Good morning, and welcome to the Second Quarter 2022 Earnings Call for FMC Corporation. This event is being recorded, and all participants are in a 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. Zack Zaki, Director of Investor Relations for FMC Corporation. Please go ahead.

Thank you, Jagrita, 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 and first half performance as well as provide an outlook for the second half 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 Web site 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, 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 Web site. With that, I will now turn the call over to Mark.

Thank you, Zack, and good morning, everyone. FMC delivered another quarter of strong growth in a dynamic global environment, while offsetting high input costs with our ability to price for the value we offer to growers. Overall, first half performance was primarily driven by significant price increases and volume gains. This growth reflects robust market demand globally, despite cost inflation and FX headwinds. We continue to expect a strong second half of the year, driven again by price increases and volume growth in a supportive market environment. Turning to Slide 3. Before we review details of our quarterly results and full year outlook, I'd like to offer a few comments on our recently completed acquisition of BioPhero, a Denmark-based insect control company that has pioneered a bioprocessing technology used to manufacture pheromone crop protection products. As you may know, pheromones are naturally produced by insects to trigger a social response in members of the same species. Pheromones are used in a variety of ways to protect crops by disrupting the insect mating process, and hence significantly lowering subsequent generations of target insect larva, which would otherwise damage crops. There are several methods to manufacture pheromones, but BioPhero's proprietary fermentation route is a game changer, enabling high volume production of pheromones at significantly lower costs than other production routes. The acquisition, which closed on July 19, significantly expands our rapidly growing biologicals portfolio within FMC's plant health business. It provides a platform for large-scale production of pheromones and pheromone-based crop protection products, which are expected to generate approximately $1 billion in revenue at above-average EBITDA margins by 2030. We have been expanding our plant health technology base, and this acquisition is another great opportunity to continue bringing biological products to growers around the world. Our Q2 results are detailed on slides…

Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a headwind to revenue growth in the second quarter, as expected, driven by weakness in European and Asian currencies, particularly the euro, Indian rupee and Turkish lira. The Brazilian real was a modest tailwind in the quarter. We continue to anticipate FX headwinds for the remainder of 2022, driven by Asian and European currencies. Interest expense for the second quarter was $35.3 million, up $2.7 million versus the prior year period, primarily due to higher short-term interest rates and higher debt balances, partially offset by benefits of the refinancing activity completed in fourth quarter 2021. With rapidly rising interest rates, especially in the United States, we now expect interest expense for the full year 2022 to be in the range of $135 million to $155 million, an increase of $10 million at the midpoint compared to our prior guidance. Our effective tax rate on adjusted earnings for the second quarter was 14%, in line with our continued expectation for a full year tax rate in the range of 13% to 15%. Moving next to the balance sheet and liquidity. Gross debt at quarter end was $3.9 billion, up roughly $715 million from year end 2021. Gross debt to trailing 12-month EBITDA was 2.8x at the end of the second quarter, while net debt to EBITDA was 2.4x. Net debt was in line with our targeted leverage levels, while gross debt was slightly above targeted leverage due to the timing of return of cash from foreign subsidiaries. Moving on to cash flow on Slide 11. Second quarter year-to-date free cash flow was negative $498 million. Year-to-date adjusted cash from operations was negative $401 million, down substantially as compared to the prior year period driven…

Thank you, Andrew. FMC delivered solid financial performance in the second quarter, despite a challenging macro environment. Price increases across all regions and strong volume growth continue to deliver strong EBITDA growth in an inflationary period. At the same time, the broader agricultural market remains positive, which we expect to continue throughout 2023. FMC remains well positioned to outperform the industry in this environment, with the focus on crop protection chemicals and biological products working to our advantage. The year is turning out largely as we expected, with a strong first half followed by a second half that is constrained by costs, especially in Q3, delivering an overall strong 2022. I'll now turn the call back to the operator for questions.

Absolutely. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from the line of Christopher Parkinson with Mizuho. You may proceed.

Great. Good morning. Mark, I want to ask what's on everybody's mind. Can you just give as much color as humanly possible on the divergence between the third and the fourth quarter? Obviously, you hit on this a little. I imagine they're things in Brazil, North America and India that are considerations. But if you could also hit on the cost aspects on a sequential basis, 3Q versus 4Q, and your confidence that 3Q would be peak, and anything else that you believe The Street should be paying attention to? Thank you so much.

Yes. Thanks, Chris, for the obvious question to start the ball rolling. Look, when you look at Q3 and Q4, I think we've been pretty clear on the slides and in the script that Q3 is driven really by the cost that we see flowing through the P&L. And Q4 is driven by a lack of that same increase in costs. You look at the top line, we have strong growth in Q3, round about 13% at the midpoint, yet we have 2% top line growth in Q4. What does that tell you? It tells you that our Q4 is not necessarily driven by the external environment. That EBITDA growth is all controlled from inside the company. And the reason we see this cadence in the second half is very simply when we buy raw materials, we have about a six months lag before the cost of those raw materials flow through our P&L. So for instance, the costs that we're seeing in Q3 are costs that we knew were coming back in Q1. So for us, it's not a surprise. It's a large amount, but we've continued to see that increases we've gone over the last 18 months. Now from a confidence perspective, think of the following. I just said in the script that in Latin America, in particular in Brazil, we have more orders on hand than we would normally have by a considerable degree. Why is that? Well, at the end of the day, the markets are robust. Commodity prices are still high. Brazil is getting ready for what will be a robust season. And we will continue to see acreage increase in Brazil and other parts of Latin America. We're seeing the same thing in the U.S. and Canada markets, where customers are now talking to…

That's very helpful color. And just as a secondary note, on Slide 10, which is very helpful, you do have a few more checks than the top end of the box, the 1.44. Can you perhaps dive in a little bit more in terms of what you're purchasing right here right now in terms of the cost inflation? Perhaps it doesn't give you the material benefit that we all want in 2022. But what is your confidence as we head into 2023? And what does that actual dynamic look like on a sequential basis? And if you just want to stack [ph] that as what you're competent in, in terms of entering the year, that would still be very helpful? Thank you.

Yes. We do believe that we're at this, what we call the highest level of inflation. We are starting to see it taper off. Obviously, I've just commented that on Q4. We will expect to see that continue as we go into 2023. If that continues and our normal cadence of flow through the P&L occurs, it would be in the second half of the year that you would start to see some significant benefit from that. I doubt whether you would see it in the first half because although I'm talking about a lower inflation, costs are still high, make no mistake. So I think it's the second half of next year that we would start to see that real acceleration of lower costs.

Thank you for the color.

Thanks, Chris.

Thank you. The next question comes from the line of Joel Jackson with BMO Capital Markets. You may proceed.

Maybe I'll follow up on that line of questions since Chris is right. It is the most important topic among investors right now. You said, and it was helpful that you might see the inflation really come off second half of '23 if things continue. If we're sort of entering 2023, would your margins be kind of where they've been through the first half of the year in the last couple of years, mid to high 20s, mid 20s? Like what is kind of -- because the 80% in Q3, 30% in Q4, these are really divergent numbers. What would beginning of '23 look like, 26% -- I know you don't give guidance, just what is the early '23 look like?

I'm glad you know asking about the guidance, Joel. It is a little early.

I know, but just early '23?

Yes, I hear you. Listen, I think from a margin perspective, what you're seeing in Q3 and Q4 are pretty extremes around a midpoint. Obviously, we've got a lot of cost in Q3. And then we have the advantages of a lot of price allied to a good P&L. I do think you'll see more normalized margins for us as we go into the first half of next year. So if you look at our margins over the last, I would say, 12 months in that sort of 25% plus range, I think that's what we would expect. So I wouldn't go any further than that at this point, because frankly I don't have the numbers going into early next year. We're right in the middle of our budget process now. So kind of expect average margins as we go into the first half of next year.

That's extremely helpful. And then obviously, it's complicated. And then the second question I have is with BioPhero, it's going to increase your R&D expense. Do you have some sense now what R&D expense inflation might be in '23 versus '22, solely based on BioPhero? And if you can't get that yet, can you give maybe some color around, I don't know, a number of positions, number of people, some sort of tidbit to let us figure out what the R&D increase might be, run rate might be in '23?

Yes. I think when you look at BioPhero, we're acquiring about 30 people with the acquisition. All those people are essentially in R&D. There are one or two that are in manufacturing and supply chain. I do think that the expense for that, if you took a base level, something around $10 million additive to where FMC is today on an R&D expenses. Not a bad number. It's rough at this point, but that's what I would be thinking, Joel.

Okay, that's helpful. It looks kind of small. Thanks a lot.

Thanks.

Thank you. The next question comes from the line of Laurence Alexander with Jefferies. You may proceed.

Good morning. I have two questions. Can you give a bit more detail on inventory levels regionally that you're seeing heading into the back half of the year? And then as you think about sort of the Latin American growth rate, sort of what you will be lapping going into next year given the very strong growth you've seen this year and sort of how tough will it be to lap that?

Yes, I'll start with the inventories, Laurence. We're very okay with inventory levels pretty much everywhere in the world right now. I would say the only spot, and I've commented on this at the last earnings call, is there has been a significant reduction in rice acres in India. And we're working through inventory in India. That will be done as we go through the second half of the year. Everywhere else, frankly speaking, is very good from our perspective on inventory. So we're not worried about that going into the end of the year. With regards to Latin America growth, we are on a growth trajectory, because we're building out our market share in pretty much every country from Mexico, Argentina and Brazil. What's little known, we've talked about it a little bit in Brazil is our market access. We're investing in more sales resources to reach further into distribution and retail and especially with the major co-ops in the South. So the growth we're seeing is actually market share growth, especially in corn and soy with insecticides and herbicides. So I know the numbers look big in Latin America, but we really are growing very quickly and it's new growth for us. It's not necessarily repeat growth in the sense of selling to the same people, which we obviously do. We're expanding that market access.

Can you give a sense for how long you think this period of sort of reestablishing a new equilibrium will take, or how long you can have this sort of be growing well above trend before you get to sort of more stable market shares?

Yes, I think we got quite a ways to go. When you look at the size of our company and you look at the market given where it is today, we have roughly 9% market share of the crop protection chemical market, with the most robust pipeline and new product introductions that are now, this year alone, the products that have launched over the last five years is $600 million of business that we will do with those new products. I expect that algorithm to continue for a considerable amount of time. We know our insecticide portfolio is very strong, and we know that we're taking share from older chemistries that are getting registration losses that we can take advantage of. So I don't see that algorithm slowing down for quite a long time, Laurence.

Thank you.

Thank you. The next question comes from the line of Laurent Favre with BNP Paribas. You may proceed.

Hi. Good morning. I've got a question, three again, on the cost side. And here I want to dig into the comment you made, Mark, around having to source from secondary or tertiary suppliers. I was wondering if you could give us some kind of idea of how big that was in the first half, for instance.

In the first half, it's very difficult to say as a percentage of the raw materials that we acquire. Only I can give you an anecdote, Laurent, that is basically when I talked to my procurement groups and supply chain groups when it was second half of last year and first half of this year, the conversations were all about where are we getting materials where we're short? And that was quite a long list. In today's reviews that we have, the list is extremely short. And we very rarely talk about secondary sources at this point. So it has changed in a meaningful way over the last six months. That's about as good as I could give you from a perspective.

Thank you. And then the second one is on herbicide pricing and what you're factoring in, especially as we started to see [indiscernible] prices coming down. So it's both I guess for your non-selective side, but also the selective side of the herbicide business. Do you think that price is -- are you factoring in pricing normalizing through the end of this year and into next year?

No. Actually, the opposite. I think a lot of the non-selectives are in a world of their own in terms of pricing is so closely linked to the raw material costs that you do see rapid increases, which we've seen over the last 18 months. You're likely to see some decreases as those pressures alleviate. We're in a very different ballgame. We've been raising prices on the back of the value that we bring. We're raising prices as we speak in many parts of the world, and we'll continue to do so. So we do not see a deceleration of pricing. As we go over the next 6 to 9 months to 12 months, we're increasing price right now.

Okay. Thank you.

Thank you.

Thank you. The next question comes from the line of Adam Samuelson with Goldman Sachs. You may proceed.

Yes. Thank you. Good morning, everyone.

Good morning.

I guess I was hoping maybe to dig in on the growth side, and if I'm looking by region, certainly the growth in North and South America were very strong. The constant currency growth in Asia was a little bit less robust. You alluded to managing inventories and declining rice acres in India. Mark, I was hoping to get just some broader color on the region. And is it just rice in India, nearly any mention of China, North Asia and just how you see competitive dynamics in that region and the market outlook there?

Yes, sure. India is the main factor for us, as I said, that working through that channel inventory due to rice. I would say the ASEAN countries are continuing to grow for us, especially on rice. And fruit and vegetables are two big segments for us in those countries. Australia on cereals with the launch of the new herbicide last year is doing very, very well. We don't mention China, because it's not one of our biggest countries. Certainly, it's a sourcing point for us. But from a revenue perspective, it's north of $100 million. It's a highly competitive market. It's not a market that we consider one of our top strategic markets. We'll grow there, we'll introduce technologies, but it's not something that is driving the region. The region is really been driven by ASEAN and all the countries in ASEAN; India, Pakistan and Australia. Those are the key drivers. Now interestingly enough from a plant health perspective and a biological perspective, South Korea and Japan are very important markets, especially South Korea, as they have quite a flourishing biological industry there and a lot of very high quality fruit and vegetables which can use the biologicals. So Asia is becoming very interesting from that plant health perspective for us.

Okay, that's helpful. And if I could just have a -- squeeze another one on cost and really thinking about the movements you're seeing in natural gas and power in Europe, and you've got some important operations in Denmark. But broadly is how do we think about your comments about inflation abating and what you've assumed on the energy power side, especially in Europe, and any thoughts and risks around some of the intermediates that you might still have to source that come in one direction from Europe?

Yes. So from an energy perspective or use of energy in our manufacturing facilities, all our manufacturing facilities, and especially our major one in Romlund [ph], we can use flex fuel to run the facilities. So in Romlund, we traditionally run on natural gas. Obviously, that's been curtailed, given Russian activities. We can also run on diesel fuel in Romlund and have been doing for some time. There are cost inflation elements there that are built into our overall cost structure. We have a pretty good view on what we think costs will be going forward longer term for those facilities. From a raw material perspective, I think we procure something like $200 million of raw materials out of our $2.7 billion purchases come from Germany, and we have dual sources for all those materials in other parts of the world. So from a supply perspective, we have that one pretty secured.

Okay, great. I really appreciate that color. I'll pass it on. Thanks.

Thank you.

Thank you. The next question comes from the line of Vincent Andrew with Morgan Stanley. You may proceed.

Thank you. Good morning. Just, Mark, you mentioned in the fourth quarter you'll have some new launches. And obviously, they'll have a positive impact to revenue. Maybe just want to talk a little bit about those. And then I'm also within that wondering whether 3Q is also incurring some launch costs associated with those new products that you're not going to obviously see the revenue until 4Q?

Yes, the launches that are coming are mainly herbicides in Europe, which kind of start now but really pick up steam in Q4. We've got insecticides in Canada that have started now. We're seeing that growth, obviously, that will continue. And then we have quite a number of smaller products in Asia to get launched. I don't think at this point that we're seeing any lumpiness in terms of launch expense. It's pretty much built into our SG&A expense as we go through each quarter. We have a very good view of our launch schedule. So we know what's coming. We pretty much spend money on launches about two and a half years before the actual launch itself. So it's not all of a sudden a step up. It's rather a gradual spending increase as we go over numbers of quarters. So in Q3, it really is not necessarily to do with any launch expense, although there is launch expense within that SG&A number.

Okay. Thank you. And Andrew, maybe on the cash flow from operations, I'm sure it will all look a lot clearer once we see the Q. But could you just talk a little bit about sort of how the working capital played out in the first half versus how it's going to trend in the second half to get you to that 67% conversion that you're still targeting?

Yes, sure, Vincent. I think certainly the big story in the first half in cash flow is working capital. And it's very, very substantial growth in receivables particularly, both from high volume growth but not the least from the impact of price increases. So those price increases directly inflate our receivables. So in the first half of '22, the big story and the big difference versus the prior year really is the growth in working capital. Now that said, given the positive market backdrop, we have good farmer economics around the world pretty uniformly. There are spots here and there, as always, but we're in pretty good shape. We've actually seen good collection performance. So the absolute dollars of receivables are going up, days receivables actually improved pretty meaningfully versus the prior year, with people having concerns about security supply and with very strong and very healthy grower balance sheets at the moment, we are collecting and collecting aggressively. So we will see the seasonal swing. We have a very pronounced seasonal distribution with working capital, amplified a bit more by the size of prepayments and the North America business, which really is a use of cash in the first half of the year. So in the second half with very high collections and shift from selling mode to collecting mode in many parts of the world, that will drive a big reversal and very, very strong cash from operations for the second half.

Thank you very much.

Thanks.

Thank you. The next question comes from the line of Steve Byrne with Bank of America. You may proceed.

Mark, you mentioned that 70% of your LatAm orders for the second half are already in place. Do you have visibility on when that revenue will be recognized? You normally have a bigger fourth quarter in LatAm than you do in the third. Do you have view on how that's going to play out this year? Could there actually be a bit of a shift more into the fourth quarter that could be an additional contributing factor to the somewhat slow third quarter expectations?

No, not really. When we kind of plan for what we call a normal season, that means in Brazil, planting starts sort of mid September to the end of September. That can shift around given weather patterns. So Q4 is obviously a big quarter for us in Latin America, not just Brazil, but Argentina. We've kind of factored that into how we look at Q3, Q4. I don't think there's anything meaningful there. Obviously, it will depend on how the weather plays out. But I think we have most of that factored into Q4 as we normally do.

And wanted to drill in a little bit more on the diamide franchise. What fraction of that revenue stream is from direct sales from FMC versus from your licensees that you have supply agreements with? And has that split between those two buckets changed in the last year as you've been growing the supply agreements? And how does that affect price? Is that a mix shift down in price? And more importantly, how does that affect EBITDA?

Yes. So when you look at where we are today, we're in the range of about -- it's kind of like 60/40; 60% FMC branded products into the marketplace, about 40% through our third partners. That has obviously been growing as we've added more partners. I think it's fair to say, though, we pegged our growth rate for the diamides in sort of the high single digits. In Q2, we grew sort of mid teens, and it's pretty evenly split between both sources of income. On the price side, we don't talk about the specifics of the individual contracts that we have, obviously. But generally speaking, the EBITDA impact for us on a percent basis is neutral. So we manage it that way. So the growth for us is equally as valuable from an EBITDA perspective from either FMC or from our partners. So I would expect to see that 60/40. I would expect the 40 to continue to grow because we've got more partners on board now. They are obviously now gearing up and selling into the marketplace. I think the most important takeaway that you should take away from this conversation is the 40%, as it grows, does not detract from the 60% as we grow. It's an expansion of the market pool for the diamides. And as I alluded to earlier on one of the other questions, we see the diamides taking share from a number of older chemistries, whether they be neonicotinoids, some of the pyrethroids, and certainly some of the carbamates around the world.

Thank you.

Thank you.

Thank you. The next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. You may proceed.

Thanks. Good morning, everyone. Mark, you were talking about costs for fourth quarter and your six months kind of lag. Do you have any visibility on the first quarter? Do you expect costs to decline further from Q4 level in the first quarter of 2023?

Yes, I'll let Andrew pick that one up. Andrew?

Yes, Aleksey, I think as Mark described, since we turn inventory about twice a year, things that we buy today start flowing through our P&L two quarters out. So things that we're starting to buy now, certainly we're getting a little bit of visibility into Q1 of '23. But it's not a complete picture yet. We've not gotten through that far of the buying and some of that buying is tilted in different parts of the quarter. I do want to be very careful with the phrasing of the question and that our expectation is that costs do continue to increase, particularly in the first half of '23. They just do so at a much lower level. And what we're seeing from Q4, Q4 is the largest cost -- excuse me, Q3 of '22 this quarter, coming quarter, is the largest cost increase we've seen and the largest cost increases we expect for the year. We expect the rate of cost increase to drop down in Q4. But there still is year-on-year inflation in Q4. So at this point, what we're seeing is a flattening off in the inflation, but not necessarily yet an absolute drop off in costs. So I think for Q1, we'll continue to see our purchasing go through the rest of this quarter to see what the outlook for Q1 is, but I think at this point we still anticipate some cost headwinds in Q1 and likely into Q2, and then with the opportunities that we start seeing the swing in the second half of '23.

Thanks, Andrew. And as a follow up, Mark, in the first half, volume gains were roughly in the low teens, 11% or so. How are you optimizing for volume or market share versus profitability and price on the other end? And how frequently do you prioritize, if demand is this strong, why is it not worth to raise prices more at a higher profit level and gain less share or less volume, or maybe it's not optimal?

Yes. Listen, I think clearly you can look at our price increases and we're targeting that high single digit price increase, and we're moving in that direction. For a company like FMC, those are unheard of price increases. Normally, we price kind of in the very low single digits to offset inflation on a general basis. I think when we're looking at the marketplace, we sell products in some of our categories that are extremely high margin products. You all know the success of the diamides, for instance. Taking volume from older chemistries with the newer chemistries adds tremendous value to the bottom line, whether you increase price or not with those products. Sometimes we do, sometimes we don't. It's a mix of decisions that are made at the local level with the overall mantra that price increases will offset cost. And that's how we've been working this year. So for us, it's somewhat of a complicated discussion inside the company. Except I would say over the last year or so, it's changed to be much more aggressive on price. We have driven price in every region of the world, more so than we ever have before.

Thanks a lot.

Thank you. The next question comes from the line of Michael Sison with Wells Fargo. You may proceed.

Hi. Good morning. Nice quarter. So when you think about your volume growth, in the second quarter it was pretty impressive, up 14%, EBITDA growth was 3% and I understand why in terms of the cost that you had on Slide 6. But just curious, of the 148 million of costs that you occurred in 2Q and maybe in the past, is any of this cost more structural than just sort of just inflation? You've had to change the way you process some of your materials, logistics are getting more. So I'm just curious how much of this cost is maybe more structural than just it might go away over time?

Yes, Mike, thanks for the comment on the quarter. Listen, I do think that most of that cost is variable in the sense of its raw materials, its packaging, its logistics that will obviously ebb and flow. And we expect them to obviously decrease over time. I would say the only structural cost that's been embedded is as we're investing in SG&A resources and R&D projects that are more longer term, those are driven around the growth of the company, the market access that I talked about in places like Brazil, Argentina, India, parts of the ASEAN region, and the U.S. as well. Those are structural costs, because they're headcount, they're investments. The other investments around precision agriculture as we're growing out our precision ag apps, such as farm Ark intelligence, those are structural costs. But the vast majority is what I would call more transient.

Got it. And then when you think about the fourth quarter, it tends to be a quarter which has a wide range for the outcomes for EBITDA and revenue. So just curious, what do you think sort of drives the upper end and the lower end of those ranges?

Well, I think from a revenue perspective, obviously, it would be what does pest pressure look like in some parts of the world? We just talked about the success we had in our North American business. As pressure in Canada was much higher than we normally forecast, that drives demand that gets used immediately. So if you have those series of events around the world that can drive you to the upper end of the range. Also, as we look to expand our market access and the success and the speed of that success, that can drive us to the upper end in terms of more market share, newer products being sold to new customers, that would drive you the same way.

Got it. Thank you.

Thanks, Mike.

Thank you. The next question comes from the line of Josh Spector with UBS. You may proceed.

Yes. Hi, guys. Thanks for taking my questions. I guess just to follow up on the second quarter and the volume outperformance, I guess optically the volumes did a lot better. The drop through was essentially pretty minimal given the cost side. I'm not really sure how much of that is higher spend on the incremental volumes or the higher costs for the base. But I'd be curious if you were to have a repeat, 3Q, 4Q volumes a lot better, should we expect a similar result in terms of the drop through, or should we expect that to be different, much better or worse, any thoughts appreciated? Thanks.

Thanks, Josh. I'll let Andrew give you the details. But generally speaking, the drop through in 2Q was not far off our average. And we have a wide range of drop through because it can be affected through different reasons. Andrew, do you want to comment on that?

Yes. Josh, I think, look, that can be a big variation and that the drop through, the contribution to EBITDA from volume relative to the contribution to revenue growth from volume. On a trailing four quarters basis, that was about 58% in Q2. The quarter itself was about 57%. So it's right in line with what we expect. Our long-term average is about 60%, which reflects the high value, the mix component of our volume growth. A reminder to everyone that in our bridges mix [ph] is in volume. You can see significant swings in that because there is lumpiness in costs increase. It's not perfect -- it's not a perfect indicator. But I think you should continue to expect that on a rolling basis that volume drop through to EBITDA should be in that 55% to 60% range for the next several quarters and beyond.

Thanks. I guess asked another way, the volume drop through was normal on that bar but was offset by the cost bar. So it volumes were 5%, 10% greater and you had visibility of what you bought six months ago, would you expect the volume bar to offset the cost bar if you saw volume upside in your forecast? Is there any reason why that wouldn't happen or would be different?

Yes. Josh, I think certainly the stronger volume growth can have that pretty healthy drop through that will help offset further cost increases. I think what we've been trying to do is pace the price increases to where price increases cover as much as possible increasing COGS. And then we make up any investments in SG&A and R&D as well as FX headwinds with volume. But certainly, when you look at the second half together where we're looking at very substantial volume growth, there will be a piece of that that will help bridge the difference between the cost headwinds and what we're able to cover in price.

Okay. Thank you.

Thank you. The next question comes from the line of P.J. Juvekar with Citi. You may proceed.

Yes, hi. Good morning. Your top line growth was -- organic growth was 21% in 2Q, but EBITDA was up only 3%. And you talked about your cost inflation and raw material costs and all that. I was wondering if you can just break down your raw material costs in sort of three buckets. What's sort of the inflation from AIs? What are the logistical costs? And what may be other costs, like packaging or labor? Can you just kind of break down within those three buckets? Thank you.

Yes. P.J., thanks for the question. We don't normally break down those types of costs. But I would tell you that the vast majority is the active ingredients, intermediates that we buy, followed by logistics and then packaging. But by far, the biggest chunk is the whole raw material spectrum that we buy. Do you want to say anything, Andrew.

Yes. P.J., I think, look, as Mark said, that biggest chunk is raw materials, intermediates and active ingredients we buy. I don't think there's many -- there's an overall category that I'd point to of those three big categories; raw materials, packaging and logistics. We've had substantial inflation in all of them. We've had substantial impact from disruption and the need to use secondary and tertiary suppliers in all of those. So I wouldn't point to one of those categories being disproportionately growing versus the other.

Okay. Thank you. And my second question is on your plant health and biologicals, you acquired BioPhero, what are the areas of biologicals that you believe that you have some holes so you would like to make some acquisitions? And what are the multiples that these biologicals are being bought at these days? Thank you.

Thanks, P.J. Yes, listen, we're building out the technology portfolio. Our biologicals today are really based around microbe technology. Obviously, we've extended into pheromone technology now. We also have through FMC ventures investments in peptides, which was a whole new area of potential pesticide development. We have a relationship with Novozymes developing enzymes as pesticides. So we feel we have quite a good floor of what we call basic structure around technology. That will continue. We'll continue to look for M&A opportunities, probably as much on the geographic side of biologicals as on the technology side, because market access here is important. And from a microbe perspective, there's many countries in the world where you can't import microbes that are not indigenous to that country. So therefore, you need R&D and you need development in those countries. One easy way to get that is to acquire it. So it's something we're looking at. From a multiple perspective, I haven't seen any deals go through in the near term that are indicative. But Andrew, you may have a better view of that than I do.

Yes, P.J., just a few thoughts on multiples. A lot of the kinds of acquisition targets we are looking at in the biological space are more early stage. BioPhero, for example, were small amounts of commercial revenue, but not large scale sales yet. So multiples really not meaningful when considering the value of the acquisition. It really is a case where NPV and IRR really come into play. And certainly as we looked at the acquisition economics for BioPhero, the IRR on that transaction was multiples of our cost to capital. So even on a risk adjusted basis, very, very attractive. So we think about the types of targets that are out there that tend to be smaller companies, more early stage. So traditional EBITDA multiples are less relevant in terms of thinking about valuation.

Great. Thank you for the color.

Yes, absolutely.

Thank you.

Thank you. The final question comes from the line of Tony Jones with Redburn. You may proceed.

Yes. Good morning, everybody. Thank you for the chance to ask a question. With all the supply chain dislocation and we've seeing this partial shift to local supply or more local production, from your perspective, have you found over the past year any sort of regional capacity mismatch? And does that have any implications for CapEx over the medium term? Thank you.

Thanks, Tony. No real what I would call mismatches, although we are and we have said that we will have a much more balanced supply chain and operations structure as we go forward. When you look at our investments for the molecules that are coming in, putting feed in the ground, we're active in India, we're active in Europe. We're looking at potential toll manufacturers in -- more toll manufacturers in the Americas. So overall, I wouldn't say we have a mismatch. But certainly as the industry grows, the need for formulating capacity is something that we're investing in quite heavily, especially in the U.S. to feed our U.S. business. So I think that that notion of getting your formulating capacity as very local as you can and as close to the customer base as you can is something that's driving our strategic thinking around manufacturing and operations. Andrew, do you want to --?

Thanks. That's really helpful.

Tony, I'll just add to that. When you think -- I think the second part of your question there on the CapEx piece related to this, our capital plan had envisioned building out supply chain that was more geographically diverse, and that very much a part of our thinking in terms of having multiple source points and balancing out points of supply. So that has been factored into the way we've been thinking about the CapEx stepping up over the past couple of years, including our CapEx guidance for this year. And I would just also comment when we start talking about formulation plans, that those tend to be very low capital. This is not heavy equipment. This is not chemical synthesis. It's not trivial, but they're not significant capital investments as compared to a new AI plan, for example.

That's great. Thanks, guys.

Thanks very much.

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

This concludes the FMC Corporation conference call. Thank you for attending. You may now disconnect.