富美實 (FMC) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Second Quarter 2017 Earnings Release Conference Call for FMC Corporation. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to Mr. Michael Wherley, Director, Investor Relations for FMC Corporation. Mr. Wherley, you may begin.

Thank you, and good morning, everyone. Welcome to FMC Corporation's Second Quarter Earnings Call. Joining me today are 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 then discuss the outlook for the remainder of 2017. Paul will provide an overview of select financial results.

As a reminder, these metrics exclude any impact from the pending acquisition of the DuPont business and our Health and Nutrition business, which is reported in discontinued operations. The slide presentation that accompanies our results, along with our earnings release and 2017 outlook statement is available on our website and the prepared remarks from today's discussion will be made available at the conclusion of the call.

Mark Douglas, President, FMC Agricultural Solutions; and Tom Schneberger, Vice President and Global Business Director of FMC Lithium, will then 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 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 upon these risks and uncertainties.

Today's discussion will focus on adjusted earnings for all income statement and EPS references. 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 now turn the call over to Pierre.

Thank you, Michael, and good morning, everyone.

FMC had another strong quarter. And with the recent approvals from competition regulators, our pending transaction with DuPont remains on track for a November 1 close.

We are pleased to announce both our Ag Solutions and Lithium businesses posted strong results in the second quarter. I will review the overall Q2 performance, then focus on our projections for the second half of the year and finish with an update on the 2018 financial impact of the pending acquisition.

Turning to Slide 3. FMC reported second quarter revenue of $657 million, which was up nearly 7% year-over-year. Adjusted EPS was $0.48 in the quarter, up 4% versus the same period a year ago and $0.03 above the midpoint of our guidance.

Before I get into specifics regarding our Ag Solutions results, let me start with a brief market update. Globally, we expect the crop protection market to decline by low to mid-single-digit percentage in 2017.

North America continues to experience difficult market conditions, largely due to weak grower economics, and we expect it to be down mid-single digits for the full year.

In Europe, the season was negatively impacted by the late start in North and Central Europe in Q1 and by hot, dry conditions in Southern Europe in Q2. We now expect the European market to be down in the low to mid-single digit range for full-year 2017, slightly weaker than we expected 3 months ago.

In Asia, we believe the market will be flat to slightly up for full-year 2017.

Although we are pleased with what we have seen in Latin America with the largest serving crop enhancing grower finances and with improved fundamentals in sugarcane and cotton, it is clear that channel inventory levels are still impacting some of our competitors in the region. Largely as a result of this last factor, we expect the overall market in Brazil to be down low to mid-single-digit for full-year of 2017.

Let me now move on to Slide 4 and FMC Ag Solutions' performance in the context of these overall market conditions. Second quarter revenue of $583 million was up 6% compared to the same quarter last year. Revenue growth was driven primarily by increased volume in Brazil and new product launches in Asia, offset partially by lower sales in North America. Overall, volume was up 10%, offset somewhat by a 4% headwind from weaker price.

Segment earnings of $96 million were down 5% year-over-year, with weakness in North America having the largest impact on our earnings. Price was a drag in the quarter. But year-to-date, price was down 2%, which is consistent with our expectations for the full year.

We continue to execute our strategy of maintaining discipline on price and terms and limiting credit risk while pursuing top line growth only where it makes sense.

We see continued growth opportunities in Asia and Latin America, and we will act responsibly, continuing to balance earnings growth with earnings quality, credit risks and cash flow generation.

Turning to Slide 5. I will provide additional comments on Ag Solutions' regional performance in the quarter compared to the second quarter of 2016.

North America sales declined 7% on lower demand for insecticide and lower pricing. In Latin America, sales increased 38%. In Brazil, we saw improvements in sales to cotton, sugarcane and soybean growers.

Our move to direct access in Argentina continues to be a bright spot with strong sales in pre-emergent herbicides.

In Europe, revenue increased 3% in the quarter as we largely caught up from lower Q1 sales to perform in line with the market for the first half of 2017.

In Asia, revenue increased 4% in the quarter. We saw successful launches of new rice herbicide in China and increased demand for rice insecticide in Indonesia.

Moving next to the outlook for 2017. We expect that Ag Solutions' 2017 revenue will be between $2.3 billion and $2.4 billion, which is about 3% year-over-year at the midpoint and slightly higher than our previous guidance. We have tightened the guidance range for segment earnings to a range of $415 million to $445 million, with the midpoint reflecting an 8% year-over-year increase.

At the midpoint, we are forecasting earnings growth of 16% in the second half of 2017 relative to the same period in 2016. These include third quarter segment earnings in the range of $100 million to $120 million, which represents a 22% increase at the midpoint.

The second half growth will be driven largely by improved performance in Latin America as significantly higher volumes and lower operating costs will more than offset the forecast price headwinds. We expect continued margin improvement with second half earnings margin of 20%.

Our expected year-over-year performance in Latin America reflects the benefit of how we have operated in Brazil in the past few years. As you recall, we took 4 broad actions commencing in early 2015 to position our business in Brazil to match the operating conditions we see today.

First, we reduced our cost base to better match market conditions. Second, we became more disciplined in our sales process, mainly with regards to sales terms and cash collection. Third, we eliminated sales of low-value product from the portfolio, selling only those products where FMC was able to achieve acceptable financial returns. And fourth, we are set to reduce the amount of FMC products in the distribution channels.

To this point, channel inventory of FMC products in Brazil has declined by 60% since the end of 2015. The impact of these deliberate actions in the last few years has been painful, but we are now positioned to reap the rewards of these actions.

We have also seen improvements in cotton and sugarcane market conditions in Brazil where FMC has significant exposure. Outside of Brazil, our move last year to a direct access model in Argentina will continue to deliver significant opportunities in the second half of 2017.

Moving now to Slide 6. Lithium delivered another very strong quarter. Revenue of $74 million was up 17% driven by improvements in pricing and product mix. The pricing improvements were seen across the portfolio. Segment earnings of $24 million in the quarter increased 47% versus Q2 2016 as significantly higher prices and improved mix offset higher costs. The higher costs were largely due to the impact of seasonal operating conditions and costs related to expansion projects. Segment earnings margin was 33% versus 26% in the prior year period.

We are raising our full year guidance for the Lithium segment. We now expect revenue to be between $340 million and $360 million, a year-over-year increase of over 30% at the midpoint, and earnings to be between $115 million and $125 million, an increase of over 70% at the midpoint. We expect a mid-30s earnings margin percentage for the full year.

We expect third quarter segment earnings in the range of $30 million to $35 million, which represents 34% sequential improvement at the midpoint as well as year-over-year growth of about 85%. The main driver of the increase in our earnings guidance versus our [mid] guidance is increased confidence in the ramp-up of our new hydroxide operation in China and the success in obtaining customer qualifications.

We began selling product from this plant late in Q2. We will steadily ramp up through September, and we should be selling at full capacity in Q4.

As a result, total hydroxide revenue in the second half of 2017 is expected to represent over 50% of segment revenue compared to about 35% of first half revenue.

Let's now turn to Slide 7 to discuss in more detail our Lithium expansions and how they will impact the next few years. This starts with our hydroxide Phase 1, which we discussed in the context of 2017 already.

In 2018, we expect to realize the full volume benefit from these 2 4,000-ton lines built in China. Hydroxide demand projections continue to outpace capacity addition across the industry, especially in the segments of EV bearing market where hydroxide has a distinct technological advantage, which is in high nickel content kettles. Most of the pure EV models currently in development will rely upon high nickel content batteries due to their greater energy density, which provides a longer driving range.

We remain fully committed to the Phase 2 hydroxide expansion. Phase 2 will add a further 12,000 tons of capacity across 3 separate units, all of which will be online in 2019. We will give more details on the timing, the cost and the location of these additional units later this year. But we could see some sales from Phase 2 in the latter part of 2018.

We will continue to enter into customer contracts similar to those we currently have before we begin to build these new units. These current contracts for a Phase 1 hydroxide volumes are largely 3- or 4-year contracts with commitments on both volume and price.

Moving to the right-hand side of this slide. The second leg of our Lithium expansion plan is to produce enough carbonate to continue to serve our downstream operations and remain a fully integrated lithium producer. With the plan outlined here, we will have enough carbonate and chloride to sustain our growth projection for our downstream business into the foreseeable future.

Our current facilities in Argentina are operating at record levels. And as you saw this quarter, we are successfully managing the seasonal products and variation caused by weather conditions. In addition, our debottlenecking project will add an incremental 2,000 to 3,000 tons of carbonate production in 2018 with the remainder coming in 2019.

Next, our agreement with Nemaska to buy 8,000 tons a year of carbonate starting in 2018 runs for multiple years, and we remain confident in Nemaska's ability to meet their commitments to FMC. We will continue to look at similar sourcing deals where terms and price make sense.

However, our first priority option to source additional carbonate is to significantly expand capacity at our Argentina location where we're planning to invest $250 million to $300 million to add 20,000 tons of capacity. This facility is one of the lowest cost producers in the world, significantly lower than it was in 2015 before the Argentine peso devaluation. We estimate our current cash costs are less than half that of a typical bitumen-based producer.

Expanding this facility has low-risk execution. We have operated at this location for many years and have benefited from our ongoing manufacturing excellence programs. We are progressing the engineering work and we are in discussion with local authorities to finalize these plans.

As we have stated since March 31, it is our firm intention to create 2 independently listed public companies with leading positions in their respective industries.

To this end, our current plan is to move toward a separate listing of FMC Lithium in the second half of 2018. We expect to announce a final decision on the timing by the second quarter of 2018.

Moving briefly to Slide 8, which summarizes our outlook for the third quarter and the full year. On a consolidated basis, again, for the third quarter, adjusted earnings is in the range of $0.57 to $0.67 per share, up approximately 45% at the midpoint versus the same quarter last year.

As I mentioned previously, we are maintaining full year earnings guidance for Ag Solutions and raising it by 9% at the midpoint for Lithium.

We are tightening our adjusted EPS guidance for the full year to a range of $2.30 to $2.50, which represents year-over-year EPS growth between 20% to 30%.

I will now turn the call over to Paul.

Thank you, Pierre. Today, I will cover 3 topics, cash flow and net debt, collections in Brazil and the forecast for the corporate cost line item.

Starting with cash flow on Slide 9. We have seen strong performance in cash flow generation year-to-date, which is reflected in a reduction in net debt of around $150 million since the start of the year. This is despite the headwind created by one-off cash costs related to the DuPont acquisition.

In the last 12 months, we have reduced our net debt balance by over $275 million. Q2 saw encouraging trends in Brazil, which I'll touch on in a moment, leading to adjusted cash from operations of $214 million year-to-date, 24% better than the same period last year.

Brazil collections were ahead of forecast, with a particularly encouraging reduction in the past due receivables balance, which fell by over 15% in the quarter. Put simply, we are collecting existing past dues and reducing the occurrence of new past-due balances.

One of the key drivers behind this collection performance has been our success in reducing the level of FMC inventory in the distribution channels, which Pierre mentioned earlier.

From FMC's perspective, channel inventory is a far smaller headwind to sales or collections than it has been in any of the last few seasons.

For the full year, we expect to generate operating cash flow in the $530 million to $630 million range, which would be broadly flat with 2016. We expect to see net debt continue to fall in the third quarter before a small increase in Q4 as we head into the half of the Brazil selling period and the start of the North America and Europe sales seasons.

You will have noticed an increase in the forecast for corporate costs for the full year and particularly high expenses in this quarter. The driver of this is the higher FMC share price that we have seen since the start of April, which creates a mark-to-market expense for the outstanding long-term incentive awards granted in 2015, which are delivered on the basis of historical total shareholder return. The higher share price is also the reason for the higher estimate of fully diluted shares outstanding from 135 million to 135.5 million shares.

Finally, you have likely noticed that we are not increasing our full year EPS guidance despite an increase in guidance for the segments of $10 million at the midpoint. The combination of higher corporate costs, higher share count and a slightly higher estimate for the full year tax rate offsets this increase in segment earnings.

With that, I will turn the call back to Pierre.

Thank you, Paul. I mentioned at the start of the call that I would give you some more thoughts on the pending acquisition from DuPont. We have received approvals from most of the major jurisdictions needed to close our transactions with DuPont, and we continue to work constructively with the few that have yet to issue a ruling.

As a reminder, our transactions are contingent upon the close of the Dow DuPont merger, which is expected this month. We also need to complete the step required to separate the business from DuPont. This remains on track for a November 1 close as set out in the purchase agreement.

If you turn to Slide 10, this is a first look at the 2018 financial performance of FMC in its new form. The model starts with the current 2017 EPS guidance and adds the impact of the DuPont acquisition, plus the 2018 impact from the growth of FMC Ag Solutions and Lithium segments. I will touch on some of these key assumptions in this model.

We now expect cost synergies will be between $40 million and $80 million in 2018. There will be additional cost synergies to come in 2019 and beyond, but we will update you on the magnitude of those on our February 2018 earnings call.

We remain quite cautious in our assumptions as to earnings growth for the core business and have assumed a lower rate of revenue growth than was presented to us by the seller. We continue to believe this is appropriate until we own the business and can develop our own view of both near-term growth potential as well as waiting until we take a first look at how the new Ag markets might perform in 2018. But we are comfortable providing the forecast revenue growth for 2018 for the entire Ag Solutions' segment in the 2% to 4% range, which equates to EBIT growth of $30 million to $60 million.

We may update this estimate again in November, but we'll certainly give a formal guidance assumption on the February earnings call.

You may have noticed we did not include an estimate for revenue synergies. We expect to give a first estimate in February 2018.

FMC has begun the process of divesting the portfolio of products required by the European Commission remedies, which was announced last week. We expect the impact of this to be about $10 million to $15 million of earnings in 2018.

Next is the growth of our Lithium segment. By looking at our projections for Q3 and implied Q4 earnings from running our Phase 1 expansion at full capacity, you get a good starting point for 2018. Taking into account seasonal production, costs and prices, we believe that earnings growth of $40 million to $50 million is appropriate for Lithium for 2018. This model shows significant earnings growth in both businesses in 2018, but we are still at an early stage in the forecasting process.

In summary, we feel very good about where FMC is today. Our current Ag Solutions business has had a solid Q2, and we are set to deliver a strong second half driven by Latin America and Asia.

Lithium had a very strong quarter and is on track to deliver higher earnings in the second half of the year as the new hydroxide unit commences full commercial operations.

We continue to receive very positive feedback from the customers, shareholders and employees on the announced transactions with DuPont, which remains on track.

Thank you for your attention, and we'll now turn the call back to the operator for questions.

(Operator Instructions) And the first question will come from the line of Robert Koort with Goldman Sachs.

I had a Lithium question for Tom, if I could. You mentioned customers looking for longer contracts. Obviously, you're going to have quite a bit more capacity. Can you talk about how the pool of customers is changing as the Lithium market evolves and broadening? Has the customer list become -- has it gone beyond just cathode producers? Can you give us some sense of those discussions?

Yes, Robert, happy to. So first off, we're watching the whole value chain at this point. I think we've mentioned in the past that we're targeting specific battery types and cathode types where we see the bulk of the growth in the pure EVs, which are going to use the bulk of the lithium and have the highest performance requirements for the lithium. As we do that, the different auto manufacturers as they launch their new EV lines are in various stages of setting up their supply chain. So there are cases where we're selling via contract to cathode manufacturers in China. There are cases where we're selling to battery manufacturers and there are cases where we're selling to OEMs on contracts. And we'll continue to evolve to find the most advantageous position in each.

And if I might follow-up on Ag. Is there any risk of some pull forward in Latin America? Obviously, the year-on-year comps looked quite strong. Should we expect maybe there's going to be a payback in the second half there?

No. It's a very, very clean quarter. As I said, we are selling online with the demand and we are expecting a -- we have a large part of the orders in hand. We are expecting a very strong Q3, Q4. We are very certain that there is nothing, which came in Q2, which was a pull forward from Q3, Q4.

Your next question comes from the line of Christopher Parkinson from Crédit Suisse.

Just given your comments about the North American crop protection market and inventories and in the context of the leverage that U.S. distributors have over some or most chemical producers, what actions, if any, can you take to alleviate their efforts to meet annual sales incentive levels later on in the year, therefore reducing the risk of an inventory build at year-end and potentially driving into overhang in '18?

Chris, it's Mark. It's a good point. We are working, obviously with our customers very closely on where the sales will occur and on what level. And those are based into our forecast. So we're predicting that we will be drawing down inventory levels, yet at the same time we built our programs so that our customers can be rewarded for the quality of the technology they buy from FMC.

And just quick follow-up. Based on the previous guidance range, you indicated that you had already locked in, I think it's roughly half of your sales as of late spring from the LatAm market in the second half. But can you just give us an update on your LatAm outlook by country? Obviously, it seems like there's some disparaging trends there, including Brazil, Argentina and Mexico, and just any comments you have on your core -- your emerging market trends in terms of pricing in LatAm and Asia?

That's a lot of questions there, but let me start off with Brazil. Yes, last time we spoke, I indicated that we had about 50% of the orders in hand. Today, that number is north of 65%. Most encouragingly, it's higher than that in the north of Brazil. So by year, Mato Grosso, sugarcane is pretty much on track. It is slightly less than 65% in the south, but that's kind of normal for us. So we feel very, very confident about where we are in terms of the orders on hand to deliver the type of second half we've said. Around the rest of the region, Argentina, we talked about Argentina given our new direct access model. We're very, very bullish on Argentina for the second half. We've got more salespeople on the ground. We see continued expansion of weed resistance, our pre-emergent herbicides are doing well. And obviously, we're looking forward to the DuPont portfolio coming through. Mexico, Mexico has had a tough time this year not only with currency devaluation, but weather conditions. However, we have a portfolio that is spread very much into the niche crops, so berries, fruits, vegetables. So we expect to see a good second half in Mexico as we end the year.

Let me use that question to make a comment very specific about Brazil because it has been in the center of the discussions for many of our competitors. I just want to reassure everybody that 60% less inventory of the FMC product in the channel, 6-0, since the peak at the end of 2015. An organization, which is now half of the size of what it was at the end of 2014 is allowing us to be highly competitive and to look at a very solid demand for our products. So as many of our competitors, we have concerns for the North American market. But I would say Europe, Asia, Latin America and Brazil for us, we are feeling much better where the company is. And we believe we have taken our pain over the last 2 years. It's been painful to announce some of the quarterly earnings when we are working on this, but I think we are very strongly positioned and believe it's going to show well in Q3 and Q4 this year.

Your next question comes from the line of Frank Mitsch with Wells Fargo.

This is Aziza for Frank. I just was wondering if you guys could elaborate a bit on that positive customer feedback you alluded to regarding the transaction.

Yes. I think, like in any market, customers like to have the choice of companies which are proposing different portfolio technologies and products. And today, we've met actually as late as last week with our largest customer, and there is a very positive reaction to see FMC expanding into a company with a broader portfolio, broader technology. And Mark, do you want to add?

I think the only thing I would add to that, Pierre, is you're talking about 2 significant companies coming together in terms of the portfolios with well-respected people with customer relations. So our customers recognize that. They see us as truly a fifth Tier 1 company which is going to give them a lot of optionality. So from a customer perspective, they're going to get new technologies from the pipeline that we have and they get full market access. So it's generally being seen very positively.

Your next question comes from the line of Mike Sison with KeyBanc.

In terms of your outlook for 2018, I appreciate the update there. When you think about some of the puts and takes, the synergies and the Ag Solutions' EBIT growth, where do you see some upside and where are you a little bit worried potentially as we head into '18?

I would say the only worries we have is not linked to the transaction. It's always today, we believe in many places, the Ag market has bottomed up -- has bottomed, and we see a cycle potentially slowly coming back to -- going back to growth. So if we are always very careful when we do forecasts, it is not linked to the transaction, it is linked to the market. We want to be sure it's evolving into the right direction, which we believe it is. The transaction, we feel very comfortable. There is not a line we have in the forecast which is of concern to us. The 2 lines, as you can guess, where we are very careful because we are still working on them, are the year 1 synergies, we said $40 million to $80 million, goes all the way from the supply chain to commercial and back-office. And the growth where we don't want to push a number, which is much higher than the 2% to 4% because we want to see a bit of what we can do once we have portfolio. So those still need to be worked on, but I would say the numbers we are giving in this forecast do not create any concern for us, nor do we have any operational concern at this stage.

Great. And then it does sound like your Lithium expansion plans are going well. You've got long-term contracts for -- it sounds like for the bulk of the capacity that you're going to expand to. So when you think about spinning -- or starting the spin process in 2Q, are there any variables that we need to consider, to see whether that spin role will go as planned?

I think today when we look at the spin, we would be very surprised if it would not happen in the second half of 2018. We don't see anything which could derail that. But we want to make sure we have finalized all of the discussion with the government in Argentina. We want to make sure we have completely detailed our capital spend and project expansion. And we believe a Q2 announcement of the exact timing for a -- an H2 2018 is very likely.

Your next question comes from the line of Daniel Jester from Citi.

So in North America in the past, you've commented on some sales within the channel versus sales on the farm. Just wondering if you have any color about the second quarter and how that progressed?

Yes. What we call product on the ground is roughly flat with last year in Q2. We had expected it and hoped it would be higher than that, but it hasn't turned out that way, especially given the weather conditions we've seen in parts of the U.S. So it's slightly lower than we thought, but flat on the ground at this point is not a bad place to be.

Okay. And then on Lithium, with regards to the Phase 2 of the hydroxide expansion. What specifics, final data points do you need to lock in, in order to pull the trigger and start construction? Is it just customer contracts, is it logistics, site location? Just can you walk us through what are the key things that we should be thinking about going into that?

Yes. I think we have no doubts or little doubt that we'll be able to contract all of this capacity ahead. I think the decision, Tom and the team have to make is around locations. We have 3 units and we have to analyze the markets and our global supply chain to decide where each of those units will be, China and North America being 2 potential locations. But we are looking at all of the options. So that's the main question which we have to decide. Tom?

Yes, the only thing I would add to that, Pierre, is that we are duplicating the engineering design. So whether we put it in China or North America, it's a tactical decision to be there.

Your next question comes from the line of Joel Jackson from BMO.

This is (inaudible) on for Joel. I just had a question on the DuPont cost synergies. So the previous estimate, I believe, was $30 million to $40 million and now it's been increased to $40 million to $80 million. So what was -- was there something that came about that allowed you to have more confidence in the synergy target? And any color on why that range was increased.

Yes. So it is simply -- as we said, it's a very different type of synergy. What we are doing is we are receiving an organization from DuPont and then we are calculating versus the theoretical model, which has a $475 million EBITDA, how much resources we will really need to add compared to what we have at FMC. So the only reason for which the number has increased versus the previous version is as we get closer to November 1, DuPont has more and more freedom to reveal to us the organization we are getting, and consequently, we are capable of better defining what we need to add to occur in structure to operate that business. So that's why it is not definitive. We are still working with DuPont. By the time we get to November, we should have a much closer view of exactly the structure we are getting. We still have some questions around commercial, supply chain or back-office and we're working on that. But it is purely because we are getting more information as we go.

As a follow-up. Post-2018, is there potential for the synergies to go up once the service agreements with DuPont kind of go away and some of that function comes in-house with your own employees? Maybe some color on past 2018.

Yes, certainly. What we're going to have to do is we're going to have, over the next 1.5 years, to put in place an SAP system which allows us to operate the entire company, move out of the TSA. Ultimately, if you look into the back end of 2019, we will be operating at a lower cost than we will be operating in 2018. Now they are going to be phased where we're going to have to decide how and when we add resources to be ready to move out on the TSA. So it is not going to be a straight line. But definitely, as you think about operating costs, when we get out of the TSA with the new SAP system operating with our people, it will be at a lower cost than what we'll have in 2018 and early 2019.

Your next question will come from the line of Dmitry Silversteyn with Longbow Research.

I wanted to follow up on the comment that I think, Pierre, you made, I wanted to make sure I heard it right. When you talked about Latin American Crop Protection business, you mentioned that inventory levels were still high for market participants but not necessarily for you. So I just want to understand that it was a comment related -- kind of to the market overall, but not specifically to your position in Latin America, given how much you've drawn down your inventories.

Yes, Dmitry. So here is the way we look at it. We believe the performance company will deliver. In the future, we'll be more linked to the actions they have taken in the last 2 years than the market. There is no doubt that overall, there is inventory in the channel, but inventory depends very much upon the company. Some have taken like us, some very serious actions since the end of 2015. We believe we have a very low level of inventory of our products in the market in Brazil and Latin America. Some have taken less actions, and we'll have to deal with it in the next 2 years. So we are pretty comfortable, that's why we're focusing significant growth in Latin America and Brazil in the second half. Other companies, we believe, will have to take the actions they need to take to get to the same place.

That's helpful, Pierre. And then a follow-up question on Lithium. Not just you, but you specifically have been surprising on the upside in terms of profitability and profit dollars as well as margins for the several quarters going back. So my question is, is this more a function for you of how quickly you're converting to hydroxide? Is it a function of price increases being more than you've originally thought about, or is perhaps volume doing a little bit better, although it doesn't look like this quarter at least? Can you give us sort of a source of these repeated and consistent positive surprises on Lithium profitability?

Sure. I would say if you look in the last -- put yourself in 2016, getting into early 2017, I think we got more price leverage than we were expecting. So pricing was better, pricing increase and pricing options was better than what we were expecting. That was driving the better performance. The -- also, a faster move to a mix containing more lithium hydroxide was also a bit faster than what we thought. That drove the better performance as we -- and it happened at the end of '16, beginning of '17. The new change is purely because our expansion in China for lithium hydroxide is going exceptionally well and fast. Consumers are qualifying the product very fast and our 2 units on stream operating -- operating very well. So we didn't have the expected troubleshooting you always have to do when you start a plant and everything went a bit smoother than we were expecting.

Your next question comes from the line of Don Carson with Susquehanna Financial.

Pierre, I want to go back to your first look at 2018 slide. You were assuming 2% to 4% revenue growth for the combined Ag Solution business. Is that sort of a forecast that the market is going to recover? Or is that more product specific where you think the combined entity can grow above the market?

So here is the way we're doing it, and once again, it's early, but we wanted to give you guys a sense. We are -- it's pretty much -- if you think about it, the EBIT growth is pretty much in line with the kind of earnings growth our core business is currently doing. So we are looking at a market which is current, the same as current, maybe a little bit better than what it is today and a portfolio of product which is similar to what we have today with the new product based on new formulations. The upside, to be very clear, is the portfolio of DuPont coming at us. We know very well that there are opportunities with molecule-like (inaudible). Very interestingly, sales appear which could boost up that number if it is still performing the way -- I mean, look at DuPont performance, it was pretty, pretty strong this quarter. So -- but we are not assuming that until we see the portfolio.

Then a follow-up on Brazil. On the last call, you talked about how you actually had the need to build inventory for sale to take advantage of your low inventory position. Is that still the case? And then also, what's your currency assumption in Brazil? I know early in the year, you were using a forward curve of about BRL 3.50 to USD 1, we're back at 3.13 now, so that seem to be potential upside from a currency perspective.

Yes. So in terms of the inventory, we are still building up inventory. It might be a little bit lower and maybe more defined because we have a very strong visibility on what is required for growth in H2. We have more clarity today in demand in which product and the mix than we had in a long time. So we're able to have an inventory buildup, which we are still building up inventory and maybe in a more and more defined way. From a currency standpoint, Paul, you want to -- forward look is what?

Yes. You know the spot rate today is BRL 3.15. We get, essentially -- look more at the forward rate Don, than we do the current spot rate. The current forward rate is in that BRL 3.30 to BRL 3.40 range. It's really been pretty consistent throughout this forecasting period, and been relatively benign for us. The reason we use the forward curve, frankly, is because once we make the sale we then hedge it to the collection period, which is on a forward rate. And that's the point and the rate at which we recognize the revenue, and therefore, the profit on that sale. So I would describe FX today as relatively benign, relatively stable throughout this year, both in terms of actual currency in Brazil and also our assumptions.

The difficulty we are facing in Brazil -- in Brazil today, and you've seen we're not the only one. Many companies have been addressing that, is you talk about the size of difficulty you have when you have in stability of currency below what was the forward curve a few months ago, is you get price pressure. So basically, the potential downside we used to have in previous quarters looking forward for 2017, which was on currency, it's, as Paul said, is becoming almost nothing on the FX side, but you see it more on the pricing side. So you have a move from a downward risk on currency toward a downward risk on price. That's where, if you look at a look forward now, a currency impact is almost nothing in the single half, but we are looking for a full year with an overall price decrease close to 2%, which I think is about the same range our competitors are seeing.

Your next question comes from the line of Steve Byrne with Bank of America.

What is the revenue and margin assumption behind that 475 EBITDA estimate from the acquired products from DuPont in 2017? What does that reflect on our year-over-year change versus 2016?

The revenue we are -- we have the numbers for 475 was slightly over $1.4 billion and $475 million of EBITDA.

Yes, the EBIT margin on '17 numbers was about 28% EBIT margin was our assumption, if you just back out -- and that includes purchase price accounting. So that's different to what it would have been under DuPont's ownership, because we have that extra slug of depreciation hitting us as a result of the accounting rules for acquisitions. And it's broad -- but to your question, it's broadly consistent with what the business saw in '16.

And with respect to the forward sales in Brazil for the second half this year, that 60% or 65% and have already locked up for the second half this year, are those sales actual (technical difficulty)

We couldn't get the last word you said. Are those sales...

Are they -- are those transactions that you can recognize as revenue? Or are these expressions of interest? I'm trying to assess whether that is -- those volumes are really secured for the second half of this year? Or do you run the risk of a competitor undermining you?

No. Those are firm orders that we have with our customers, distributors and co-ops throughout Brazil. So, no, they're firm.

And just to on that point, the revenue recognition is when a product is shipped and risk transfers to the customer, so we will recognize that revenue as the shipping takes place.

I think we have not said in a long time, but we have solid certainty around the Brazil sales, and what we have on the books today and what we have to deliver. But as Paul said, the revenue recognition is a different thing. We have to ship the products to get the revenue recognized. We are not, of course, yet, except for the month of August, we are not yet in this period in time for Q2 -- Q3, Q4.

Your next question comes from the line of Aleksey Yefremov with Nomura Instinet.

You mentioned that other companies may still take action to correct their crop protection inventory in Latin America. Could this impact your business in a negative way?

Well, yes. If I may say, I wish everybody would have been a bit more aggressive and would have a better situation where we would have more clarity. The competition is always more intense when people have a high level of inventory for which they need to take action. But that's the way you do business, and all of this will clear up in the next 1 to 2 years. So yes, it has an impact, but no more than what you see right now or you will see in Q3, Q4.

But I would say, though, just as a point on that. Not all inventory is created equal and I think if you were to look at what many of our competitors have talked about, the category of product, largely in areas, particularly within Brazil, is where we, FMC, are not major players. And so it isn't necessarily -- I know there're a lot of concerns of, as I think Steve just mentioned, undercutting price and concerns with regard to substitution, it is not that simple. And so we are not particularly concerned about direct substitution of inventory in the channel into our product and perhaps the way some of you guys are inferring.

And on Lithium, thank you for providing your initial estimate for Lithium growth for 2018. You also mentioned that you expect Lithium prices to continue growing in 2018. Does your initial estimate of $40 million to $50 million EBIT growth include such potential price increases?

Yes. So what we're seeing right now is a tight market. We do expect pricing to be having upward pressure going into next year, but it's still a little early to call just how much we'll see. So that estimate really takes into account prices essentially a little bit more than offsetting inflation, and it reflects the run rate at full volume from our expansion.

I just want to make sure we give clarity. We wanted to give an overview of a business for 2018 for Lithium, but please wait until we get to the firm guidance to have more precision than this $40 million to $50 million. Plus of $5 million -- plus or minus $5 million today will depend on what we see in pricing and mix. So we'll give much more color and precise numbers when we get -- at the February call in '18. But directionally, we just give you a sense of what we're expecting.

Your next question comes from the line of Laurence Alexander from Jefferies.

This is Dan Rizzo on for Laurence. I noticed the cash flow from operations outlook for the full year is now 350 to 450. That's up, I think, $130 million at the midpoint since the first quarter. I was just wondering, just some color on that and how you can attribute to the large increase?

Yes, I'm happy to. It's essentially receivables, collection of receivables. We are performing well. We're performing well in Brazil, we're performing well around the world. And we have a lot more confidence today that the reduction in receivables in Brazil that we had been looking to drive will actually occur. So it is almost entirely driven by a more positive outlook on our side as to what we think the receivable collection performance will be. You'll notice we were ahead in the first half on cash flow, and we expect that trend to continue in the second half.

Great. And then just one other question. You mentioned that poor weather conditions in Europe have kind of limited sales from the growing season. Is there a chance for inventory build in that region? If I recall correctly a couple -- 2 or 3 years ago, one of the initial catalysts for the inventory build in North America was a poor growing season and then you realized that there was kind of a big build up in inventory. I was wondering if something similar can unfold in a different region?

I don't think so for the following reason. I mean, Europe is 27 countries, so you've got a lot of different dynamics going on even when you have a certain type of weather condition. So I don't think you're going to see broad-based inventory builds in Europe. You may see some country-based inventory, but it won't be big enough to derail a whole region like what we saw in Brazil, for instance.

Just to add to what Mark is saying, it's a very important comment when you think about inventory level. You see much more challenge around inventory in the channel when you have market concentrated with very large customers and very large countries like North America or Brazil. You see way less of an impact around inventory when you have a more fragmented market with multiple countries and regions like you see in Asia or in Europe.

And our next question comes from the line of Brett Wong from Piper Jaffray.

I just wanted to get your thoughts around the crop in the U.S. and how that sets up for chemistry demand in 2018? And I know it's still a bit early, but I just wanted to know your thoughts there. And then on top of that, given the weakness in insecticides in the U.S., have you seen any increase bug pressure so far this season? And how that could drive or what your view is on insecticide demand as we look at the 2018 crop season?

Yes, Brett. It is early, right, to think about where we go into the next season. Obviously, soy is doing well in the U.S., [d-Con] under a little more pressure. But for us, that's good. Obviously, with a major position in pre-emergent herbicides, and we are seeing good business in our post-herbicides as well. So the increase of soy is good for us. Weather conditions we'll see over the next few weeks how things develop. With regards to bug pressure, everybody says every 3 to 5 years, you should have a good bug run. Well, we're due one, we've been 3 years without anything. So we certainly have inventory out there available for -- in case there are issues with bugs, so we'll see how we go in the next -- again, the next month will be very telling.

That's helpful. Looking at South America, you talked about sugarcane fundamentals being stronger in Brazil. But do you see any risks looking out over the next season, given the decline in sugar prices here more recently, or at least compared to where we were at the beginning of the year? And yes, I know again a little bit early and yes, ethanol prices have been supported by ongoing lifts in gas taxes, but just wondering your thoughts given weaker sugar prices.

Yes, sugar prices are weaker, but you've got to remember where they came from. They came from 9, 10, up to 21, 22, they're down at 14, 15. So they are off the peak, but there's still a profitable business for a lot of our growers in Brazil. We're seeing constant planting now. So our month-to-month sales are very consistent with our forecast. So we feel very good about where the sugar business is right now.

Your last question comes from the line of Arun Viswanathan from RBC Capital Markets.

Just a question on Latin America. One of the large competitors in this space reported very strong growth in acreage for INTACTA. Any thoughts on how that impacts your legacy products or molecules acquired from DuPont, i.e., Rynaxypyr and Cyazypyr?

Yes, I think it's always something we're watching, of course, because of Rynaxypyr. There are going to be some growth in acres -- in acreage for INTACTA, but it is very important to understand that Rynaxypyr is not a Brazil soybean story. We believe that the usage of Rynaxypyr on soybean, and we have not seen all the numbers, but our market intelligence make us believe that Rynaxypyr on soybean is about mid-single digit percent of the portfolio we acquired from DuPont. So it is a small part. So it's going to have some impact, but it's very minimum. I mean if you think about Rynaxypyr growth opportunities in major parts of the market, just for example, in Asia I would believe that Rynaxypyr is 50% sold in Asia. So we are watching, we are looking. There might be some little down pressure on usage on Rynaxypyr on soybean in Brazil. But we don't think it will be much and it is a very small part of the portfolio we acquired.

That's helpful. And can you just give us some thoughts on your margin targets in Ag? You were down year-on-year. And I think in the past, you had said that you want to get those above the mid-teens level. Any thoughts on what your projections are for margins longer term in Ag?

I think for the second half, we know we are going to be in the 20% range. We also know we're acquiring a portfolio of product which, as Paul said, was in the 28%, so -- and it's about 30% to 40%. So the market will tell that you're going to bring -- you're to bring fairly quickly your EBIT margin in the 23% to 26% range.

That's all the time we have for today. This concludes the FMC Corporation Second Quarter 2017 Earnings Release Conference Call. Thank you.