The operator introduces the Third Quarter 2023 Earnings Call for FMC Corporation and hands over to Zack Zaki, Director of Investor Relations. Mark Douglas, President and CEO, and Andrew Sandifer, Executive VP and CFO, will discuss the company's third quarter performance, outlook, and update on the Diamides franchise. The presentation will include forward-looking statements and references to non-GAAP financial measures.

The article discusses the financial terms used in a conference call and introduces the speaker, Mark Douglas. It also mentions the decline in volumes in Q3 due to industrywide destocking activity, particularly in Latin America. The company underestimated the extent and duration of this destocking and is taking actions to adjust its cost structure. More information will be provided at the upcoming Investor Day. The Q3 results are outlined on slides 3, 4, and 5.

The third quarter revenue for the company was 29% lower than the previous year due to lower volumes from channel destocking and dry weather conditions. However, sales of newer and differentiated products performed well, with launches accounting for 4% of total company sales. North America saw a 34% decline in sales due to anticipated destocking, while EMEA had a relatively flat revenue decline of 1%. Latin America experienced a 33% decline in sales, but had a successful launch of a new product.

In Asia, sales were down 28% and 23% organically due to destocking in India and an FX headwind. However, new products launched in the last five years showed growth, particularly Isoflex herbicide. EBITDA was $175 million, a 33% decrease, but costs were lower due to input cost benefits and cost control measures. Q4 revenue is expected to be 22% lower with a volume decline and pricing headwind, but minimal FX impact.

Adjusted EBITDA in Q4 is expected to decline by 36% due to lower volumes, but positive mix impact from new product sales is anticipated. Operating costs are expected to remain in line with the previous year. Foreign exchange had minimal impact on revenue in Q3, with some currencies providing tailwinds while others had headwinds. EBITDA margin in Q3 was down 120 basis points, primarily due to a significant decline in volume. Q4 is expected to have lower EBITDA margin and gross margin due to pricing pressures and lower revenue. Interest expense in Q3 was higher than the previous year, mainly due to increased US interest rates and higher debt levels. Elevated interest expense was solely due to higher debt balances compared to previous guidance.

The company expects interest expense for the full year to be higher than previously predicted due to increased debt levels. The effective tax rate for the quarter was in line with expectations. The company's gross and net debt-to-EBITDA ratios have increased due to lower earnings and higher working capital. The company is in talks with their bank group to amend their covenant and provide more flexibility. Free cash flow for the quarter decreased significantly compared to the previous year, largely due to lower earnings and lower payables. Capital expenditures were slightly lower, but legacy spending increased due to timing of expenses.

The company's year-to-date cash flow through September 30th was negative, mostly due to lower cash from operations. They returned money to shareholders through dividends but did not repurchase shares in the third quarter. The company has reduced their free cash flow guidance for 2023 due to lower expected EBITDA and reduced volume. Adjusted cash from operations is also expected to be lower than previous guidance. Capital spending is expected to support new product introductions. The company's free cash flow conversion is below their target due to the impact of an inventory reset in 2023. However, the company states that demand for their products remains strong.

The company's receivables are in good condition and expected to improve with the completion of industrywide inventory adjustments. The Diamides product franchise has shown resilience in the current market and has been a successful investment for the company over the past six years. The company plans to continue growing the franchise through various strategies and has a strong track record of meeting targets. The insecticides market, which the Diamides are a part of, has been growing at a rate of 5% per year and is valued at over $20 billion.

In summary, FMC's Diamides, including Rynaxypyr and Cyazypyr, make up a significant portion of the insecticide market and have experienced strong growth, outperforming other leading chemistry classes. Cyazypyr has grown more rapidly than Rynaxypyr and is expected to continue doing so in the future. FMC has partnerships with other companies to expand the market for their Diamides, with partner sales making up one-third of their Diamides revenue. Branded sales have also outperformed the company as a whole. In 2022, branded sales were geographically diverse.

In 2017, Asia accounted for 40% of branded sales, followed by Latin America, EMEA, and North America. This year, branded sales are expected to outperform total sales in Latin America due to new product introductions. The diversity of crops in our Diamides revenue reflects the broad market potential and our presence in over 90 countries. Our Diamides are not a single product and are defended through various mechanisms such as branding, patents, and agronomic support. Our precision ag offering, Arc farm intelligence, supports over $700 million in branded Diamides revenue. Managing the Diamides life cycle involves multiple strategic components, including innovation and intellectual property (IP). FMC has significantly grown the Diamides innovation since acquiring them in 2017, with a diverse portfolio of formulations and brands in over 80 countries. This diversity minimizes reliance on any single formulation and instead focuses on innovation for future growth.

Recent innovation in Diamides has led to an increase in total sales of Branded Diamides, with new products such as Coragen MaX and Premio Star contributing significantly. FMC has developed and launched four new patented or patent-pending formulations in multiple countries, and these new technologies are expected to make up 17% of branded Diamides sales in 2023. FMC has a strong patent portfolio for Diamides, with over 1,000 granted and pending patents in 75 countries. The company's patent and regulatory timelines have been updated to reflect recent developments, including the inclusion of patented mixtures and patent-pending formulations that can extend patent coverage until 2040 and beyond in some cases.

The paragraph discusses how approvals of registrations do not affect patent validity and how FMC will continue to enforce their patents. They also have a regulatory advocacy strategy to protect their data and notify regulators about companies that do not comply with regulatory laws. The company believes that the current channel destocking will run its course and their new products are performing well.

The speaker, Mark Douglas, responds to a question about FMC's outlook for 2024 and mentions that they will discuss it in more detail at their upcoming Investor Day. He acknowledges the current volatility and inventory reset but reassures that the business is seeing strong demand globally. He also mentions that the resetting process is still ongoing.

Next year's first quarter is expected to be more challenging due to the continued inventory reset in Latin America, Europe, and possibly the US. However, the second half of the year is expected to see growth in revenue and EBITDA, driven by new products and a more balanced industry. The company is not expecting a significant snapback in inventory due to current economic conditions. New products launched in the past five years are expected to bring in $630 million in revenue this year, with even higher numbers expected next year. Costs are also being closely monitored.

The company is seeing cost savings and unabsorbed variances coming out of their manufacturing plants due to shutdowns and restructurings. Input costs are expected to be a modest tailwind next year, but the impact will be offset by unabsorbed fixed costs. The company plans to launch cost savings programs that will drive profit growth next year. They expect to see revenue and EBITDA growth, and are confident in their plan to defend the Diamides. They will provide more detail at their Investor Day.

Mark Douglas, speaking on behalf of the company, discussed their strategy for growth in different countries such as India and Brazil. They are focusing on introducing new products, such as Premio Star in Brazil, which has already shown significant growth in Q3 and is expected to continue doing so. These new products not only extend the company's product line, but also offer sustainability benefits and improved efficacy. Additionally, the company is expanding geographically and obtaining new registrations and label expansions for their products in order to replace older chemistries that will be phased out in the next 10 years.

The speaker discusses the factors driving the growth of their company, including innovation and geographic expansion. They will provide more details on their growth profile in November. The questioner asks about the increase in working capital and the speaker explains that they are restructuring the company to improve all performance metrics, including working capital. They expect working capital to return to normal levels by 2024-2025.

Andrew Sandifer and Laurent Favre discuss the normalization of working capital in the ag input space. Sandifer explains that the working capital cycle in this industry is longer due to purchasing on reasonable terms, holding inventory, and selling on longer terms. He also mentions that there has been a significant increase in inventory levels, which will take 12 to 18 months to adjust to the rapid growth and deceleration in the supply chain. However, Sandifer expects a robust working capital release in 2024 and bleeding into 2025.

The speaker addresses a question about the potential for sharp decreases in prices in the northern hemisphere during the upcoming season. He clarifies that the recent normalization of pricing in Latin America is not broad-based and is a reflection of how they are managing customer inventory. He also mentions that they have had price increases in other regions and will continue to consider them in the next 12 months. The speaker then answers a question about their working capital and states that the traditional build in Q1 will be lower due to their already substantial inventory.

The speaker discusses the impact of receivables and inventory on the company's working capital in the fourth quarter. They note that there may not be as much relief on the receivable side due to advance payments received in the previous quarter. They also mention that the company significantly reduced production levels in Q3 and Q4, resulting in depressed payables. The speaker expects inventory levels to come down in Q4, but notes that it takes time for this to happen due to the long lead time for production. They also mention that sales were $250 million lower than expected in the quarter, leading to a reduction in inventory.

In this paragraph, the speaker discusses the current state of the company's inventory and its plans to reduce it in the future. They also mention ongoing discussions with the banks regarding their covenants and the potential costs associated with amending them. The speaker also mentions the support and understanding from the bank group in regards to the company's need to adjust and reset their business during this transitional period.

Mark and the team are facing a challenging Q4 and Q1, but they expect to see an improvement in Q2. They plan to use any extra cash to reduce debt and will be redeeming $400 million in senior notes this quarter. They will provide more information on the covenant and their long-term financial policy at the Investor Day in two weeks. As for pricing and sales outlook for 2024, it's too early to tell, but FMC generally tends to raise prices every year to cover inflation. More details will be provided on November 16th.

Mark Douglas answers a question about the impact of new product introductions on volume and sales. He also clarifies that there will be no push of sales into next year due to inventory reduction. In response to a question about Diamides, Douglas states that they will provide more information on November 16th, but mentions that the number of formulations will increase over the next 5-10 years. He also references the well-documented trend of growth for molecules after they go off patent.

The speaker discusses the potential growth of the Diamides market and states that it will likely be in line or better than average due to the fragmentation and different patents in different regions. They also mention that they have worked to enable potential competitors to work with them through licensing and commercial arrangements, and have already secured agreements with five large and 60 smaller companies. However, there may still be potential competitors who will try to create generic versions of their Diamides without working with them. The speaker does not provide a specific outlook for this aspect in the coming years.

Mark Douglas, CEO of a pesticide company, discusses the normal occurrence of generic products entering the market as patents expire and jurisdictions change. To combat this, the company is focusing on developing new formulations, expanding into new markets, and leveraging their strong branding and reputation. However, the current visibility on channel inventories and order patterns is limited, with Latin America being the main focus due to the beginning of their season. Other regions may also have channel inventory, but it is not as significant.

Mark Douglas is confident that the company will see growth in the first half of 2024 due to lower raw material costs and restructuring cost savings. He also expects FMC to have sales growth next year, despite the headwinds from lapping 2023 sales declines. He believes that the growth of new products and the full season of LATAM in the second half of the year will provide a positive tailwind. More details will be provided during the Invest Today event.

The speaker addressed concerns about the Diamides franchise, stating that the EBITDA contributions are high and account for around $500 million to $600 million annually. They do not see any significant risk to this.

Mark Douglas, CEO of FMC, assures that the company's EBITDA contribution from their Diamides franchise will remain stable and any potential decline will be filled by the growth of new products such as biologicals. He also emphasizes that FMC's growth is not solely dependent on Diamides, but also on other faster-growing products and platforms. As for supply chain management, FMC is constantly seeking ways to gather better intelligence on inventory levels, including through their grower and distributor networks. Douglas believes there is accurate communication about inventory levels at all levels of the supply chain.

Mark Douglas, CEO of a company, discusses the magnitude of destocking in the industry and the challenges of understanding inventory levels due to the fragmented structure of the industry. He mentions that the company is taking steps to improve their demand forecast accuracy and supply chain planning. He also hints at some learnings that they will keep to themselves. The final question of the conference call asks about the appropriate baseline for future growth and the cumulative inventory build in the distribution channel and at farm customers. Douglas responds that the company will provide more detail at their upcoming Investor Day.

The speaker discusses the expected reset of the industry in the first half of next year, with more balanced growth and inventory management. They also mention the complexity of inventory movement throughout the value chain. The second half of the year is expected to be more normal in terms of growth and inventory management. The call ends after the speaker thanks the participants.

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