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. After today's prepared remarks, there will be an opportunity to ask questions. 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, 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 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 Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based upon these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, free cash flow, net debt and organic revenue growth, all of which are non-GAAP financial measures. Please note that as used in today's discussion, earnings means adjusted earnings and EBITDA means adjusted EBITDA. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website. With that, I will now turn the call over to Mark.

Thank you, Zack, and good morning, everyone. 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 foreign exchange 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, significantly lowering subsequent generations of target insect larvae, 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 4, 5, and 6. Revenue was up 21% organically, EBITDA up 3% and EPS up 7%, driven by strong market demand for our innovative portfolio and an average price increase of 7%. Adjusted earnings were $1.93 per diluted share in the quarter, $0.08 above the midpoint of our guidance range. The year-over-year EPS increase was primarily driven by an increase in EBITDA and lower share count. GAAP results reflect the impact of our exit from Russia in April this year. We had double-digit growth across several product categories, with insecticide showing the greatest increase at over 20% year-over-year. Our herbicide portfolio also had a strong quarter, with 15% growth led by North America and EMEA. Sales from products launched in the past five years grew more than 35% compared to the same period last year. And these products made up 10% of our total sales in the quarter. The global plant health business grew 20% year-over-year, led by a 35% growth in our biologicals portfolio. The momentum of this business reflects our customers' demand for new sustainable solutions. We reported $1.45 billion in second quarter sales, led by price and volume growth in Latin America and North America. In North America, sales increased 26% year-over-year. Demand for both herbicides and insecticides grew double digits. In Canada, high pest pressure supported the successful launch of Coragen MaX, an insecticide powered by Rynaxypyr, targeting a broad spectrum of pests such as grasshoppers in cereals and other crops. Diamides sales were impacted in California and Texas due to dry conditions, but this was offset by growth in the Midwest in soy and corn. In Latin America, sales increased 44% year-over-year, led by Brazil, Mexico, and Argentina. Results were driven by the full range of our insecticide portfolio for soy, corn, and cotton. Sales in EMEA grew 3% versus the prior year and were up 15% organically. Aside from strong pricing, results were driven by increased demand for herbicides. Finally, Asia was down 1% versus the second quarter last year and up 4% organically. Pricing gains were offset by foreign exchange headwinds. Demand for Cyazypyr grew in India for applications on fruits and vegetables. In Australia, Overwatch Herbicide continued to outperform competing products in cereals. Overall, adjusted EBITDA was $360 million, an increase of 3% compared to the prior year period, and $10 million above the midpoint of our guidance range. Volume gains and price increases more than offset cost inflation and foreign exchange headwinds. Average price increases of 7% contributed $84 million in the quarter. As we expected, cost headwinds more than doubled from the first quarter as inflation continued to challenge our supply chains. Foreign exchange was a $23 million headwind in the quarter, due to the weakening of European and Asian currencies against the U.S. dollar. Before we review FMC's full year 2022 and second half earnings outlook, let me update you on our views regarding the overall market conditions. We now expect the global crop protection market will be up mid to high single digits on a U.S. dollar basis versus our earlier expectation of low to mid single digit growth. Latin America is now expected to be up double digits, primarily driven by pricing of non-selective herbicides. We still expect North America to be up mid single digits, while Asia is now expected to grow low single digits. EMEA is still expected to be down low single digits, including the impact of foreign exchange. Excluding currency impact, EMEA is expected to grow low single digits. While commodity prices have come down somewhat from their highs earlier in the year, they remain elevated versus historical averages. This bodes well for the demand for our crop protection products through the end of this year and well into 2023. Moving to Slide 7. We have seen pronounced shifts in demand and cost between individual quarters this year. Therefore, looking at the business in halves gives a better understanding of the underlying performance. For the first half, performance was very strong as a result of price increases and volume growth, which contributed $178 million and $132 million to EBITDA, respectively. These drivers more than offset significant cost and foreign exchange headwinds of almost $250 million, resulting in 9% EBITDA growth over the prior year period. In the context of our full year guidance, first half EBITDA growth represents more than three quarters of the increase required to achieve the midpoint of our full year guidance. When we consider the drivers for the second half of the year, price is again expected to contribute more to EBITDA than volume. Cost increases are expected to have the biggest impact in the third quarter, with continued but lower cost inflation forecast in the fourth quarter. There are two primary reasons for the expected cost increases. The first reason is the cost inflation related to sourcing from secondary and tertiary suppliers due to lack of availability from our preferred suppliers. The second reason is the lag of six months between procuring high-cost material and its impact on our P&L, since FMC typically turns inventory twice a year. Latin America and North America are our biggest drivers of revenue in the second half. And we have already captured roughly 70% of the orders needed in Brazil to deliver our second half guidance. For reference, this is normally around 50% at this time of the year. The increase in orders is due to the higher-than-average customer demand driven by favorable commodity prices. In the U.S., Q4 order discussions are taking place as we speak, which is much earlier than in previous years, making us confident in our forecast. Overall, we expect the second half of the year to contribute 2% in EBITDA growth following a very strong second half of 2021. Turning to Slide 8 and the review of FMC's full year 2022 earnings outlook. After a strong first half of the year, we are raising full year 2022 revenue to a range of $5.5 billion to $5.7 billion, representing an increase of 11% at the midpoint versus 2021. Sales growth will be driven by volume and price growth in all regions, partially offset by foreign currency impact in EMEA and Asia. We are narrowing the full year adjusted EBITDA range to $1.36 billion to $1.44 billion, representing a 6% year-over-year growth at the midpoint. The range for 2022 adjusted earnings per share is narrowed as well, and is now expected to be in the $7.00 to $7.70 per diluted share, representing an increase of 6% year-over-year at the midpoint. Consistent with past practice, we do not factor in any benefit from potential future share repurchases in our EPS guidance. Q3 and Q4 outlook is provided on Slide 9. Midpoint of our third quarter guidance implies year-over-year sales growth of 13%. Q3 EBITDA and EPS growth are expected to be limited by the highest cost increases of the year, despite the targeted mid to high single-digit price increases. FX volatility in the absence of sales in Russia will also be headwinds to earnings in the quarter. Guidance for Q4 implies year-over-year sales growth of 2% at the midpoint compared to the exceptionally strong growth in the prior year period. Cost increases are forecasted to be lower in Q4 compared to Q3, while price increases are expected to continue. This is anticipated to result in an EBITDA growth of 17% at the midpoint with EPS up 13% at the midpoint year-over-year. Moving now to the updated drivers of 2022 EBITDA outcomes on Slide 10. While the market growth assumptions have improved, costs remain elevated, though we are beginning to see signs of cost inflation flattening. Price in the mid to high single digits and strong volume growth are expected to offset cost and foreign exchange headwinds keeping the midpoint of our guidance unchanged. While we expect the highest cost increases of the year in Q3, we do not expect material benefits from easing inflation to be realized until 2023. With that, I'll now turn the call over to Andrew.

Thanks, Mark. I'll start this morning with a review of some key income statement items. Foreign exchange 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 foreign exchange 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 the fourth quarter of 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 by higher working capital. Strong sales growth, including the impact of aggressive price increases on receivables, was the key driver of increased cash consumption for working capital. Capital additions and other investing activities of $65 million were essentially in line with the prior year period. Legacy and transformation spending was down, primarily due to the absence of spending on our SAP program, which was completed in the prior year period. We are narrowing the range of our free cash flow guidance for full year 2022 to $565 million to $685 million, unchanged at the midpoint of $625 million and reflecting the more narrow EBITDA guidance range. Adjusted cash from operations is now expected to be in the range of $790 million to $870 million, unchanged at the midpoint. Working capital growth is expected to result in a year-on-year reduction of $80 million in cash from operations at the midpoint. Our guidance for capital additions and legacy and transformation remain unchanged. With this guidance, we anticipate free cash flow conversion of 67% at the midpoint, with conversion limited this year by inflation's impact on working capital. This guidance also results in rolling three-year free cash conversion of 71%, in line with our long-term targets. Through the first half of 2022, we have deployed $334 million of cash, $200 million for the BioPhero acquisition and $134 million in dividends. Given the BioPhero acquisition and the seasonality of our free cash flow, we did not purchase any FMC shares in the first half. For the remainder of 2022, we expect to return up to $334 million to investors through continued dividends and up to $200 million in share repurchases. The reduced outlook for share repurchases reflects two key changes since we last gave guidance. First, as I mentioned just a moment ago, we deployed $200 million of cash to acquire BioPhero. Second, we are limiting the amount of incremental debt we had in 2022 to mitigate in part the earnings impact of faster-than-expected interest rate increases. We continue to expect to utilize more than 100% of our free cash flow to invest in growth and reward shareholders. And with that, I'll hand the call back to Mark.

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. 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 possible on the divergence between the third and fourth quarter? Obviously, you hit on this a little. I imagine there are 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 costs 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, around 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-month 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 increase as 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 us already about Q4 demand. That doesn't normally happen at this stage of the cycle. It's usually a month or so later than this. So we know already that we have a high degree of confidence, not only from the top line perspective in Q4, but also from a cost perspective. Why? Because we've already incurred a lot of those costs in Q2, that will hit in Q4. So we know to the vast majority of what the cost structure will be in Q4. I like to think that for the first time in probably about three years, I can tell you we're not actually managing any crises out of China. Things are flowing very well for us and our manufacturing units are operating, our suppliers are generally operating well. And we already see that flowing through. So we feel very confident about supply. The other element is price. You can see that we've raised our prices significantly as we move from midyear last year. A lot of those prices are already embedded into our cost structure and pricing structure for the third and fourth quarters. It doesn't mean to say that we're not still moving prices; we are, and there will be more price increases coming. But the fact is we have a very high degree of confidence about Q4. Just a further comment on Q3. You can see the change is predominantly driven by the impact of costs that we've seen flowing through our P&L. But there is another factor. The biggest impact of our Russian exit is in Q3. And remember, we've kept our midpoint guidance of $1.4 billion despite absorbing $25 million of lack of EBITDA from Russia. So I think that kind of gets lost in the noise here, but we are covering Russia and we haven't moved our guidance downwards. So I think that's a very positive aspect of how we're managing the P&L. So I hope that gives you a little more insight into how we feel about Q4 and Q3. We're very confident of Q4. We're also very confident of our top line in Q3.

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 that as what you're confident 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 mentioned that inflation might decrease in the second half of 2023 if conditions persist. As we enter 2023, would your margins be similar to where they have been in the first half of the year over the past couple of years, in the mid to high 20s? What would the start of 2023 look like, considering the divergence between the 80% in Q3 and 30% in Q4? I know you don't provide guidance, but what does early 2023 look like?

I'm glad you know asking about the guidance, Joel. It is a little early. Yes, I hear you. Listen, I think from a margin perspective, what you're seeing in Q3 and Q4 are pretty extreme 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 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, 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 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. The second question is about herbicide pricing and how you're planning for it, especially as we are seeing a decline in prices. This applies to both your non-selective and selective herbicide segments. Are you anticipating that prices will stabilize 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 was 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 being 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. I would like to ask another question about costs, particularly regarding the changes in natural gas and power in Europe, where you have significant operations in Denmark. How should we interpret your comments about inflation decreasing and what you expect in terms of energy costs in Europe? Additionally, do you have any insights or concerns regarding some of the intermediates that you may still need to source 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, 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 in 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. Currently, our sales are roughly 60% from FMC branded products and 40% through our third-party partners. This distribution has been increasing as we bring more partners on board. We anticipate our growth rate for diamides to remain in the high single digits. In the second quarter, we experienced growth in the mid-teens, balancing evenly between both revenue sources. While we don't disclose specific contract details, generally speaking, the EBITDA impact is neutral on a percentage basis. This means growth from either FMC or our partners is equally beneficial in terms of EBITDA. I expect the 40% share to continue rising as more partners engage in marketplace sales. Importantly, the increase in the 40% does not take away from the growth of the 60%; rather, it expands the overall market for diamides. As mentioned previously, we see diamides capturing market share from various older chemistries, including neonicotinoids, some pyrethroids, and certain carbamates worldwide.

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 the 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, as Mark mentioned, since we turn over inventory about twice a year, the purchases we make today start impacting our profit and loss statement two quarters later. Thus, with the items we are beginning to acquire now, we have some visibility into the first quarter of 2023, but it is not yet complete. We haven't made enough purchases to provide a full picture, and the timing of these purchases varies throughout the quarter. I want to emphasize that we expect costs to keep rising, especially in the first half of 2023, although the increase will be at a lower rate. The fourth quarter of 2022 will show the largest cost increase we've experienced, and the largest we predict for the year. We anticipate that the rate of cost increases will decline in the fourth quarter, but there will still be inflation compared to the previous year. Currently, we are noticing inflation flattening out, but we have not seen costs drop significantly yet. Therefore, for the first quarter, we will continue to monitor our purchasing as we progress through this quarter to gauge the outlook, but we still expect some cost challenges in the first quarter and possibly into the second quarter, with improvement likely in the second half of 2023.

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. But I'm just curious, of the 148 million of costs that you incurred 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, there can be a significant difference in the contribution to EBITDA from volume compared to the contribution to revenue growth from volume. Over the past four quarters, that was approximately 58% in Q2, with the quarter itself being about 57%. This aligns with our expectations. Our long-term average is around 60%, reflecting the high value and mix component of our volume growth. It's important to note that our mix is included in the volume, which can lead to noticeable fluctuations due to variable cost increases. While it isn't a perfect indicator, you should continue to anticipate that the volume drop-through to EBITDA will remain in the 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 if 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.

Good morning. Your top line organic growth was 21% in the second quarter, but EBITDA only increased by 3%. You mentioned cost inflation and raw material costs. Could you break down your raw material costs into three categories? Specifically, what is the inflation from AIs, what are the logistical costs, and what other costs might be involved, such as packaging or labor? 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., as Mark mentioned, the largest portion of our costs comes from the raw materials, intermediates, and active ingredients we purchase. I wouldn’t identify a specific category among these three—raw materials, packaging, and logistics—that is growing disproportionately compared to the others. We have experienced significant inflation across all of them, as well as notable disruptions that have necessitated the use of secondary and tertiary suppliers in each category.

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 are 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. We haven't identified any significant mismatches, but we have indicated that we will be focusing on creating a more balanced supply chain and operational structure moving forward. Regarding our investments in the upcoming molecules and establishing production, we are actively involved in India and Europe, and we are exploring additional toll manufacturers in the Americas. Overall, I wouldn’t say there is a mismatch. However, as the industry continues to grow, we recognize the increasing demand for formulating capacity, and we are investing significantly in that area, particularly in the U.S., to support our business here. Our strategy emphasizes positioning formulating capacity as close to the customer base as possible, which is influencing our manufacturing and operations planning. Andrew, would you like to add anything?

Tony, I'll add to that. Regarding your question about capital expenditures, our capital plan includes building a supply chain that is more geographically diverse. This has been a key consideration as we think about having multiple supply points and balancing our sources of supply. This strategy has influenced our approach to increasing capital expenditures over the past few years, including our guidance for this year. Furthermore, when we discuss formulation plans, it's important to note that they generally require very low capital investment. These plans do not involve heavy equipment or complex chemical synthesis. While they are important, the capital commitments for them are not as significant compared to, for example, a new AI facility.

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.