富美實 (FMC) 2016 Q2 法說會逐字稿

Welcome to the second-quarter 2016 earnings release conference call for FMC Corporation.

(Operator Instructions)

As a reminder, today's conference is being recorded. I will now turn the conference over to Mr. Brian Angeli, Vice President of Investor Relations for FMC Corporation. Mr. Angeli, you may begin.

Thank you. Good morning. Welcome to FMC Corporation's second-quarter 2016 earnings call. Joining me 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 second-quarter performance and discuss the outlook for Q3 and the full year of 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. 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.

Thank you, Brian. 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 benefit of the Cheminova acquisition. Lithium outperformed on higher sales volumes and higher realized prices across the portfolio, with lower operating costs from ongoing manufacturing excellence program.

Earnings in Health and Nutrition were below expectations, 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 remain focused on reducing the level of FMC product inventory in the channels 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 volume, unfavorable weather conditions in Europe and Asia, the draw down 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 led favorable product mix in Asia and North America and a stronger US 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 -- rationalization and cost savings from the Cheminova integration.

As we move to slide 3, I will first give a few comments from 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 where as expected and little changed from Q1. In North America, soft commodity prices continued 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. While foreign exchange rates have 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 proceed for the remainder of the year. We see a forecast that the global crop protection chemical market will decline by mid to high single-digit percent in 2016 on a US 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 remains one of defending price and terms, allowing the level of FMC product inventory in the sales channel to reduce. All the data we see supports our view that inventory of FMC product in the channel is declining. Reflecting the benefits 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. Independent data showed that the Authority brand has taken market share this year.

We also saw grower support toward the expanded fungicide product 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 US 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 conditions, further product rationalization and a stronger US 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 channel -- 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 from 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 the incremental cost savings target of $60 million to $70 million in 2016 and the 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. Revenue declined approximately 6%. 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 with business at prices that are close to cash cost of production, resulting in considerably lower volume for our products in Southern Korea. 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 these lost volumes this year and do not anticipate a change in pricing levels anytime 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 [excipient], 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 and $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 costs and improved production yields.

Turning next to retail on slide 5. Lithium delivered another outstanding quarter. Revenue increased 15% year-over-year to $63 million. 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 volumes, higher average prices in all major product categories, improved mix and lower operating costs all contributed to deliver segment earnings above the top end of our prior guidance range and pushed segment earnings margins 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 having still 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 3 times segment earnings in 2015. Higher prices and lower operating costs, 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 from higher prices will be partially offset by seasonally lower production at our operations in Argentina.

FMC's Lithium 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 would accelerate the capacity expansion. 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 the 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 de-bottleneck 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. Of course, we retain the option to add significant capacity at our operation -- our existing operation in Argentina beyond the debottlenecking I just mentioned. Consequently, we are highly confident that access to Lithium carbonate will not be a constraint in our ability to expand our 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 expectations 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.

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 US, towards 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 a significant activity in Brazil; therefore, the recent strengthening of the real 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 real/US 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 real to US 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. Therefore, we do not expect either a positive or negative impact on our second-half performance from the real 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 remained 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 the form of new sales. On the first point, we were pleased with our performance in collecting in Brazil, with net cash collections slightly ahead of our expectations and particularly good progress in collecting from our past due balances.

As a result, we saw meaningful reduction in our Brazil receivables balance; however, it is still significantly higher than we would like. 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 the disciplined approach to credit exposure. With that, I will turn the call back to Pierre.

Thank you, Paul. Before I continue with my remarks, let me correct a statement I made. The 20,000 ton of additional Lithium hydroxide capacity is to be online by 2019, not as I said 2017. So let me 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 the performance for the remainder of the year.

We have remained focused on reducing the level of FMC product inventory in the channel, maintained disciplined 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 the 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 roadmap in order to offer a unique value added solution to our customers.

We see high acceptance rate for our new product launches, including our biological platform and remain on track to introduce our new active ingredient pipeline starting in 2017. Lithium continues to deliver strong performance altering it's 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 return. Demand across key nutritional and pharmaceutical markets also pull 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. With that, I will turn the call back to the operator for questions.

(Operator Instructions)

Christopher Parkinson, Credit Suisse.

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 good market strategy? Then also parse out your views for Northwest tier versus CIS? Then also you mentioned a product rationalization as well, just any additional detail would be helpful. Thank you.

Christopher, this is Mark. First of all, for Europe, obviously, we now have a very different business model with the acquisition of Cheminova. I think you can expect just to see over the long haul out-performance in the marketplace. It kind of fits in with your second question around the 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, Czeche-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 had exposure that FMC did not have. So if you think of out-performance versus the market, it's really going to be cereals and the niche crops, especially the South and then accelerated growth in the East.

Perfect. Thank you. Then just a quick follow-up, can you just comment a little bit more about the working capital improvement you saw during the quarter? 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? 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.

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 in 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 are taking. 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. We think about the ability of the customer to repay as the stability of the customer and their access to finance. There are natural differences by crop and by region in Brazil. 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.

That's helpful. Thank you.

The only thing I would add, Chris, is you know Brazil very well, given where the exposure is, I would say that 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. Then sugar cane as well. The sugar industry has gone through a lot of challenges, but with the price of sugar today, they are in better shape as they go forward into 2017. But it's definitely the North, where the stress is.

Great. Thank you for the detail. Thank you.

Joel Jackson, BMO Capital Markets.

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

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 -- that's the change we started to make in the fourth quarter is truly focusing on pruning down our own inventory of product. There is product in the channel, but really to comment specifically about our competitors, I would not make sense for us to do so.

If I look at your guidance, you seem to be implying a 300 or 400 basis point improvement in Ag Solutions margins in the fourth quarter. Can you talk about that? Where you see the big margin pick-up in Q4? How it's going to play out? Thanks.

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

Second of all, we have been pretty successful over the last three or four quarters in moving a price. So we -- 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 the third-party products and the pricing FX situation we'll need to first of all to more predictable business. We have a much better visibility going in the second half of the year than we had in a long time and with stronger margins for the business.

Mike Harrison, Seaport Global Securities.

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? Whether there can be some potential upside as we look at your guidance for Q3 and Q4?

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. 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 are 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 correct at the earnings level. Mainly, there is multiple reasons, which have been 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 products. Then we have been -- we're continuing to do that for the second half, sending more product made within the Company than third-party product we would resell and then there is some volume.

So, if I 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 is 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'd say 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 comes on stream. So that one we've made some assumption -- you never know.

All right. Thank you. 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? Is there any more to come? Just trying to get a sense of whether we can see some additional pressure there. 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 are selling?

I think the product rationalization is very well advanced today. I think it's a mix. It's as much from Cheminova product than it is from FMC product. Both Company's used to resell third-party product as a service to customers. I think 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 defined what those product 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. This is it. There will be no further, as far as we can see, actions to be taken.

Thank you very much.

Thank you.

Frank Mitsch, Wells Fargo.

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

Yes, Frank, this is Mark. We have seen increased sales of specific insecticides that we provide into that vector controlled market. It's not huge though, let's put it in perspective, it's not going to move the Ag business. It's nice business to have. We have a leading position in Brazil. We've seen that business grow over the last 18 months. We expected 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.

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

It's pretty good. Why don't we just put it in perspective, the global public health market is about $700 million. That's within the total Ag space in crop protection chemicals of over $51 billion. So really for mosquito control, the market worldwide is about $325 million to $340 million. The US 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, but only with our [prioritized perk] with a product called Malathion that we bought from Cheminova. So just keep it in perspective, people talk about it a lot, but the US market is only $90 million out of that $700 million.

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

I wish I could predict FX markets that well, Frank. 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 rate. We've seen the peso has been a surprising area for us. We never see them coming. The Brazil has been -- the real has been kind of a bright spot, not because of the absolute rate but as I mentioned about the stability around the rates. I think that sort of the key for us, as we look forward, that stability of the rates and then a lack of surprises is more important to us on most of our business than the actual movement in the exchange rates.

Thank you so much.

Daniel Jester, Citibank.

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 profits, which seems seasonally maybe a little bit different than the past few years. So given to the comments that you called out about Omega-3, can you just walk us through some of the key drivers for the second half?

Certainly. 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. We always work our costs and decrease our costs, but the way cost flows into operations depends upon the speed at which you churn your product.

I think we call that capitalized variance, but the main reason for the bump in earnings in the back half of the year is due to the fact that we would 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 churn in demand for any of our product. But much more the benefit of prior activity we've done on operational cost and manufacturing excellence.

Okay, that's helpful. Thank you. 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? Then maybe just holistically, beyond just cost synergies, where do you see the integration process for Cheminova today? Thanks.

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

Okay, thank you.

Mark?

Do you want me to tell them a little bit about the integration side? From an integration perspective, we are 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 are still working through SAP in Europe, as an example, which will be completed early in the fourth quarter.

Then the long lead-time item is how 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. 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 today, but everything else is pretty much done by now.

I think from a Cheminova integration, we're going to start reporting -- we will answer any questions you guys might have, but we can almost declare success. Everything is in place to reach, as we discussed by the middle of next year, the $140 million to $160 million run rate, the 800 to 900 positions negative. So we are very much more than on track ahead of initial schedule. I think lots of the remaining activities are more under imposed shop around IT, SAP, finance integration. So much more back office integration than anything dealing with the front end of the business.

Rosemarie Morbelli, Gabelli & Company.

I was wondering if you could talk about the expected Lithium capacity -- Lithium carbonate capacity increase in 2017? Based on what you see and hear in the marketplace, is that coming on stream a lot of it in the first half of 2017? Therefore, would have a negative impact on pricing?

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

That particular capacity addition is going to be smaller than the demand increase, isn't it? Therefore, pricing is going to come down across the board including Lithium hydroxide? Or you don't think so?

No. First, yes, there will be -- we are expecting as time goes starting in 2017 and into 2018, we are expecting carbonate pricing to go more to our normal pricing, which means a lower pricing, we are currently seeing when there 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 -- 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.

Just to add a little bit to that, Rosemarie, in our hydroxide business, we are targeting specific segments of that demand, where it's high-quality hydroxide, where they are 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 one that might trade-off to carbonate or other supply.

Okay, thanks. 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 flat, has it plateaued?

I think from a -- as I said and want to repeat, we're 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 feel we're in a place where the dialogue with the customers is changing. There is more serpentine, there is more productivity. It still means that the inventory in the channel is pretty heavy. We are not yet in a situation where it is not, but the dialogue is changing. I believe everybody is trying to decrease their inventory. But we believe we most likely are the most aggressive, but overall, I think the situation is improving.

Thank you very much.

Mark Connelly, CLSA.

Two things, Paul, you talked about the longer timeline 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? Then the second question, to Latin America again, as we think about the working capital cycles in cotton and sugar cane, 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. Do you see more receivables, for example, I'm curious whether that has all shifted over to your way of doing things?

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 decision 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. 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. It's a matter of doing continuous improvements and being able to supply what will be requested by the market at the time when the market tells everyone.

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

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 are at 90%. We should not believe that the fact that we have a plant in India [in penalty] and a plant we have in [rome land] are fundamentally changing the mix of product which are made at all manufacturers versus what is being made today. Those are big plans, but in the big scheme of things, their product capacity versus what we do through -- to a network is fairly small. So it is not a fundamental departure to what we used to be in the past.

Let me touch 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 shifted away from cotton, we will expect to see our working capital terms come it and toward, sugarcane also does the same thing.

I would not though expect that you're going to be able to track that through our working capital balances as you look at it. It's definitely a factor that helps, excuse me, 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 -- this is separated into 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.

To be blunt, as a weak balance sheet company with very unsophisticated treasury operations, they used to use some very, very expensive local financing in Brazil, which can give the impression that they are reducing their working capital. It was appropriate for a non-US GAAP reporter. It was appropriate for a sub-investment grade company. It was incredibly expensive and will certainly factor in why their overall profitability was so low. It's certainly not something we intend to do.

Very helpful. Thank you.

Aleksey Yefremov, Nomura Securities.

What are the current competitive environments in Latin America and North America? Do you see your competitors generally being more disciplined on the crop production prices?

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 are doing everything we can to make sure we manage price in 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 are very focused on making sure that we maximize price not only in terms of pricing but across the portfolio of what we are 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.

I think in terms 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 it is not any longer us asking the customers to pay higher price, but the customer asking us to lower the price to alter currency.

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

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

Yes, the direct market situation is a one-time impact. It is just a capital of situation, which happens all the time when you do these 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 are repositioning your own now warehouses to sell. So there is still time where you have two networks, which have to overlap for a little while. 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 the [stage one] so where you're distributors and not repositioning their inventory in advance. So by the time we get into -- this is happening as a transition now, I believe if 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.

Thank you very much.

Thank you.

Mike Sison, KeyBanc.

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

So I think in the first half, the way I would look at it, Mike, is when we give a range, we said mid single-digit to start 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 towards the higher end of the range. That is due, maybe less due, to challenged inventory than it was to specific reasons in Asia and Europe, mostly driven by weather. So for us when we look at the market, if you remember, we were thinking about North America and Latin America in the higher end of the range.

These being helped by flattish to slightly down markets 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 our earnings by being even more drastic on price being more drastic on product rationalization. So we will be slightly lower on sales, but we believe we are going to be -- we're going to have very solid performance in the second half and productivity on the earnings side.

Great. 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?

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

Great. Thank you.

Mostly weather.

Peter Butler, Glen Hill Investment.

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

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 prudent, but the big breakthrough for us is the technology we're able to develop from a manufacturing standpoint, allowing us to, at a very low capital span and efficient cost of operations, ability to create 4,000 to 8,000 tons modules for Lithium hydroxide instead of having to build, in one shot, a 20,000 or 30,000 tons.

So today, we do have an improved view and more certain view of where 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, allowing to match the demand. Where are we on our forecast? We are taking pretty much the middle of the range. We are far in the process of predictability for the numbers I gave to you, to take the highest prediction from easy companies. So there could be upside, you know we are prepared also for the downside. Maybe I'll ask Tom to comment on the technology.

Yes. Thanks for the question. On the technology, we've got a technology roadmap. I'd say that with this strategy that we've undertaken on the high-value products, the biggest shift is increased collaboration or formalized collaboration with our customers. So we do have a number of exciting opportunities that are being discussed with customers and being trialed customers. 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 derivatives.

As it 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 promised to do. Everything we've done in the two quarters had done a few things for us. First of all, I believe from an Ag standpoint, even if the markets are not yet returning to the level of growth these kinds of markets could expect to see one day, we have improved highly our control, visibility and productivity of our own business.

I think from the Lithium standpoint, it is a bright spot for us. We have refined our strategy. I have to say the breakthrough we had in technology around Lithium hydroxide manufacturing are an enormous win for us looking at our future. Health and Nutrition, the business is solid. The business is highly profitable, but we also understand the challenges we have on Omega-3. It is something we will be focusing on in the quarters to come. So with this, I'm going to turn the call back to Brian.

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

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