FMC (FMC) Pierre R. Brondeau on Q2 2016 Results - Earnings Call Transcript

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FMC Corp. (NYSE:FMC)

Q2 2016 Earnings Call

August 03, 2016 9:00 am ET

Executives

Brian P. Angeli - Vice President, Corporate Strategy and Development

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Paul W. Graves - Chief Financial Officer & Executive Vice President

Mark A. Douglas - President-FMC Agricultural Solutions

Thomas Schneberger - VP & Global Business Director-Lithium Division

Analysts

Christopher S. Parkinson - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Joel Jackson - BMO Capital Markets (Canada)

Michael Joseph Harrison - Seaport Global Securities LLC

Frank J. Mitsch - Wells Fargo Securities LLC

Daniel Jester - Citigroup Global Markets, Inc. (Broker)

Rosemarie Jeanne Morbelli - Gabelli & Company

Mark Connelly - CLSA Americas LLC

Aleksey Yefremov - Nomura Securities International, Inc.

Michael J. Sison - KeyBanc Capital Markets, Inc.

Peter E. Butler - Glen Hill Investment Research

Operator

Good morning, and welcome to the Second Quarter 2016 Earnings Release Conference Call for FMC Corporation. Phone lines will be placed in listen-only mode throughout the conference. After the speakers' presentation, there will be a question-and-answer period. As a reminder, today's conference is being recorded.

And I will now turn the conference over to Mr. Brian Angeli, Vice President of Investor Relations for FMC Corporation. Mr. Angeli, you may begin.

Brian P. Angeli - Vice President, Corporate Strategy and Development

Thank you and good morning. Welcome to FMC Corporation's second quarter 2016 earnings call. Joining me his today is Pierre Brondeau, President, Chief Executive Officer and Chairman, and Paul Graves, Executive Vice President and Chief Financial Officer.

Pierre will begin the call with a review of FMC's second quarter performance and discuss the outlook for Q3 and the full year 2016. Paul will provide an overview of select financial results. The slide presentation that accompanies our results, along with our earnings release and 2016 outlook statement, are currently available on our website, and the prepared remarks from today's discussion will be made available at the conclusion of the call.

As with our prior calls, Mark Douglas, President, FMC Agricultural Solutions; Eric Norris, President, FMC Health and Nutrition; and Tom Schneberger, Vice President and Global Business Director, FMC Lithium, will join to address questions.

Before we begin, let me remind you that today's 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 information. Actual results may vary based on these risks and uncertainties.

Today's discussion will focus on adjusted earnings for all income statement and EPS references, and pro forma revenue and segment earnings for FMC Agricultural Solutions. 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 Pierre.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Thank you Brian, and good morning, everyone. As you can see on the first slide, for the second quarter of 2016, FMC reported revenue of $810 million and adjusted operating profit of $143 million. Adjusted EPS of $0.69 was $0.01 below the second quarter of 2015 but above the midpoint of our guidance range.

Ag Solutions delivered another solid quarter as it continues to realize the benefits of the Cheminova acquisition. Lithium outperformed on higher sales volume and higher realized prices across the portfolio, with lower operating cost from ongoing manufacturing excellence program. Earnings in Health and Nutrition were below expectation, as results in Omega-3 were significantly weaker than anticipated.

Based on our performance to date and the outlook for the back half of the year, we are increasing full-year adjusted EPS guidance by $0.05 to $2.60 to $2.90 per share. I will provide more detail on how that breaks down across each of the businesses shortly.

But first, I will discuss second quarter results for each of our three segments, starting with Ag Solutions on slide 2. Overall, market conditions and our performance in the quarter were in line with our prior expectations. We remained focused on reducing the level of FMC product inventory in the channel and on maintaining discipline on price and terms. We also took actions needed to complete the product rationalization that began in late 2014.

For the second quarter, Ag Solutions reported revenue of $550 million and segment earnings of $101 million, slightly ahead of the midpoint of our guidance range. Revenue declined 19% compared to the second quarter of 2015, largely due to lower sales volumes, unfavorable weather conditions in Europe and Asia, the drawdown of channel inventory by customers in most regions, and planned product rationalizations all contributed to the decline in volume in the quarter.

Excluding planned product rationalizations, revenue declined broadly in line with the crop protection market as a whole. Segment earnings declined 14% compared to 2015, as the impact of lower sales volumes, less favorable product mix in Asia and North America, and the stronger U.S. dollar were partially offset by lower operating costs. Compared to pro forma results from Q2 last year, operating margin increased 100 basis points, reflecting pricing discipline, the elimination of sales of low-margin products due to portfolio rationalization, and cost savings from the Cheminova integration.

As we move to slide 3, I will first give a few comments on the global crop protection market, then I will move on to review FMC's performance by region and discuss the outlook for Q3 and the full year. So, first the market. Overall, conditions in the global crop protection market were as expected and little changed from Q1. In North America, soft commodity prices continue to put pressure on farm incomes, resulting in more cautious buying behavior by growers and elevated inventory levels across the channel. In Europe, unfavorable weather conditions early in the quarter, most notably in Central and Western Europe, reduced market demand leading to lower volumes and increased channel inventory in certain countries.

In Brazil, channel inventory across the market remained elevated, especially for insecticides. And while foreign exchange rate had been more stable, growers continue to be negatively impacted by a lack of credit availability. In Asia, weather conditions were poor across most of the region, resulting in weaker market demand. We believe these challenging market conditions will persist for the remainder of the year, and we still forecast that the global crop protection chemical market will decline by mid to high single-digit percent in 2016 on a U.S. dollar basis.

I will now discuss FMC's performance in light of these market conditions. First, let me address the lower-than-expected revenue for the quarter. Markets in Asia and Europe were weaker than expected, but the main driver of the lower revenue is a more successful and aggressive product rationalization. We continue to manage the quality of our sales in order to protect margin, earnings and working capital.

In North America, our strategy remained one of defending price and terms, allowing the level of FMC product inventory in the sales channel to reduce. All the data we see support our view that inventory of FMC product in the channel is declining. Reflecting the benefit of the actions we took early in the season to reduce inventory of FMC product in the channel, sales in Q2 increased 5%. We saw strong demand for FMC's Authority brand of pre-emergent soybean herbicide, and independent data show that the Authority brand has taken market share this year. We also saw grower support for the expanded fungicide products we can now offer as a result of the Cheminova acquisition.

In Europe, revenue declined by 19%, driven largely by poor weather conditions and reduced volume due to the planned product rationalization, as well as the impact of transitioning to a direct market access model. However, the product rationalization and move to direct market access have resulted in improved operating margins in the region.

In Latin America, revenue declined 43%, primarily as a result of steps we took to reduce the level of FMC product inventory in the sales channel in Brazil. We were encouraged by our ability to recover U.S. dollar pricing in the quarter. While not material to overall segment performance, given the seasonally lower sales volume, realized price increased in Brazil more than offset the negative impact of FX on our reported revenue. In Asia, the combination of poor weather condition, further portfolio rationalization, and a stronger U.S. dollar caused revenue to decline 22% compared to the second quarter last year.

Moving on to the outlook for Ag Solutions. Our full-year segment earnings guidance remains unchanged at $380 million to $420 million. For the third quarter, we expect segment earnings of between $80 million and $90 million. At the midpoint of guidance, second-half segment earnings will increase by approximately 35% compared to 2015, driven by improved performance in Brazil and Latin America and additional cost savings from the Cheminova integration.

The steps we have already taken to rationalize our product portfolio and reduce the level of FMC inventory in the sales channel leave us well-positioned as we enter the 2016-2017 crop season in the Americas. The relative stability of the Brazilian real over the past few months gives us increased confidence in our ability to recapture price despite tightening credit conditions for growers and weak market demand as channel inventory levels decline.

We expect full-year segment earnings margin to be between 17% and 18%, which at the midpoint represents more than 250 basis points of improvement compared to 2015, driven by more favorable mix, improved pricing in Brazil, and realization of cost savings. We remain on track to deliver an incremental cost savings target of $60 million to $70 million in 2016, and a full run-rate cost savings of $140 million to $160 million by the middle of next year.

Moving on to Health and Nutrition on slide 4. The business reported second quarter segment revenue of $195 million and segment earnings of $45 million dollars. Revenue declined approximately 6% and earnings declined approximately 11% compared to the second quarter of 2015. Results for the quarter were negatively impacted by worse-than-expected performance of Omega 3. The headwinds we saw in Omega 3 over the past year increased in the second quarter. Specifically, prices and volumes were much lower than anticipated.

There is significant overcapacity in the industry, which, combined with lower demand for higher-concentration products, has exerted even greater pressure on prices than we saw earlier in the year. We have seen new entrants win business at prices that are close to cash cost of production, resulting in considerably lower volume for our products in certain key area. We have aggressively taken cost out of this business, with fixed cost falling by almost 40%. We continue to pursue new opportunities for high-end concentration products, but do not expect to recover this lost volume this year and do not anticipate a change in pricing levels any time soon.

Excluding Omega 3, results were in line with expectations. In nutritional ingredients, volumes in the quarter were slightly below Q2 2015, largely due to timing as orders shifted to the second half of the year. In health excipients, sales volumes increased in all key pharmaceutical markets.

Given performance to-date in Omega 3 and our expectations for the rest of the year, we are lowering our guidance for Health and Nutrition. We now expect full-year segment earnings to be in the range of $190 million to $196 million, roughly flat with 2015, and third quarter segment earnings to be in the range of $44 million to $48 million. We continue to expect operating margins of approximately 25% for the full year, helped by lower operating cost and improved production yields.

Turning next to Lithium on slide 5. Lithium delivered another outstanding quarter. Revenue increased 15% year-over-year to $63 million, and segment earnings more than tripled to $16.5 million. Lithium's performance reflects the success of FMC's strategy of converting lithium carbonate into higher-value downstream specialty products, supported by strong manufacturing performance, especially in Argentina and at our Bessemer City hydroxide facility.

Higher sales volume, higher average prices in all major product categories, improved mix and lower operating cost all contributed to deliver segment earnings above the top end of our prior guidance range, and pushed segment earnings margin to over 26% in the quarter. We expect supply/demand conditions to remain tight for the remainder of the year, as previously announced capacity expansions across the industry have been slow to come online. This reinforces our confidence in favorable pricing conditions through the remainder of 2016.

For the full year, we expect segment earnings to be in the range of $58 million to $66 million, an increase at the midpoint of approximately 30% compared to prior guidance, and nearly three times segment earnings in 2015. Higher prices and lower operating cost compared to last year will support operating margins in the range of 24% to 25% for the year. We expect third quarter segment earnings to be in the range of $13 million to $17 million, as the benefit of higher prices will be partially offset by seasonally lower production and operations in Argentina.

FMC's midterm business is positioned to deliver significant earnings growth in 2016 and beyond. In May, we announced plans to triple our production capacity of lithium hydroxide to 30,000 metric tons by 2019 in order to meet growing demand from our customers, starting with a 4,000 metric ton expansion scheduled to come online in 2017. Last week we announced we will accelerate that capacity expansion, and we now expect 8,000 metric tons to come online by the middle of 2017. We continue to evaluate the timing of further capacity expansion and expect the entire 20,000 metric tons of additional capacity to be online by 2017. We believe we will more than double the revenue and earnings of our lithium business between 2016 and 2020, resulting in over 20% per year growth through the rest of this decade.

We recognize that our hydroxide investment plans require us to have cost effective access to sufficient lithium carbonate. Our current carbonate capacity is sufficient to support expansion in FMC's hydroxide production through at least 2018. Beyond this, we are actively pursuing multiple paths to ensure we are not carbonate constrained. First, we have several low-capital options to debottleneck our Argentina operations, potentially adding 20% capacity. Second, we are in ongoing discussions with multiple carbonate producers who have announced plans to add capacity in the coming years, and are exploring mutually beneficial long-term supply agreements or strategic partnerships. And of course, we retain the option to add significant capacity at our operation – our existing operations in Argentina, beyond the debottlenecking I just mentioned. Consequently, we are highly confident that excess lithium carbonate will not be a constraint in our ability to extend the hydroxide business in the coming years.

Before I turn the call over to Paul, I will comment briefly on the outlook for the third quarter and full year 2016 on slide 6. As I mentioned, we are maintaining full-year segment earnings for Ag Solutions and adjusting our full-year earnings expectation for both Health and Nutrition and Lithium. As a result, on a consolidated basis we are increasing full-year adjusted EPS guidance by $0.05 at the midpoint to $2.60 to $2.90 per share. For the third quarter, we expect adjusted EPS to be in the range of $0.53 to $0.63.

I will now turn the call over to Paul to discuss select financial results.

Paul W. Graves - Chief Financial Officer & Executive Vice President

Thank you, Pierre. As usual, I'll start with the income statement, and specifically the tax rate. Our adjusted effective tax rate for the full year is now expected to be in the range of 24% to 25%, given there's a small benefit this quarter compared to Q2 last year. This lowered rate is largely due to the continued change in the mix of our earnings away from high-tax jurisdictions such as the U.S. toward regions where tax rates are lower.

Foreign exchange was not a major factor in our results this quarter, with the stronger dollar mainly impacting the Ag Solutions segment. Various Asian currencies plus the Mexican peso were the drivers of the FX headwind in the quarter. The second quarter is not a period of significant activity in Brazil, and therefore, the recent strengthening of the reais had a limited impact on our financials in the quarter. However, with an FX rate in the quarter that was weaker than the same period of last year, and with a price list that largely reflected the current spot rate, the combined effect of price and currency in Brazil was a net positive to our second quarter earnings.

Looking into the second half of the year, the recent stability in the reais-U.S. dollar exchange rate means that the assumptions regarding the future exchange rate that has underpinned our guidance is unchanged. To remind you, our guidance has assumed that we have a reais-to-U.S.-dollar rate that is relatively stable with no major short-term swings in the FX rate, combined with a price list that largely reflects the prevailing spot exchange rate. Sitting here today, both of those assumptions remain unchanged, and therefore, we do not expect either a positive or negative impact on our second half performance from the reais FX rate compared to our previous guidance, provided these conditions hold.

Turning to the balance sheet and cash flow on slide 7. We continue to make progress in increasing our cash generation while maintaining discipline on capital spending. For the first half of the year, our adjusted cash from operations was 40% higher than the first half of last year, driven primarily by stronger working capital performance. We remain on target to meet our outlook for the full year of $450 million to $550 million of adjusted cash from operations. Net debt fell by $90 million compared to the first quarter and by over $120 million since the start of the year.

The second quarter is an important period for us in terms of cash collections in Brazil. We remain very focused on the credit capacity of our customers, particularly given the constrained access to third-party financing for Brazilian growers. This has an impact on both our ability to collect cash from customers and our willingness to continue to extend credit in a form of new sales.

On the first point, we were pleased with our performance in collecting in Brazil, with net cash collection slightly ahead of our expectations, and particularly good progress in collecting from our past-due balances. As a result, we saw a meaningful reduction in our Brazil receivables balance. However, it is still significantly higher than we would like, and we will remain focused on reducing our exposure in the coming quarters. The credit tightness in Brazil has been an important factor for us for several quarters now, with our willingness to extend credit to certain segments of the market reduced. As we head into the key second-half selling season in Brazil, our guidance reflects this disciplined approach to credit exposure.

And with that, I will turn the call back to Pierre.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Thank you, Paul. And before I continue with my remark, let me correct the statement I made. The 20,000 tons of additional lithium hydroxide capacity is to be online by 2019, not as I said 2017. So to continue and to conclude, I am very pleased with the overall execution of our strategy and improved outlook for the year. Despite ongoing challenges facing the agricultural industry, our strategy and the actions we have taken in the back end of 2015 and the first half of 2016 give us strong confidence in our performance for the remainder of the year.

We have remained focused on reducing the level of FMC product inventory in the channel, maintained discipline on price and terms, aggressively managed our mix by rationalizing our product line, leading to stronger margins. This strategy, combined with the successful integration of Cheminova and a more benign FX situation in Brazil, have increased the predictability of our business and will drive the second-half performance of Ag Solutions, with earnings up 35% compared to pro forma results for 2015.

We are investing in our technology road map in order to offer unique value-added solutions to our customers. We see high acceptance rates for our new product launches, including our biological platform, and remain on track to introduce our new active ingredients pipeline starting in 2017.

Lithium continues to deliver strong performance, altering its product mix and increasing output to meet growing market demand. FMC's focused strategy has enabled the business to take advantage of favorable market conditions to realize significant earnings growth in 2016. Our announced capacity expansion strengthens FMC's leadership position in lithium hydroxide and specialty lithium applications, and will deliver further growth in the years to come.

Health and Nutrition had a weaker than expected quarter. However, the business continues to generate high margins and returns, and demand across key nutritional and pharmaceutical markets multiple growth over the second half of the year. Finally, we are generating increased operating cash flow to improve our balance sheet. We are on track to increase adjusted cash from operations by approximately 40% in 2016.

I thank you for your attention this morning. And with that, I will turn the call back to the operator for questions.

Question-and-Answer Session

Operator

We'll pause for a moment to compile the Q&A roster. And your first question comes from the line of Christopher Parkinson with Credit Suisse. Please go ahead

Christopher S. Parkinson - Credit Suisse Securities (USA) LLC (Broker)

Perfect. Thank you very much. Can you just comment a little more on your longer-term expectations for your European business, given your shift, or I'd say rather evolution, of your go-to-market strategy, and then also parse out your views for Northwest Europe versus CIS? And then also you mentioned a product rationalization as well. Just any additional detail will be helpful. Thank you.

Mark A. Douglas - President-FMC Agricultural Solutions

Hi, Chris. This is Mark. Well, first of all, for Europe, obviously we now have a very different business model, with the acquisition of Cheminova. I think you can expect us to see, over the long haul, outperformance in the marketplace. Any it kind of fits in with your second question around CIS and Western Europe. We obviously have a bigger exposure in Western Europe with the Cheminova acquisition.

But we see a lot of opportunity in the CIS countries, other parts of Eastern Europe in terms of Poland, Hungary, Czechy, Slovakia, as well as the Ukraine. Introduction of new technologies is important for us in Europe. The portfolio is strong. But with our pipeline, we have new products that will benefit both niche crops and especially cereals where Cheminova have exposure that FMC did not have. So, if you think of outperformance versus the market, it's really going to be cereals and the niche crops, especially in the south, and then accelerated growth in the east.

Christopher S. Parkinson - Credit Suisse Securities (USA) LLC (Broker)

Perfect. Thank you. And then just a quick follow-up. Can you just comment a little bit more about the working capital improvement you saw during the quarter? And then also on a go-forward basis, specifically how do you typically evaluate growth versus credit risk as we head into the third quarter with Brazil? And is it becoming more dependent on crop type, farm size or even region within Brazil? Just any comments on the puts and takes would be helpful. Thank you.

Paul W. Graves - Chief Financial Officer & Executive Vice President

Sure. Let me touch on that. The working capital progress we made, really if you look at the cash flow improvement we had over last year and the first half of the year, you can really put almost all of that down to better collections in Brazil. So we've made significant progress over there. We've talked many times about the steps we're taking, and I can't point to any one thing that's changed that. It's about getting some momentum behind those collection conversations.

Now in terms of growth versus credit, I'm not sure we really think about it that way. We think about credit in terms of credit. And we think about the ability of the customer to repay us, the stability of the customer and their access to finance. There are natural differences by crop and by region in Brazil, and we obviously factor all of that in the way that we go to market. But we have the same questions that we ask and the same standards that we set regardless of region or crop, essentially based on our confidence that we will recover the payments from our customers on the terms that we sell them to. That's the single largest factor that we consider.

Christopher S. Parkinson - Credit Suisse Securities (USA) LLC (Broker)

That's helpful. Thank you.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Go ahead. Go ahead.

Mark A. Douglas - President-FMC Agricultural Solutions

Yeah. The only thing I would add, Chris, is you know Brazil very well. Given where the exposure is, I would say the north – the Cerrado regions are where it is probably the most stressed. The south with the co-ops and the distribution channel is in better shape, and then sugarcane as well. Sugar industry has gone through a lot of challenges, but with the price of sugar today, they're in a better shape as they go forward into 2017. But it's definitely the north where the stress is.

Christopher S. Parkinson - Credit Suisse Securities (USA) LLC (Broker)

Great. Thank you for the detail. Thank you.

Operator

And your next question comes from the line of Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson - BMO Capital Markets (Canada)

Hi. Good morning. Just staying in Brazil, you commented that you had a good destock of your own FMC product. Can you talk about where you're seeing your competitors for their – in the channel for inventories? I think we've seen commentary before that there has been over a year of products from your competitors? Thanks.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Thank you. No. We can't and we don't want to comment on competitors. It's sometimes quite difficult to understand the overall inventory in the channel. So really what we've been doing, and that's a change we started to make in the fourth quarter, is truly focusing on trimming down our own inventory of product. There is product in the channel, but really to comment specifically about our competitors would not make sense for us to do so.

Joel Jackson - BMO Capital Markets (Canada)

If I look at your guidance, you seem to be implying a 300 or 400 basis point improvement in Ag Solution margin in the fourth quarter. Can you talk about that, where you see the big margin pickup in Q4 and how it's going to play out? Thanks.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Yes. Certainly, and I think the comments I would make are valid for the entire second half, is we are getting now into a position, if you look, compared to the back end of 2015, where there is multiple area of improvement. First of all, our product mix is getting much stronger than what it was. Our actions to walk away from a low-margin third-party more generic product is working very well. So we are increasing the margins of our product through mix.

Second of all, we have been pretty successful over the last three or four quarters in moving the price. So with a situation looking at the importance of Brazil and Latin America in Q3 and Q4, and taking into account the pricing versus FX situation, we are in a stronger position. So a blend of stronger volume we're going to see in the second half of the year, a better mix because we are moving away from third-party product, and the pricing FX situation will lead to, first of all, to more predictable business. We have a much better visibility going into the second half of the year than we had in a long time, and with stronger margins for the business.

Operator

And our next question comes from the line of Mike Harrison with Seaport Global Securities. Please go ahead.

Michael Joseph Harrison - Seaport Global Securities LLC

Hi, good morning.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Good morning.

Michael Joseph Harrison - Seaport Global Securities LLC

Pierre, you mentioned last call that Q2 in the Lithium business was when you were expecting some seasonal production weakness there, yet you were able to deliver well ahead of your guidance. Can you talk about what drove that upside during the quarter and whether there could be some potential upside as we look at your guidance for Q3 and Q4?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Certainly. I think that seasonal weakness is not only in Q2. It's in the back end of Q2 and through Q3. So, we've seen part of it and we're going to keep on seeing it. It's usually due to the fact that it is winter, there is more rainy season right now in Argentina where we're operating. So it's not only a Q2 phenomenon, it's the back of Q2, early Q3.

I think the visibility we have today due to production is quite, quite correct at the earnings level. Mainly, there is multiple reasons which are we leading to the improved earnings. First of all, the mix. We are moving more business toward our lithium hydroxide, where we've been able to operate our plants quite well and where there is a healthy demand and pricing situation.

Second of all, our plants have been operating also very well for carbonate production and we have been – and we're continuing to do that for the second half, selling more product made within the company than third-party product we would resell. And then there is some volume. So if look at the second half of the year, I think our earnings is quite in line with our expectation. I don't think there is a lot of upside. Most likely, what you will see is we decided not to change the revenue range, because we were a little bit below the middle point of the range initially. Looking at the demand for the back end of the year, it's most likely going to lead us toward the higher end of the range from the revenue standpoint. But I believe the earnings we have forecasted in lithium for Q3, Q4 are correct.

Unless – I tell you, the only place where I could see upside, but it is not possible for us to predict that today, is pricing. Pricing is always something, depending upon demand and how capacity come on stream. So that one, we've made some assumption; you never know.

Michael Joseph Harrison - Seaport Global Securities LLC

All right. Thank you. And then a question just on the product rationalization that you did in Ag Solutions. Is that mostly legacy FMC products or are they some Cheminova products? And is there any more to come? Just trying to get a sense of whether we could see some additional pressure there. And at some point, do you hit a point where you could see some negative leverage as a result of scaling back on the number of products you're selling?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

I think the product rationalization is very well advanced today. I think it's a mix. It's as much from Cheminova legacy products as it is from FMC product. Both company used to resell third-party products as a service to customers. And the things you can afford to do at a given time with a very healthy market, you cannot do when the market is more tense. So it was a normal thing for us to move the way we had, very precisely define what those products could be.

I'm very pleased with the speed at which the organization responded to it. I think more than half of the shortfall in our sales today in the second quarter is coming from product rationalization. But that's pretty much where it is. So you will not see numbers going beyond what we've talked about, which was a total run rate at the end of this year of $350 million, which is $100 million more than we did last year, we did $250 million last year, and this is it. There will be no further, as far as we can see, actions to be taken.

Michael Joseph Harrison - Seaport Global Securities LLC

Thank you very much.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Thank you.

Operator

And your next question comes from the line of Frank Mitsch with Wells Fargo. Please go ahead.

Frank J. Mitsch - Wells Fargo Securities LLC

Good morning, gentlemen, and appreciate all the details and color. Hey, Pierre, I was struck by the comment that the inventory levels of insecticides are rather high in Brazil, and I guess I was thinking about Zika there. Does that offer any opportunity for you in that marketplace?

Mark A. Douglas - President-FMC Agricultural Solutions

Yeah. Frank, this is Mark. Yeah, we have seen increased sales of specific insecticides that we're providing to that vector control market. It's not huge though. Let's put it in perspective. It's not going to move the Ag business. It's a nice business to have. We have a leading position in Brazil, and we've seen that business grow over the last 18 months, and we expect it to continue with the way Zika is progressing through the region. But it's not going to be significant enough to really move the needle.

Frank J. Mitsch - Wells Fargo Securities LLC

Interesting. I mean, as the geography of concern spreads, one would think that that would be an opportunity, I guess, just simplistically. How would you describe your market share in that application?

Mark A. Douglas - President-FMC Agricultural Solutions

It's pretty good. Why don't we just put it in perspective? The global public health market is about $700 million, and that's within the total ag space, crop protection chemicals, of over $51 billion. So really, for mosquito control, the market worldwide is about $325 million to $340 million, and the U.S. is about $90 million of that. So you can get a sense of the scale of that business. In particular applications we have a very good market share, not only with our pyrethroids, but with a product call malathion that we brought from Cheminova. So just keep it in perspective. I mean, people talk about it a lot, but the U.S. market is only $90 million out of that $700 million.

Frank J. Mitsch - Wells Fargo Securities LLC

Mark, I appreciate you throwing a wet blanket on that thesis. And then, hey, lastly, Paul, you sounded more sanguine with respect to the FX impact for 2016. Do you have a size as to what you think the negative effect will be when all is said and done on the year?

Paul W. Graves - Chief Financial Officer & Executive Vice President

I wish I could predict FX markets that well, Frank. I mean, I wouldn't be in this job, I'm pretty confident around that. I think the key is that we seem to have more predictability around rates. We've seen the peso has been a surprising area for us. We didn't – I mean, we never see them coming. And Brazil has been – the reais has been kind of a bright spot, not because of the absolute rate, but as I mentioned, about the stability around the rates. And I think that's sort of the key for us, as we look forward, that stability of the rates and then the lack of surprises is more important to us on most of our business than the actual movements in the exchange rates.

Frank J. Mitsch - Wells Fargo Securities LLC

Thank you so much.

Operator

And our next question comes from the line of Daniel Jester with Citibank. Please go ahead.

Daniel Jester - Citigroup Global Markets, Inc. (Broker)

Good morning, everyone. What kind of visibility do you have in Health and Nutrition in the second half of this year? Your guidance seems to imply an acceleration in process, which seems seasonally maybe a little bit different than the past few years. So given sort of the comments that you called out about Omega 3, can you just walk us through some of the key drivers for the second half?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Certainly. You know, I think we do have a pretty good visibility on our three segments today, from a demand standpoint. But it is important to understand that the earnings growth, especially in the fourth quarter, is maybe more predictable because it is due to a cost situation. You know, we always work our cost and decrease our cost. But the way cost flows into operations depend upon the speed that you turn your product, and I think we call that capitalized variance.

But the main reason for the bump in earnings in the back end of the year is due to the fact that we will be operating at a lower cost than we've been operating the other quarters and previous years. That is why you will see such a jump. So it is not due to a major turn in demand for any of our product, but much more the benefit of prior activity we've done on operational cost and manufacturing excellence.

Daniel Jester - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. Thank you. And then, of the $60 million to $70 million of full-year cost synergies from Cheminova, can you quantify how much of that you realized in the first half? And then maybe just holistically, beyond just cost synergies, where do you see the integration process for Cheminova today? Thanks.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Yeah. Thanks. I think, at a run rate basis, we're going to close the half year, on the run-rate basis, in the $30 million to $40 million range for the first half of the year on the Cheminova.

Daniel Jester - Citigroup Global Markets, Inc. (Broker)

Okay. Thank you.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

You want – Mark?

Mark A. Douglas - President-FMC Agricultural Solutions

Do you want me to talk a little bit about the integration side?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Yes.

Mark A. Douglas - President-FMC Agricultural Solutions

From an integration perspective, we're very much done on the commercial side. That's all in place. A lot of the functional groups are also fully integrated and operating. We have some systems that we're still working through, SAP in Europe is an example, which will be completed early in the fourth quarter. And then the long-lead-time item is how we bring together the different manufacturing units, the tall manufacturing units and the formulating units. We are well progressed with that. We still have some to go, but that will occur over time. And the basic need there is to make sure that we have registrations as we move products around the world. So that's the rate-limiting step, but everything else is pretty much done by now.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

I think from a Cheminova integration, we're going to stop reporting. I mean, we'll answer any question you guys might have. But we can almost declare success. Everything is in place to which, as we discussed, by the middle next year the $140 million to $160 million run rate, the 800 to 900 positions being eliminated. So we are very much more than on track, ahead of initial schedule. And I think the – lots of the remaining activities are more under in Paul's shop around IT, SAP, finance integration, so much more back office integration than anything dealing with the front end of the business.

Operator

And we do have a question from the line of Rosemarie Morbelli with Gabelli & Company. Please go ahead.

Rosemarie Jeanne Morbelli - Gabelli & Company

Thank you, and good morning everyone. I was wondering if you could talk about the expected lithium capacity – lithium carbonate capacity increase in 2017. Based on what you see in here in the marketplace, is that coming onstream a lot of it in the first half of 2017, and therefore would have a negative impact on pricing?

Thomas Schneberger - VP & Global Business Director-Lithium Division

Thank you, Rosemarie. Yes. We're starting to see some exchange of volumes coming on even in the back half of 2016, mostly out of the new spodumene capacity that's coming online in Australia. As you know, there's also some capacity in Chile and there's been capacity ramping up in Argentina, targeting back end of 2016 and early 2017. So these are the volumes that we're watching, and I characterize it, could be anywhere between 50,000 tons to 75,000 tons by early 2017. So, as Pierre has commented earlier, this is where we make a pricing assumption, and we're monitoring the conditions as we interact with customers, in terms of pricing expectations.

Rosemarie Jeanne Morbelli - Gabelli & Company

And that particular capacity addition is going to be smaller than the demand increase, isn't it? And therefore, pricing is going to come down across the board, including lithium hydroxide, or you don't think so?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

First, yes, there will be – we are expecting, as time goes, turning in 2017 and into 2018, we're expecting carbonate pricing to go more toward normal pricing, which mean a lower pricing we are currently seeing, when they will be more of a balance between the carbonate demand and the supply. It will not impact the hydroxide pricing. If you look right now, and if you put together all of the hydroxide capacity increase, which actually we are leading, they are very much in line with the demand increase. So from a pricing standpoint, we might not see hydroxide rising tremendously in the year to come, but I think we'll be in a healthy pricing situation for the next three to four years.

Thomas Schneberger - VP & Global Business Director-Lithium Division

And just to add a little bit to that, Rosemarie, in our hydroxide business, we're targeting specific segments of that demand, where it's high quality hydroxide, where they're willing to pay for the quality we bring to the market. So when we look at supply/demand, we're looking even specifically at that customer mix, versus ones that might trade off to carbonate or other supply.

Rosemarie Jeanne Morbelli - Gabelli & Company

Okay. Thanks. And my second question deals with the inventory, overall inventory in the Ag sector. You said that you have lowered the FMC product inventories, but without talking about any specific competitors. What do you see in terms of the overall inventory channel? Is it declining or is it still growing or more or less at a flat – has it plateaued?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

I think from a – as I said and want to repeat, we are mostly focusing on our inventory. But overall, if I would have or if we would have to make an overall statement, we believe overall inventory in the channel is declining. We do not believe right now we are at a turning point from a market standpoint. But we can see we are at a place where the dialogue with the customer is changing. There is more certainty, there is more predictability. It still means that the inventory in the channel is pretty heavy. We are not yet at a situation where it is not. But the dialogue is changing, and I believe everybody's trying to do their bit to decrease their inventory. We believe we most like are the most aggressive. But overall, I think the situation is improving.

Rosemarie Jeanne Morbelli - Gabelli & Company

Thank you very much.

Operator

And our next question comes from the line of Mark Connelly with CLSA. Please go ahead.

Mark Connelly - CLSA Americas LLC

Thank you. Two things. Paul, you talked about the longer time line for rationalization of the manufacturing in Europe. Is that sort of a 2020 time goal in your mind, or is there a specific target in your mind?

And then the second question, to Latin America again. As we think about the working capital cycles in cotton and sugarcane, is your penetration in that market permanently shifting your working capital cycle in a material way? My understanding is Cheminova managed working capital much differently than you did, using more receivables, for example. I'm curious whether that has all shifted over to your way of doing things?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Let me address first the question on the manufacturing rationalization. Right now, we are at a place where we have a stable manufacturing network for Ag business. We are always looking at improving, but any improvement, any decision today is always a mid- to long-term decisions because there is some product registrations which are changing when you do a change of manufacturing.

So I have to say that right now, as any company would do, we are keeping our options open. But we are in what I would call a stable manufacturing network. And we will see, as time goes what are the best decisions to be taken for our business in terms of network. But today we are not penalized by the structure we have, and it's a matter of dong continuous improvement and being able to supply what will be requested by the market at the time when the market turns around.

Mark Connelly - CLSA Americas LLC

So, you're comfortable then not being quite as asset-light as you had been, sort of in the medium term?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

We are asset-light. I think if you think about FMC prior to the acquisition of Cheminova, our manufacturing cost was 95%, asset-light. I would say today maybe we're at 90%. We should not believe that the fact that we have a plant in India, in Panoli and the plant we have in are fundamentally changing the mix of products which are made at all manufacturers, versus what is being made today. Those are big plants. But in the big scheme of things, their production capacity versus what we do with our total network is fairly small. So, it is not a fundamental departure to what we used to be in the past.

Paul W. Graves - Chief Financial Officer & Executive Vice President

Let me just on the working capital question down there in Brazil, sugarcane and cotton can have very, very different terms. Cotton tends to be longer term. Sugarcane tends to be much shorter term, although that does vary, depending on the nature of the planting cycles and on the financial health of the sugarcane guys. But as a rule, as we shift it away from cotton, we'll expect to see our working capital terms come in, and towards sugarcane also does the same thing. I would not, though, expect that you're going to have to track that through our working capital balances, as you look at it. It's definitely a factor that helps, but it's not so large that you're going to really see a major movement in our numbers.

In terms of how Cheminova approached it, Cheminova – let's just separate the two important differences. Cheminova did not have a different approach to working capital than anybody else in the industry. They did have a different approach to how they financed that working capital. And to be blunt, as a weak-balance-sheet company with very unsophisticated treasury operations, there used to be some very, very expensive local financing in Brazil, which can give the impression that they're reducing their working capital. It was appropriate for a non-U.S.-GAAP reporter. It was appropriate for a sub-investment grade company. It was incredibly expensive, and will certainly factor into why their overall profitability was so low, and it's certainly not something we intend to do.

Mark Connelly - CLSA Americas LLC

Very helpful. Thank you.

Operator

And we do have a question from the line of Aleksey Yefremov with Nomura Securities. Please go ahead.

Aleksey Yefremov - Nomura Securities International, Inc.

Good morning. Thank you. What is the current competitive environment in Latin America and North America? Do you see your competitors generally being more disciplined on crop protection prices?

Mark A. Douglas - President-FMC Agricultural Solutions

Well, obviously, I'm not going to talk about what the competition is doing on price. I'll tell you where we are. As Pierre said earlier, we're doing everything we can to make sure we manage price and terms across North America, and certainly in Brazil where we have reduced our exposure to the Brazilian market by taking out, through product rationalization, a significant amount of volume and revenue. But we're very focused on making sure that we maximize price, not only in terms of pricing but across the portfolio of what we're selling.

I think you're going to see all sorts of different activities as we go through the next year. But for us, it's very much around protecting the margins, protecting the value of the business, and certainly looking after working capital.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

I think in term of pricing, just to get back to one of the comments Paul made around the balance of FX and pricing, as you know, we tend to have a rule in Brazil where we index price on currency. Last year, we were, with our pricing, running after the currency and trying to move up our price. This year, the same process of adjusting pricing to currency is going the other way, which means this is not any longer us asking the customers to take higher price, but the customer asking us to lower the price more to other currency.

So, needless to say that for all of us, regardless of what behavior individual companies would take, it is an easier conversation from the predictability of the pricing. I think this FX situation give us a much better position to talk about pricing, more control in term of understanding pricing in the next two quarters. And I think it's got to apply to every company. It is just an FX price situation.

Aleksey Yefremov - Nomura Securities International, Inc.

Thank you. Very helpful. And turning to Europe and crop protection, you have some revenue declines there. How much of that was your move to direct market? And was it a one-time impact, or is there any way to improve that next year?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Yeah. The direct market situation is a one-time impact. It is just a couple of situations which happen all the time when you do this kind of a transfer. First of all, you work with your distribution network, which you're moving away from. Those guys have inventory, they have stock, they are filling it while you're replenishing your own, now, warehouses to sell. So there is a period of time where you have two networks which have to overlap for a little while, and you have to give the time to your distributors to sell the product they were supposed to sell in the past by contract.

Second of all, you are at a stage also so where your distributors are not replenishing their inventory in advance. So, by the time we get into – this is happening as a transition now. Our belief is by the time we get into European season, Q1, Q2 next year, we should be in a very normalized situation and it will be stable for the future.

Aleksey Yefremov - Nomura Securities International, Inc.

Thank you very much.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Thank you.

Operator

And we do have a question from the line of Mike Sison with KeyBanc. Please go ahead.

Michael J. Sison - KeyBanc Capital Markets, Inc.

Hey, guys. Just curious, you maintained your outlook for the crop protection markets this year, down mid- to high-single-digit. What was it down in the first half, and just trying to gauge what the expectation is for the second half in terms of demand?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

So I think in the first half, the way I would look at it, Mike, is when we give a range, we say mid-single-digit to high-single-digit, maybe we were thinking about more toward, when we started this process, the lower end of the range, maybe 5%, 6%, 7%. We are more today on a 7%, 8%, more toward the higher end of the range. And that is maybe less due to channel inventory than it was to specific reasons in Asia and Europe, mostly driven by weather.

So for us, when you look at the market, if you remember, we were thinking about North America and Latin America in the higher end of the range, and this being helped by a flattish to slightly down market in Europe and Asia. We don't see that any longer. I mean, we still see North America and Latin America on the high end of the range, but we see Asia and Europe being down in the 5%, 6% for this year. That is why, today, we are looking at maybe more the higher end of our range.

For us, what we've been doing is we've been able, no matter what, to protect earnings by being even more drastic on pricing, more drastic on product rationalization. So we'll be slightly lower on sales, but we believe we're going to be – we're going to have very solid performance in the second half, and predictability on the earnings side.

Michael J. Sison - KeyBanc Capital Markets, Inc.

Great. And then for the fourth quarter for Ag Solutions, you talked about better visibility than in the past. But just curious, what sort of gets you to the high end of the range? I mean, it's pretty wide in terms of the top end, given your guidance for Ag Solutions in the third quarter, and the low end. What sort of gets you to the top?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

I would say always the same answer. When we give a middle of the range, it is under normal circumstances from a demand and weather standpoint. In those, there is always a range. You just need an infestation, you just need very strong insect pressure or other pressure, and you will drive that either to the lower or either to the higher end. Today, we believe we are very comfortable with the middle of the range. To see anything going up or down would be due to external events, not linked to channel inventory or anything of that kind, but much more to specific agricultural seasonal situations.

Michael J. Sison - KeyBanc Capital Markets, Inc.

Great. Thank you.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Mostly weather.

Operator

And our last question comes from the line of Peter Butler with Glen Hill Investment. Please go ahead.

Peter E. Butler - Glen Hill Investment Research

Hey, good morning. Pierre, early on regarding lithium, you folks had a conservative outlook on shorter term lithium growth, but you saw good possibilities longer term, and this outlook has been proven correct. What do you see now for the longer term growth of lithium? And how do – how does your research pipeline on lithium derivatives look compared to what you're seeing from competitors, and how does this change your future position on earnings and cash flow growth, et cetera?

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

Thank you, Peter. Yes. So lithium, I have to say we do have increased confidence in the future today. We believe this market is getting more and more solid. I have to say that we are still prudent. But the big breakthrough for us is technology we're able to develop from a manufacturing standpoint, allowing us to, at a very low capital spend and efficient cost of operations, ability to create 4,000 tons to 8,000 tons modules for lithium hydroxide instead of having to build, in one shot, a 20,000 tons or 30,000 tons.

So today we do have an improved view and more certain view of what lithium hydroxide is doing, but all the work we've done over the last two years was to develop a manufacturing process allowing us to follow the demand growth, which means that if the growth is not as we're expecting, we can stop one or two of these modules manufacturing and slow down the capacity increase we have planned. If the demand becomes more aggressive, very easy for us to speed up the building of those modules.

So first to your question, yes, we have increased confidence. Our strategy is very highly focused on the downstream product where we have the highest profitability. Third, we have a safety net around demand by this manufacturing process we have in place, so allowing to match the demand. Where are we on our forecast? We are taking pretty much a middle of the range. We are far in a process and predictability for the numbers I gave to you to take the highest prediction from EV companies. So, that was the upside, but you know we are prepared also for the downside. And maybe I'll ask Tom to comment on the technology.

Thomas Schneberger - VP & Global Business Director-Lithium Division

Yes, and thanks for the question. On the technology, we've got a technology roadmap, and I'd say that with this strategy that we've undertaken on the high value products, the biggest shift is increased collaboration and formalized collaboration with our customers. So we do have a number of exciting opportunities that are being discussed with customers and being trialed with customers, and we're looking forward to that. It will continue to add to high quality sales of new lithium derivatives and new applications of existing lithium derivative.

Pierre R. Brondeau - Chairman, President & Chief Executive Officer

As this was the last question let me close with a couple of words before I hand the closing comments to Brian. I think we went through those two quarters very highly focused on delivering what we promise to do. Everything we've done in the two quarters has done a few things for us.

First of all I believe, from an ag standpoint, if any of the market are not yet returning to the level of growth these kind of markets could expect to see one day, we have improved highly our control, visibility and predictability of our own business.

I think from the lithium standpoint, it is a bright spot for us. We have refined our strategy. And I have to say, the breakthrough we had in technology around lithium hydroxide manufacturing are an enormous win for us looking at the future.

Health and nutrition, the business is solid. The business is highly profitable. But we also understand the challenges we have on Omega-3, and it's something we'll be focusing in the quarters to come. So with this, I am going to tell to call back to Brian.

Brian P. Angeli - Vice President, Corporate Strategy and Development

Thank you, Pierre. As always, appreciate the time and the questions. I'll be available following the call to address any further questions that you may have. So with that, thank you and have a good day.

Operator

And ladies and gentlemen, today's conference will be available for replay after 10 AM today through September 3 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 378964. International participants may dial 320-365-3844. And those numbers again are 1-800-475-6701 and 320-365-3844, again, entering the access code 378964.

That does conclude your conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.

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