12 months contributed $30 million in sales growth in the quarter. And our plant health products including biologicals posted Q2 sales growth in the high teens. We continue to expect a very strong second half of 2021, driven by robust volume growth. We have lowered our full-year earnings guidance due to the continued acceleration of raw material, packaging, and logistics costs. We will go into this in more details later. I'd like to take a moment to provide a COVID-19 update on our business. All our manufacturing facilities and distribution warehouses remain operational and properly staffed. Our research laboratories and greenhouses also have continued to operate throughout the pandemic. We are resuming in office operations where permitted by local authorities. And in June, we introduced flexible work arrangements to facilitate the return of all our staff to our headquarters in Philadelphia, as well as some other locations in adherence with local guidelines. We continue to have zero transmission of the virus in our facilities. But I want to acknowledge that we have lost employees to the pandemic and our employees have also lost family members. Thankfully, that number of affected employees has been small. Our thoughts are with employees that have been impacted directly by COVID-19. And we are thankful for everyone who continues to work safely at FMC. Turning to our Q2 results on slide 3, we reported $1.2 billion in second quarter revenue which reflects an 8% increase on…

Thanks Mark. Let me start this morning with a few highlights from the income statement. FX was a stronger than expected tailwind to revenue growth in the quarter at 4% versus our expectations of a 1% tailwind as the US dollar weakened against all major currencies relevant to FMC. Interest expense for the quarter was $32.6 million, down $8.1 million from the prior period driven by the benefit of lower LIBOR rates and lower foreign debt balances. With continued low-interest rates, we now expect interest expense to be between $130 million and $135 million for the full year. Our effective tax rate on adjusted earnings for the second quarter was 13.5% as anticipated and in line with our continued expectation for the full year tax rate. Moving next to the balance sheet and liquidity. Gross debt at quarter end was $3.8 billion, up roughly $200 million from the prior quarter. Gross debt at trailing-12-month EBITDA was 3.2 times at the end of the second quarter, while net-debt-to-EBITDA was 2.6 times. The difference between gross debt and net debt metrics is much larger than usual this quarter as we had significant cash that we were not able to return to the United States prior to quarter end. We are exploring repatriation alternatives for this cash in the third quarter. Both leverage metrics were above our targeted full year average leverage levels due to seasonality of working capital and will improve through the remainder of the year. Moving on to slide 9 and cash flow and cash deployment. Free cash flow for the second quarter was $204 million, essentially flat to the prior-year period. Adjusted cash from operations was lower than the prior year period in large part due to timing changes of certain tax payments. Inventory was higher reflecting the accelerating…

Thank you, Andrew. Today, we'll provide an update on the progress of our diamide growth strategy. Since we launched FMC as a pure play agricultural science company, diamide has been a core part of our business. Our next appearance [indiscernible] have grown to be almost 40% of FMC sales today. Turning to slide 11 and some basic data on the insecticides market, which has grown by 83% from 2007 to 2019 and there's approximately $17 billion in value today. Following the broad crop protection market drop in 2015, insecticides have grown 2% per year. We expect this to accelerate in the next decade to about 3.3% compound annual growth rate. As higher value technologies take more share from older insecticides that are being phased out by regulators. We believe by 2030, the insecticide market will expand by about $7 billion versus 2019 to $24 billion in total. Moving to slide 12, we show the year-by-year revenue of the major insecticide active ingredient classes from 2014 through 2019 as reported by AG Bio investor and the respective share gains and losses over the period. FMC diamides or [indiscernible] make up well over 80% of the entire diamides class which includes a few other smaller active ingredients. Our diamides have grown to be about 10% to 11% of the total insecticide market and the total diamides class has gained 2% share from 2017 to 2019 to reach 13% of the total insecticide market. Conversely, organophosphate and Conversely, organophosphates and neonicotinoids have lost overall share. Turning to slide 13, we show the geographic breakdown of our $1.8 billion in diamide sales in 2020. This is all Rynaxypyr and Cyazypyr sales and includes FMC sales of branded products and sales to our partners. Asia makes up nearly 40% of our diamides business today with…

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Steve Byrne with BMO. Please go ahead.

Yes. Thank you. And just a shout out to Mike. We appreciate all the help over the years. Mark, I wanted to drill in a little more on the diamide outlook. I appreciate the detailed update on the IP strategy and partnership and so forth. But we'd like to hear your views about the competitive landscape.. What are the primary products by region or crop that you can comment on that the diamides are really down in the trench competing with? And the reason I ask is that the biggest bucket is the neonics and the top two in that category are being banned by Europe. And I don't know whether you think that could spread to other regions. And then in our next big bucket is the organophosphates and the number one in there is [indiscernible] and we think the EPA could ban that in the next two weeks. And so, whether that could expand as well, I would like to hear your view on that. But more importantly, what are those actions mean for the competitive landscape for your diamides?

Yes, Steve. Thanks for the question. I think you're hitting on something that I think you're hitting on something that I sort of touched on in the script when I said that part of the growth of the future of the diamide is going to be how that insecticide landscape changes. And you're right, neonics are under pressure; organophosphates, some of them are certainly under pressure; and some of the pyrethroids as well. So when you look at those major classes of chemistry, we do believe that either the diamides as they are built today and formulated today will take share in certain parts of the world from all of those three classes. But more importantly, I think the way we're going to formulate and our partners are formulating these products, I think you'll also see that accelerated market share gain against those three classes of chemistries. And, by the way, there are other chemistries out there as well that are older. Those are just happens to be the big ones. So part of the growth is going to be that share gain. And we've already seen that. You can see that the diamides are growing strongly as some of the other technologies are declining. I don't see that slowing down. In fact, for everybody that watches this space, you can see the regulatory environment is getting tougher and tougher. That bodes well for the diamides. And, frankly, for the next set of insecticides that we will launch over the decade out of our new pipeline. So, very strong growth expected. And, yes, some of it will be against those different types of classes of products.

Our next question will come from Adam Samuelson of Goldman Sachs. Please go ahead.

So I was hoping to maybe dig a little bit on the revised outlook and maybe, A, provide -- if you can provide a little more color on some of the sources of incremental cost headwind that you're seeing and kind of the risks or likelihood that that actually will leak further into 2022. And then corollary to that is the pricing actions that you’re taking which on a net basis, it seemed a little bit more modest than you might have thought a few months ago. And really looking back over the last couple of years when I look at price, FX, and cost kind of all three FMC that that's still on a multi-year basis still a full negative numbers. So, just help us think about how you would frame that on a go-forward basis and how maybe the approach to pricing for cost and FX maybe needs to evolve if at all beyond 2021.

Yeah. Thanks, Adam. There's a lot wrapped up in that question. I'm going to try and tackle it with a few different angles because there's a few things that are connected here. First, when you look at what we've said on the cost side, in our February guide, we had about $90 million of negative cost. And we're now up into the 150-plus-million-dollar range. As we've gone through the first half of the year, we've continued to see that many of our raw materials from not only a cost standpoint but from an availability standpoint which ultimately does drive the cost have started to increase and not slow down. This started with the wave of the commodity changes that we saw due to various issues around the world whether it was the Texas freeze or other things in China. And that has now spread into the intermediates and the fine chemicals. So, we're seeing this wave continue through the business. And we took the decision without procurement groups and the commercial groups with what we saw coming, we felt it was the most prudent way to forecast the rest of the year from a higher cost perspective. So, we see the second half of the year cost is significantly higher than the first half. We had about a $55 million cost headwind in the first half of the year. We’ve got approximately a $96 million to $100 million headwind in the second half. Now you have to put that in the context of what is happening in the overall marketplace in terms of volume. If you look at our volume growth, we have increased our volume expectations for the year on the back of very good demand for our portfolio. And we're seeing that pretty much across the world. I…

Okay. All right. Thank you. I'll pass it on.

Our next question will come from Laurent Favre with Exane BNP. Please go ahead.

Thank you and good morning, all. Mark, I've got a question, I have 10 questions on but just for one. On slide 13 and 14, I was wondering if you could talk about how you guys think about the focus areas for FMC branded diamides and the power [ph] in terms of areas of incremental growth. So i.e., therefore, geographies or crops. Are there areas where you think you can drive the growth better than the partners and vice versa? Can you elaborate a little bit on that, please.

Yeah, sure. So if you think about -- if you think about the Rynaxypyr and Cyazypyr, you look at the chart, the donut chart on slide 13 on the far right-hand side. We've given a breakdown of our diamide sales by crop. It's very different for Cyazypyr. Cyazypyr is almost 100% fruit and vegetables, at this point in time. So for Cyazypyr, which is growing very quickly. It's now just north of $300 million in 2020. It’s growing well this year. I think the fruit and vegetable market for Cyazypyr has a long way to go. When you think of the size of that business not only in Asia, but in places like Mexico where we're growing strongly, we're seeing Cyazypyr take share. I think the other aspect that I would highlight is that a lot of our business today is not in brand new formulated products. It is in the active ingredients that's formulated to be used. Our partners and does now are branching out with pretty sophisticated formulations that take us into new spaces. So it's not just a crop perspective, it's a pest spectrum. For instance, our Elevest formulation in the US. It is a Rynaxypyr plus bifenthrin which is a pyrethroid. The pyrethroid gives you very fast knockdown of insects. So you have a different mode of action which enhances the use of the Rynaxypyr. It's those types of activities that not only FMC is doing, but many of our partners are now formulating and getting registrations for formulations that we don't have. So I think of it as the fruit and vegetable market. I would say expansion in Asia, parts of Latin America, and then I would also say Eastern Europe, Mid East, Africa for Rynaxypyr as well. So you can tell by the way we think about this. There's an awful lot of growth left in and not only how we formulate the products, but the geography and the crop and the pest aspect. I hope that helps a little bit, Laurent.

Thanks, Mark. And as a follow-up to Steve's question, you should think about the long range forecast on neonics and organophosphates market share losses. I mean, would you assume that on average, that 1% share gain for diamides is directionally correct on average for the next well through the end of this decade? And I appreciate the linear progression but…

Yeah. You’re right. It's not going to be linear. I mean, you have products that lose a registration. So in any one year, you could have an acceleration of other products, replace them. Certainly, when I think about where we are today in that 12% to 13% range, over the next decade we should be adding another 300 to 400 basis points of market share as the market grows. So you don't only take in the current market, you're taking growth in the extended market. And that's one of the reasons why we see this robust growth. And it's not just FMC that sees that robust growth. Our partners see it too. That's why they're investing early to get into this molecule ahead of patent expiration as we go through the decades so that they can build their positions and take share in these other chemistries as well.

Our next question will come from Mark Connelly with Stephens. Please go to.

Thank you. Mark, you sound very bullish on LatAm despite the disappointments we've had in the last year and whether that doesn't look all that great. And I know Latin America is more than Brazil corn and soy. But can you help us understand how the pieces down there are fitting together this year and where the risks are if the weather stays disappointing? I'm thinking from an FMC portfolio perspective, how different is this year actually shaping up than last year when Brazil did disappoint?

Yeah. Thanks, Mark. So you're right. We tend to focus on Brazil, but let's be clear, we have some other large pieces of business that are growing very rapidly in Latin America. And I would single out Mexico, where we're seeing extremely strong growth on all the fruit and vegetable complex as well as on corn, not just with the diamides, but with our other herbicide products as well. And as we grow our -- start to grow fungicide portfolio, Argentina is becoming a very important country for FMC. We're well north of $200 million in revenue. Our portfolio fits very well there from a insecticide and herbicide for the soy complex. So we see Argentina growing very well. And then I singled out a couple of the Andean countries as well. They're small but they're growing very well for us. And they're high value because it's again a fruit and vegetable market. For Brazil itself, I made the comment in the script that we have over 70% of the orders in hand for the -- to deliver our full year expectations in Brazil. That's probably, I would guess, about 15% more than we had at this time last year. So already we can see that the growers themselves are much more bullish on expectations. Think about the comment that I made about the cotton growers already telling us that we're going to see a reversal in cotton acres. We're going to see approximately 15% more than we saw last year. And you look at the latest forecast, it's forecasted that for the first time Brazil will plant more than 40 million hectares of soy. That's up 3% to 4% on the prior year. We're growing our applications on soy especially with insecticides and strangely enough, not the diamides; our other insecticides that are very good on piercing pests such as stinkbugs. So you put all that together. We are very bullish on Latin America. The situation feels very different to last year. Now, if there is a weather issue, you know what, that's going to impact everybody. It will impact us at some point. We'll deal with that as we go through the year. But the indications are right now that the weather in Brazil and Argentina should be more normal than it was last year.

Our next question will come from Vincent Andrews of Morgan Stanley. Please go ahead.

Hi. Thank you. I'm just trying to tie together the volume versus price discussion, as well as the increase in the sales from the new products to -- and maybe they don't have anything to do with each other, but where is the incremental $30 million of new product sales? Are there particular geographies that, that's coming from or is it widespread? And is it -- those sales that were -- what we’re determining the decision to be more focused on volume rather than price? And if that's the case, why did that impact the price decisions on sort of the Heritage portfolio?

Yeah, there's a couple of things there, Vincent, that they’re not necessarily obviously joined together. For instance, the new products sales that you see, we register that in volume, where you look at our full-year chart. So, it's mixed in with all the regions, it’s not separated out. Those new products essentially North America very, very strong growth in North America. We're also seeing growth in Asia and a little bit in Europe, but I would say this season, with the types of products, North America, the US in particular and Australia with the herbicide launch of Overwatch. Those new products did not influence our decision to go and get volume on other parts of the portfolio. That is occurring naturally in terms of the new product introductions. And unless you remember, some of those markets, in fact, most of them are markets where we're not cannibalizing ourselves. Overwatch Herbicide is a brand new market for us. It is a serial herbicide, the first one we have. It's brand new market space for us. So, we're not cannibalizing and it's not impacting the rest of the portfolio in terms of how we think about volume demand. We have requests for volume across our portfolio whether it is pre-ermergent herbicides in the US, whether it is getting ready for the fungicide launches in the US. So it's more broad-based than the new products. I wouldn't mix them up -- I wouldn't mix them up like that. And then you know what, we have extremely high incremental value. When you look at the dropdown from a volume perspective, it's very high for us right now. So that also helps us make that decision, go get the volume.

Our next question will come from Mike Sison with Wells Fargo. Please go ahead.

Hey, good morning guys and good luck to you, Mike. Mark, just wanted to revisit 2022. I know it's way early to give specific guidance but I guess you reduced the outlook for this year by $0.30 or so, price cost and doesn't seem like we should just add that back as we head into 2022. So what's the best way for us to think about the growth algorithm into 2022 assuming we don't just add back the $0.31 and try to get to a realistic number for next year?

Yeah. I'm glad you said it that way, Mike. I think, listen, importantly for us we are right on track through our five-year plan. And we've had significant headwinds during the year, during the period from 2018 to today. Yet we're still growing in that 5% to 7% top line range. I would model on a 5% to 7% top line next year. Yes, costs will potentially look different. Pricing may look different depending on how much price we get versus our plan this year and also into the first quarter of next year where we'll be raising prices again. I would simply model on that 5% to 7% range and then we will give more guidance as we walk through the end of this year. Probably in the November call, we'll start to give you a little more clarity. And then in the February call, we'll give you the actual numbers. But I would stick with that 5% to 7%. There are so many moving pieces. I mean, think about it, at the EBITDA line, we had $600 million of FX and raw material costs since 2018, yet we're right on in the range of our five-year plan. So, it just shows the resilience of the portfolio, our crop and geographic mix, and our ability to offset what our enormous costs that have flown through the organization.

Our next question will come from Frank Mitsch with Fermium Research. Please go ahead.

Hey, Mr. Olympian, great working with you. All the best to you, Mike. I was just curious, Andrew, if you wanted to talk about the buyback program. It looked a little light in 2Q. What should investors be expecting there?

Yeah. Thanks, Frank. Look, if you look at our balance sheet, we ended the quarter with a high level of cash. And I mentioned, it’s in my prepared comments, we have some cash and some overseas subsidiaries who weren’t able to get back to the US this quarter, which has sort of limited our ability to buy back at the pace we might have anticipated. When you look at the timing of that movement, as well as just the timing the generation of cash, I think you should expect that our -- the pace, the sequence of our buybacks is this year is much more heavily weighted to the fourth quarter. We will be -- we're looking at alternatives to bring that cash back to the US here this quarter, but not clear of the exact timing. But that $350 million to $450 million buyback range for the full year very much in reach It just will be a bit more backend loaded in Q4 than what we'd initially anticipated.

The next question will come from Joel Jackson with BMO Capital Markets. Please go ahead.

Hey. Good morning. Just to go back to kind of the 7% to 9% growth algorithm five-year plan, Mark and I appreciate all the color you've given already on the call, but, I mean, in light of your comments, do you have a lot less confidence in the EBITDA growth algorithm targets versus -- it seems like you've got strong comps within top line. And what process are you going internally now to sort of reassess the mid- and long-term EBITDA growth target?

Yeah. Listen, I have absolutely no wavering on our targets whether it's the top line or EBITDA. I mean, think about our latest guidance for this year. We're growing EBITDAR at 6% this year. And that's pretty close to our 7% to 9% despite $150 million of headwinds that we were not expecting when we started the budget process last year. So no, Joel, I think when I look at the portfolio of the company and the growth opportunities and I am very encouraged by the $130 million of revenue from products put in the marketplace this year alone. We have about $400 million of sales this year that have come from products that we've launched over the last three years. So that growth algorithm is very much in place, plus the fact that those products have higher margin than our general portfolio and the products that are dropping off the other end are at a much lower margin. So I have no reason to believe that the EBITDA projections of 7% to 9% are not unrealistic at all and we are certainly as confident as we were when we put the plan together. So, yeah, very much in that range.

Our next question will come from Aleksey Yefremov with KeyBanc. Please go ahead.

Thank you. Good morning, everyone. Mark, in your chart, you showed that FMC’s diamides products represent about 80% of the class. How do your products compared to the 20% that are sold by your competitors? How do you think competition between those 80% and 20% buckets will evolve as the overall class grows?

Yeah. Well, listen, I think the fact that we're over 80% of that class and those products have been around for a while tells you that the growth algorithm for what we have. The products are different. I mean, when you look at Rynaxypyr, it has just unbelievable residual activity versus the other diamides that are out there. They may be in the same class of chemistry, but they're not the same chemistry. And that's important when you look at things like residual pest spectrum, etcetera. So we do see our products continue to outpace the rest of the diamides that are in there. And, let's be honest, there's only three or four of them from different companies. I expect our growth rates will continue and that 80% number will go up over time.

Our next question will come from John Roberts with UBS. Please go ahead.

Thank you. During the quarter, the diamide partners’ geographic shift reduced the US sales. Did it benefit ex-US by an offsetting amount? And if so, could you give us the ex-US numbers excluding the partners?

Yeah. It did, John. I think the amount is roughly about $50 million to $60 million. And it's not -- it wasn't like Q1 exactly, where it all went to one region. It did go to a couple of regions. But certainly, the growth rate in Latin America without that would have been very high single digits versus the 15% that we showed on the chart. So, there is an offset in Latin America, a little bit in a couple of the other regions. But I think that's how you should think of it, $50 million to $60 million, most of it in Latin America; a little bit in the others.

Our next question will come from Mike Harrison with Seaport Research Partners. Please go ahead.

Hi. Good morning. Wanted to ask a couple of questions on the Europe. First of all, you noted the weather issues and kind of the slower start to the year. Obviously, we've seen a lot of pictures out of Europe. So, do you think the weather situation could worsen as the year progresses? And then the deregistration impacts this year, is that a fairly normal pace of a volume headwind or that worse this year than you would normally see in Europe?

No, it's about -- I'll take the second part first, Mike. It's about the same. It's about 150 basis points of revenue. Most of it is in Europe, a little bit in Latin America as well. I've kind of normal -- we kind of muddle about 1.5% drag on revenue through the registration elements that flow every year. It can go as high as 3%. We had one year where it was 3%, but that was a deliberate action by us. I would expect it to be in that 1.5% range as we go forward. From a weather perspective, yeah, the spring was certainly late and cold which impacted us. We are seeing increased pest pressure now with the weather as it is which is good from an insecticide perspective. The fall is very important The fall is very important for autumn applied herbicides for cereals. We'll see if the weather is good there then that certainly helps Q4. But I've talked about this year and how we're not expecting a lot of growth out of Europe. And I think that's a fair way to look at Europe this year given the weather issues. I don't think we're being too bullish on Europe. Now, next year, if weather improves, we have a more normal season, we should see a good uptick in Europe next year.

Our last question will come from Michael Piken with Cleveland Research. Please go ahead.

Yeah. Just a question on the diamide business and thanks to the color. With respect to the sales that you make to your partners, is it fair to assume that it's at a competitive margin? I know you guys showed the chart on your margins have gone up as the sales through the partners have gone up. But are the margins generally pretty competitive? And if so, I mean, what's the net benefit of selling it yourself versus just relying on the partners to sell the product? Thanks.

Yeah, Mike. So, from our perspective, the way the contracts are written, they have to be advantageous for the partner who has to make money in the markets they're in and it can't be dilutive to us. And that's how we view it. So from an EBITDA margin perspective, these products are equally as important as the branded products that we sell. They gain access and what they're financially extremely attractive to us and financially attractive to our partners. So we have that win-win. But obviously don't disclose the margins of these products or with our partners or ourselves. Suffice to say that we're very happy with the financial performance of our partner growth. But obviously, our partners keep growing. So they're also very happy with the financial performance as well.

That is all the time that we have for the call today. Thank you, and have a good day.

The conference has now concluded. This will conclude the FCM Corporation conference call. Thank you for attending. You may now disconnect.