The FMC Corporation is hosting an earnings call for the second quarter of 2023. Zack Zaki, Director of Investor Relations, is leading the call and is joined by Mark Douglas, President and Chief Executive Officer, and Andrew Sandifer, Executive Vice President and Chief Financial Officer. The call will include forward-looking statements and references to non-GAAP financial measures. The earnings release and slides are available on the company website.

In the second quarter, FMC experienced a substantial decline in sales volumes, leading to a 30% decrease in revenue compared to the previous year. This was due to higher interest rates, increased product availability, and price reductions in fertilizers and nonselective herbicides. Despite the challenging market conditions, sales of new products introduced in the last five years remained resilient, and price increases of 3% were implemented.

Sales declined in nearly every country compared to the prior year period. North America saw a 25% decline, while EMEA and Latin America saw 26% and 38% declines respectively. Asia saw a 29% decline, with India and other parts of ASEAN facing adverse weather. EBITDA was down 48% due to the volume decline, but pricing momentum continued and costs became a year-over-year tailwind. The outlook for the second half of the year is in line with the guidance provided during the first quarter earnings call, with lower volumes expected to be offset by lower costs.

The company is expecting revenue to be slightly lower in the second half of the year than the prior year period, but they are expecting EBITDA growth and healthy margin expansion. Destocking is expected to continue in the third quarter, resulting in a volume decline in the low-teens percentage. However, favorable input costs are anticipated to offset the revenue headwind from the volume decline. The majority of pricing actions are already in place, and FX impact is forecasted to be minimal. The fourth quarter is expected to have higher volume in Latin America, and the company is guiding EBITDA for the second half of the year to be $801 million in the midpoint.

In the second quarter, FX was a 2% headwind to revenue growth, primarily from the Indian rupee, Pakistani rupee, Canadian dollar, and Turkish lira. For the rest of 2023, FX headwinds are expected to be modest in the third quarter and diminish in the fourth quarter. EBITDA margin of 18.5% in the quarter was down more than 600 basis points versus the prior year period. Fourth quarter revenue is expected to increase 6% at the midpoint, while EBITDA and earnings per share are both expected to be 24% higher than the prior year. The largest variable in the range is volume, which is closely tied to the duration of channel destocking.

The company's gross margin percent increased 200 basis points year-on-year due to input cost tailwinds, higher prices and favorable mix. However, the lower revenue and increased operating spend resulted in a lower EBITDA margin. The EBITDA margin is expected to increase by 120 basis points for the full year despite the tough first half of the year. Interest expense for the second quarter was $64.5 million, up $29.2 million from the prior year period due to higher U.S. interest rates and higher overall debt levels. The effective tax rate on adjusted earnings for the second quarter was 15%, in line with the midpoint of the full year expectation. The company issued $1.5 billion in senior unsecured notes and equal tranches of 3-year, 10-year and 30-year maturities to retire the 2021 term loan and pay down commercial paper balances. After these financing actions, gross debt was $4.7 billion at June 30th, up $470 million from the prior quarter.

FMC experienced a decline in free cash flow of $72 million in the second quarter due to lower use of cash for receivables and other negative cash flow impacts. To address this, the company amended their leverage ratio covenant and returned $123 million to shareholders. They also reduced their free cash flow guidance to zero for the remainder of 2023, due to the decline in EBITDA, lower sales, and expected decline in accounts payable.

Andrew has announced that the adjusted cash from operations will be between $40 million and $370 million, lower than the prior year. Capital additions are expected to be between $125 million and $135 million. Legacy and transformation cash spending is expected to remain flat. Free cash flow conversion is expected to be 47%, well below the targeted 70-plus-percent due to the cash flow impacts of the channel inventory reset. Cash generated in the second half will be used to pay the dividend and reduce short-term borrowings, with no plans for further share repurchases this year. Mark has also mentioned that the company will be holding an Investor Day in November to update attendees on their new strategy.

Mark Douglas discusses the company's strategies for navigating the current demand shock, such as reducing inventories of raw materials and finished goods, managing internal costs, investing in R&D, and focusing on selling newly launched products. He is confident that the company will emerge stronger and more profitable, and he expects to see good growth demand for their products globally. He also suggests that growers may be holding inventory to unprecedented levels.

Growers were holding inventory due to supply disruptions, resulting in a global reset of inventories. This phenomenon is expected to continue through Q3, with volumes down in the low teens. Orders are expected to flow closer to the planting season in Latin America, North America, Europe, and Asia.

Mark Douglas explains that the strength of the portfolio and the differentiated products they are bringing will allow them to hold prices despite the disruptions in the industry. He also mentions that 14% of their revenue in Q2 came from products launched in the last five years, which is an increase from 10% in the same quarter in 2022.

Mark discussed the 20% increase in new products for the year, including two brand-new products for Latin America in Q4. He also mentioned the decline in branded sales of diamides, and the inventory management of their partners. Christopher Parkinson asked about the possibility of retail channels overshooting to the downside in terms of inventories due to lack of urgency from wholesalers and co-ops.

Mark Douglas explains that inventory levels will vary across different geographies, with some overshooting and some not. He believes that North America will not be in any different shape than other areas, and that there will be a combination of overshooting and normal levels of inventory. Douglas mentions that major distributors in the U.S. have commented on how inventory levels will reduce and come back during the next season. He also addresses the focus on free cash flow generation and how investors have been thinking about the rolling three-year averages, with '23 being a hiccup in the long-term trends.

Andrew Sandifer explains that the company's EBITDA guidance has dropped significantly, resulting in a decrease in free cash flow. The company is adjusting production levels, which means they are not buying any new material and accounts payable will drop by $400 million. However, free cash flow should rebound in 2024 when the company experiences more normalized conditions.

Mark Douglas explains that there are various methods to understand what farmers are doing, such as looking at acreage planted and using independent sources of information. This is particularly strong in Brazil, the U.S., and to a lesser extent in Europe and Asia.

Mark Douglas explains that they are supplying raw materials to their partners, which is causing them to reduce their inventories. He also states that the demand for diamides is not slowing down, and their own branded products are doing well in the U.S. due to new, higher concentration formulations.

Mark Douglas discusses the expected deflation of raw material costs in the second half of the year and into 2024. He anticipates lower costs and notes that prices have already come down in the industry. He believes that the Chinese producers are selling products below cost and predicts that some of the smaller companies will disappear due to their financial issues.

Andrew Sandifer and Mark Douglas discuss the current cost situation and how it will affect the business in 2024. They note that the cost tailwinds are stronger now than initially expected, with improved costs in Q2 and expected stronger costs in Q3 and Q4. They also discuss the balance between improving near-term earnings and investing in the business for the long-term, noting that they are trying to ensure that they are continuing to do the right things to invest in the growth of the business.

The company is focusing on long-term growth and is not cutting back on R&D. They are instead focusing on reducing costs in sales and general and admin areas, while still investing in commercial operations and expanding market access. They have demonstrated their ability to control spending in the past and are doing so again.

Mark Douglas is discussing the expected volume growth rate for the upcoming year. He believes that the soft commodities and grains market is currently in a good position, with prices above the long-term average and stock-to-use ratios trending down due to yield issues. He states that it is difficult to predict the volume growth rate for the coming year, but that it is likely to return to the long-term low single-digit growth rate.

Andrew Sandifer discusses the positive backdrop for agriculture in 2024, noting that acreage increases are expected and productivity must increase by 3% a year to combat hunger. He then talks about fourth quarter margins, noting that there will be a positive volume contribution, cost tailwinds, input cost favorability, and modest pricing benefits.

Mark Douglas explains that the current decrease in inventory is different from the Brazilian event in 2015-2016, as it is happening faster and not caused by a new seed trait. He also notes that the current decrease is more extreme than the one in 2015-2016.

Andrew Sandifer explains that while they have not yet quantified the headwinds from unfavorable cost absorption due to lower production levels, they do expect some modest fixed cost absorption headwinds in Q4. This is built into their guidance and partially offsets the input cost benefits they have in Q4. Adam Samuelson then asks for a distinction between orders from customers as suppliers of diamides to other crop chem manufacturers and sales into the channel. Sandifer does not provide a clear distinction but does explain that the sales decline has been global and unprecedented.

Mark Douglas discussed how the new branded diamides that the company is introducing are doing well, and that their sales to partners are being used for a variety of applications. He also noted that the new product introductions are targeted at Latin America, but he did not give away any competitive information on how well they are doing. He concluded by emphasizing that the new products are helping the company return to growth in the fourth quarter.

Mark Douglas describes the various weather conditions that have impacted the agricultural field in the first half of the year, including drought in the south of Brazil and Argentina, dry conditions in the Midwest of the U.S., flooding in China, and dryness in India and Australia. He then addresses a follow-up question about whether more competitive products will enter the market, explaining that generics play a major role in the marketplace.

Mark Douglas believes that the current macro environment has caused customers to manage their inventories differently, and that this year should be seen as a reset for the company. He expects to share a view of the company's growth potential in November, which is expected to be 5-7% top line growth and 7-9% bottom line growth, with potential to outgrow the market by 1.5-2.5 times.

Mark Douglas of FMC states that the recent reset has impacted the crop protection market, but the plant health business is still expected to grow in the 20-plus-percent range. FMC is investing in R&D to accelerate this growth, and they are considering all tools to deliver value to growers and appropriate value to FMC, including potential rebate programs.

The costs for Q4 are largely locked, but there are some elements that can move quickly through the cost structure, such as packaging and logistics. Price and volume expectations for Q4 are still uncertain, but FMC Corporation expects orders to come close to the planting season. The call then concluded with closing remarks from Zack Zaki.

This summary was generated with AI and may contain some inaccuracies.