富美實 (FMC) 2018 Q1 法說會逐字稿

Good morning, and welcome to the first quarter 2018 earnings release conference call for FMC Corporation. (Operator Instructions) I will now 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 First 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 review FMC's first quarter performance and provide the outlook for 2018 and the second quarter. Paul will provide an overview of select financial results.

The slide presentation that accompanies our results, along with our earnings release and our 2018 outlook statement, are available on our website, and the prepared remarks from today's discussion will be made available after the call. Mark Douglas, President, FMC Agricultural Solutions; and Tom Schneberger, Vice President and Global Business Director, 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 will now turn the call over to Pierre.

Thank you, Michael, and good morning, everyone. In the first quarter this year, Ag Solutions benefited from higher revenue synergies and lower operating costs. Both of these factors will continue to deliver stronger earnings in the rest of 2018.

The rapid progress we have made on integration is creating a very strong platform for 2018 and beyond, and the early traction we are seeing on revenue synergies will enhance 2018 performance and accelerate in the years to come. We will talk about these areas in more detail today.

In addition, while we do not believe the crop protection market outlook has changed from 3 months ago, we see significant pockets of opportunity that are a very good fit for FMC's portfolio. For example, the late planting season in the U.S. has the potential to lead to a greater shift to soybeans from corn, which could be a large benefit for FMC, given our Authority pre-emergent herbicide.

The fear of Chinese tariffs on U.S. soybean import is leading to South American growers looking to expand soybean acreage, again, a shift that will benefit FMC. Higher replanting of sugarcane in Brazil, plus expanded acreage in cotton due to higher cotton prices, will create greater demand for FMC products in these markets where we are particularly strong. As always, growing conditions are very favorable, and we are seeing very rapid growth in demand for the acquired insecticides as a result.

Overall, market-driven opportunities in the next 2 or 3 quarters are perhaps the best FMC has seen in multiple years. A critical component of the growth strategy of the business is new product registration and label expansions. We have over 200 of them coming for Rynaxypyr and Cyazypyr insect controls over the next 4 years.

Beyond the immediate future, FMC has a very strong technology pipeline. We launched our first new active ingredient from FMC R&D pipeline, bixafen, in North America later this year, and we'll launch new fungicides and insecticides in multiple regions in 2020 and 2021.

What you will hear today is that FMC has started the year very strong, due largely to a very successful initial integration of the acquired portfolio that FMC is operating in market conditions over the rest of the year that are a very good fit with its strengths, leading to above-average growth for the rest of the year. And FMC's growth potential beyond 2018 is extremely high, driven by revenue synergies, technology launches, and wider and deeper market penetration of the combined portfolio.

The Lithium business also continues to perform strongly, as demand for differentiated performance products remains very high. We are on track to list the Lithium business, targeting an October 2018 IPO, which will be followed by a direct spin to FMC shareholders within 6 months.

Turning to Slide 3. FMC reported first quarter revenue of just over $1.2 billion, which was double the revenue from Q1 2017. Adjusted EPS was $1.84 in the quarter, more than 4x the EPS from the same period a year ago and $0.32 above the mid-point of our original guidance range.

Ag Solutions EBITDA was $51 million, above the midpoint of our guidance range. The outperformance relative to our guidance was mainly due to strong revenue growth and lower operating cost in our Ag Solutions business.

In Lithium, the strong year-over-year performance was due to more favorable customer mix and higher pricing, combined with higher volumes and good operating performance.

Moving on to Slide 4 and Ag Solutions. Revenue of $1.1 billion in the quarter more than doubled year-over-year on a reported basis, and increased 13% on a pro forma basis. Following the close of our acquisition, we gave high priority to training the 2 sales organizations on all product, which has allowed us to quickly capitalize on cross-selling opportunities. Our global sales force delivered an impressive performance in its first full quarter with the combined portfolio.

First quarter segment EBITDA of $356 million increased 250% year-over-year, and were $51 million above the midpoint of our guidance. Segment EBITDA margin was over 32%, 270 basis points above the midpoint of our guidance. Higher revenue contributed about 2/3 of the earnings beat in the quarter, and lower cost contributed the final 1/3.

We have been able to leverage FMC's existing sales and back office infrastructure to limit the number of new position added. We also incurred lower operating cost as a result of savings across procurement and plant services.

On Slide 5, you see we delivered double-digit Q1 revenue growth on a pro forma basis in every region: North America revenue increased 16%; Latin America revenue grew 15%; Asia revenue increased 13%; and Europe revenue grew 11%. There were several growth themes that drove revenue synergies, which led to this strength in the quarter.

Turning to Slide 6. These are some example that highlight synergy opportunities we are seeing all around the world. Expanded market access is the simplest way to look at where the synergies are coming from, and this is driven by 2 things: cross-selling to customers that didn't have access to the product before; and leveraging the expanded portfolio to address more of the available market.

Brazil is a good example of this, which we show on the left side of the slide. You can see that 975 of the customers previously served by FMC were also served by DuPont, but nearly 700 customers, over 40% of the total, only had access to other FMC or DuPont products.

Let me remind you that the product portfolio that we acquired has very little overlap with our existing portfolio, so every customer that didn't have access to one or the other's product is a cross-selling opportunity for us.

The second path of expanding our addressable market is through a broader portfolio of product. This is not totally distinct from the cross-selling, but it is another way to look at it. We believe that our new portfolio of products, our addressable market in Brazil has increased from 53% to 62%. This equates to an additional $1 billion in a $10 billion market.

When you look at the different channels to market in Brazil, dealers are an important piece. And we believe we now have access to about 2/3 of all dealers across the country compared to 50% before the acquisition. We now sell to nearly all the co-ops in the south, and these co-ops provide significant access to growers of niche crops which support the growth of the acquired portfolio.

But Brazil is not the only country where we believe our addressable market has expanded. In China, agricultural practices and policies are changing. The entire crop protection market is evolving toward higher-technology product, and growers are aligning with suppliers they see as technology providers. We have an example where one of the largest ag chem distributors in China is expected to triple its purchases of FMC product in 2018 due to our expanded portfolio and pipeline of new products underway.

We believe this is an instance of a customer that is perceiving FMC differently. Beyond the quality of our products, this customer truly values our service and business model. In addition, they now see us as a technology provider, one with which they want to build a closer longer-term relationship.

In Europe, our expanded commercial organization has much broader and deeper access into all parts of the region. In Italy, for example, we have doubled our total of customer base. And with more retail outlets, we have more shelf space and expanded access.

The acquired business has better market access than FMC [initially] in Europe. In Romania, for example, we increased the number of distributors we sell to by 5x, and quadrupled our sales of legacy FMC product in Q1. We are seeing opportunities in multiple countries in Europe, and together, we expect they will deliver significant growth in the future.

In India, our new super distributors give us a much better access with the overall market, as well as the ability to sell FMC's herbicide portfolio into new segments such as sugarcane.

Another opportunity for further sales synergy is in crops where either FMC or the acquired business has a very strong market position, and we can now aggressively sell a broader portfolio to the specific groups of farmers. For example, we can sell the acquired insecticide to our long-time sugarcane and cotton customers in Brazil, and we can sell FMC legacy herbicides to the super distributors in India. We are also seeing opportunities in specialty crops in Eastern Europe, as well as rice, fruits and vegetables in Asia.

Moving now to Lithium on Slide 7. Lithium delivered another strong quarter, with revenue up 57% compared to Q1 last year and segment EBITDA of $50 million, almost double that from a year ago. The business continues to benefit from a favorable environment, with demand growth continuing to outpace supply growth for key battery-grade lithium product.

Prices continued to climb, with realized hydroxide and carbonate prices around 30% higher than Q1 2017, and butyllithium prices also up 8%. Volumes were also higher in all areas, as debottlenecking in Argentina, new hydroxide capacity in China and higher demand in BuLi all contributed to the year-over-year growth.

Our EBITDA margin was 49% in the quarter, as these factors, combined with the better-than-normal customer mix, all drove stronger financial performance. Our product mix continues to migrate towards performance product, with basic carbonates and chloride accounting for only 10% of revenue in the quarter.

We continue to see very strong demand. Customers are increasingly seeking long-term supply commitments, demonstrating that they are expecting a very tight market for lithium hydroxide for several years to come. The performance of hydroxide puts FMC on a very short list of companies that can provide the necessary grade of product for high-end EV battery applications.

We took an important step in March when we announced Paul Graves will become the CEO of the new lithium company, and Gilberto Antoniazzi will become its new CFO. As you know, Paul has been FMC's CFO since he joined the company in 2012, while Gilberto has been CFO for Ag Solutions segment the past 4 years, and has been with FMC since 1993. We would like to thank Paul and Gilberto for the exceptional work they have done for FMC.

Turning to Slide 8, which summarizes our outlook for the full year and for the second quarter. We expect adjusted earnings per share for full year 2018 to be between $5.90 and $6.20 per share. At the midpoint of the range, this represents an increase of 12% from our February guidance. Second quarter 2018 adjusted EPS is expected to be between $1.65 and $1.75.

We expect 2018 Ag Solutions revenue will be in the range of $4.05 billion and $4.25 billion, an increase of 2.5% at the midpoint compared to our February guidance. On a pro forma basis, this equates to a 7% to 8% year-over-year increase. We also expect Ag Solutions EBITDA will be in the range of $1.16 billion to $1.24 billion, up 9% or $100 million compared to the midpoint of our prior guidance.

This increase is being driven by both higher revenue and lower costs, with about half of the impact coming from each. Second quarter segment revenue is expected to be in the range of $1.1 billion to $1.16 billion, which represents a year-over-year increase of 6% at the midpoint on a pro forma basis. Segment EBITDA is forecasted to be in the range of $315 million to $345 million in Q2.

Our guidance implies nearly 60% of 2018 Ag Solutions EBITDA will occur in the first half of the year. This is a reversal of the ratio in previous years when 40% of the segment earnings were generated in the first half. The shift is driven by the acquired business, which is more heavily weighted to the first half. We are also raising estimates for our Lithium business, reflecting a strong Q1 performance.

We now expect full year revenue for Lithium to be in the range of $430 million to $460 million, a year-over-year increase of 28% at the midpoint. Full year EBITDA is now expected to be in the range of $193 million to $203 million, which represents an increase at the midpoint of 40% year-over-year and $8 million versus our February guidance.

We expect price mix and incremental volume to each contribute approximately half of the year-over-year increase in earnings. The volume increase is largely due to the 4,000 tons of incremental capacity coming online from debottlenecking project. We expect second quarter segment revenue to be in the range of $110 million to $120 million, a year-over-year increase of 55% at the midpoint. EBITDA is forecasted to be between $47 million and $51 million, which represents a year-over-year increase of 77% at the midpoint.

Moving now to Slide 9 and the key drivers for the Ag Solutions business in 2018 and beyond. Our expectations for the overall market remain unchanged from what we said in February.

We continue to expect the global crop protection chemical market on a U.S. dollar basis to be flat to up low single digits in 2018. However, we expect Ag Solutions revenue will grow 7% to 8% on a pro forma basis, which is up from the 5% growth forecast we presented in February. This includes the impacts of revenue synergies, which were not in prior forecast.

The growth factors we stated in our February call still hold true, and they are driving most of the growth in 2018. It is the sale synergies from the larger addressable market that we saw in Q1 that are accelerating our growth forecast.

The most important driver we mentioned a few months ago was the strength of the acquired insecticide. As we said earlier, we believe Cyazypyr insect control is far from its peak in annual sales. Volume are expected to grow because of expanded sales into cotton and soybean in Brazil and because of new product registration in EMEA, as well as fruit and vegetables in many Asian countries.

Rynaxypyr insect control will continue to gain market share in crops and geographies such as rice and sugarcane in India, and further grow in Southeast Asia, China and Japan.

New products in the form of new active ingredients coming from FMC's legacy pipeline and new formulations of the acquired products will be another leg of growth starting in 2019. Our first new active ingredient, the fungicide bixafen, will be introduced near the end of the year in North America. These growth factors will have multiyear impact, and we are only starting to see the benefits of the synergy opportunity. FMC will continue to outperform the global crop protection market for many years to come.

As I said earlier, the integration process is progressing very well. After 6 months of ownership, we are finding that the business requires lower spending than was forecasted by the acquired management team. We are seeing significant savings on the SG&A line, which I outlined earlier, and lower cost in our manufacturing facilities.

We expect these cost savings will continue through the rest of 2018 and beyond, helping to drive EBITDA margin of approximately 29% at the midpoint of our full year 2018 guidance. As the DuPont transition service agreement roll off, and as we implement a new SAP system at the end of 2019, we expect to realize further cost savings and another meaningful step-up in EBITDA margin in 2020.

In Lithium, the key drivers for 2018 and beyond are unchanged from what we showed you in February. FMC is very well positioned to take advantage of our unique strategy focused on high-performance lithium hydroxide applications. We have demonstrated that our approach to expand our hydroxide capacity in line with market growth, is capable of meeting accelerating demand with relatively low capital needs.

Our low-cost production resource in Argentina provides us with the raw materials we need to make our downstream products highly cost competitive. Prices in 2018 will be higher than in 2017 across all product categories. The majority of our 2018 forecast revenue fall under multiyear contracts that have defined pricing, and we believe this trend will continue in 2019 and beyond.

We expect that by the end of this year, we will have 80% of our 2020 lithium hydroxide capacity of 30,000 metric tons committed under long-term contract. To that end, our current expansion in both carbonate and lithium hydroxide are on track and progressing as expected.

I will now turn the call over to Paul.

Thanks, Pierre. Since this is my last time delivering this section of the earnings call, I will keep it as short as possible. Let me start with FX and its impact on FMC's consolidated results.

The euro has had the largest impact on our results in Q1, with the RMB and the Argentine peso smaller factors. We estimate that around 3% to 4% of the year-over-year growth in FMC's pro forma revenue was due to currency tailwinds, meaning that underlying top line growth for FMC as a whole was around 12% to 13%.

We estimate that the Q1 benefit to EBITDA compared to last year was around $10 million. We do not have sufficient data on last year's earnings from the DuPont portfolio to be more precise than this.

Looking at full year guidance, we are not expecting this FX tailwind to continue. We have far lower euro revenue in the latter half of the year, and forward rates do not suggest the same tailwind will occur.

We always watch the Brazilian reais carefully at this time of year. The forward rates for the reais, which are the rates at which we protect our revenues and receivables, are in line with the assumptions underpinning the guidance we have provided. Our estimate of the impact of FX on our full year revenue guidance is unchanged from our previous guidance of 1% to 2% positive, meaning underlying revenue growth guidance of 7% to 8% across all of FMC.

Interest expense continues to tick a little higher as interest rates climb. However, the impact on our guidance is muted by our expectations of cash generation going to debt paydown. Tax expense is in line with our estimates, but we continue to work through the interpretation of the new tax rules. And we'll have more clarity on the overall impact on our tax rate, and especially on our tax provisions, by the end of the second quarter.

Cash generation in Q1 was another bright spot. Q1 is historically a cash outflow quarter, and the required building receivables for the acquired portfolio was expected to make this pattern even more pronounced. However, a very strong collection performance in Brazil, with past dues falling by over $100 million compared to the same time last year, allowed us to largely offset this build and generate operating cash flow in our legacy ag business that was stronger than prior years.

We did not increase our cash flow guidance despite the EBITDA reforecast and the strong first quarter. However, we have greater confidence that we will deliver cash flow at the high end of the guidance range, and we will revisit our full year cash flow guidance in early August with our second quarter results.

We believe that 2018 will be an unusual year in terms of cash generation, and that once we're through the build in receivables, we will generate significantly more cash from operations. When we normalize for this receivables build and remove the non-recurring capital spending from our base, we expect that adjusted cash from operations, less CapEx, will be at least twice that of 2018, assuming constant EBITDA.

A final comment on the Lithium separation. We remain on track to IPO the business in October of this year. We will be looking to file with the SEC this summer, and we'll have a clearer view of the timing when we get our first set of comments back.

It is important to be aware that as we get closer to the filing, our lawyers have advised us that we will be expected to reduce the commentary we provide on the Lithium business during earnings calls and investor meetings, as required by securities laws. You should, therefore, expect that this is the last quarter that we will give extensive comments or undertake substantial Q&A on the Lithium business before we enter what will be effectively an extended quiet period on the business.

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

Thank you, Paul. We feel very good about where FMC is today. Our Ag Solutions business delivered an exceptionally strong Q1, and we are set to deliver an outstanding 2018, with revenue growth significantly above the market growth rate. This trend of growth above market will carry on for the foreseeable future.

The integration of the acquired business is progressing very well. Growth synergies are being realized, and our cost will be lower than we were expecting a few months ago. Lithium had another strong quarter to start the year, and is on track to deliver another exceptional year in 2018.

With that, I will now turn the call back to the operator for questions. Thank you for your attention.

(Operator Instructions) Your first question will come from the line of Chris Parkinson from Credit Suisse.

You guys continue to buck the sluggishness trend in ag chemicals pretty well in most geographies, which many attributed to your earlier actions on inventories years ago now leading to better flow-through. But it now appears you're expanding your addressable markets, enhancing distribution and have a pretty solid pipeline of new products.

As the competitive environment is still fairly fierce, what do you, Mark, have up your sleeves left to further assess the opportunities to outperform the market?

Chris, I think the way we are looking at the situation, as you said, first of all, I think we have a pretty clean base of operation. We do have a situation from an inventory of FMC products, including the acquired business, which is healthy, and which is close to -- close, if not normal, so allowing us to operate under normal condition.

I think to this -- as we said in the previous half here, there is multiple drivers, which are going to play out over the years to come. I think it is very clear that -- and it's even better than what we were expecting.

On the customer front, there was way less overlap than we were expecting. There is many customers which were only solely served by FMC, and some solely served by DuPont, creating an incredible cross-selling opportunity.

We are seeing, as we were expecting, a capability to reach more crops and more markets of distribution over the years. And then we have, above all of this, the quality of the portfolio we have brought to market where we keep on expanding registration.

So you put all of that together, it is giving us a picture of growth potential, not on the quarter, not only this year. But when you create multibillion dollar growth opportunity, those are multiyear growth opportunities we are facing. Mark, do you want to add any comments to the question?

Chris, I think, Pierre, on the main points, for me, it's a two-way factor, really. It's the market access and the portfolio that we have and that we have coming. We talk about the growth we've had this year in all the regions in Q1. It's come from different places. I think of North America as an example, which is, let's make no mistake, it's a tough market right now. We know it's delayed.

But our Authority franchise for pre-emergent herbicides, we launched a new product, Authority Supreme. It's a different combination. It's there to address growers' needs that have extremely tough weed resistance issues. It's taken off very well in its first quarter of sales, and Q2 is also looking strong.

So that's kind of the example that we're looking at in terms of bringing new technologies to address growers' needs. And that's not just with the acquired portfolio, it's with the legacy FMC portfolio. But more importantly, longer term is the technology pipeline that's coming. And I'm very excited about the opportunities we have to address those growers' needs, both from an insecticide, herbicide and fungicide needs. So for us, it feels very good where we are today.

Your next question will come from Frank Mitsch from Wells Fargo Securities.

Congrats on a nice start to the year. And Paul, congrats on becoming the CEO of the Lithium business.

Thank you.

And given your commentary, Paul, perhaps, this is a great opportunity to ask just a couple of questions on Lithium. Pierre mentioned that by the end of the year, you're going to have 80% of your 2020 volumes under contract. How should we be thinking about those contract terms in terms of flexing with the underlying lithium carbonate cost?

And I guess, more broadly, there's been a lot of discussion about new supply of lithium carbonate. What are your general thoughts there on what we can expect that -- how that plays out?

Look, I think the first point I would make is that the hydroxide market is distinct and different from the carbonate market. They have very different supply and demand dynamics. There's a very different supply landscape. And there's a very different requirement on the part of the purchase of that product in terms of performance of the product.

So it's difficult to draw direct parallels to carbonate because, frankly, it really isn't a conversation with the customers. The carbonate market, as I say, really is truly a distinct and different market than the hydroxide market.

And then obviously, I'd draw, although it's a different product, it's no different to our BuLi business, which is also clearly a lithium business. But again, it's sold into very different market structure, very different customer requirements, and so you see very different contracting expectations.

Customers are far more focused on security of supply of hydroxide than they are on certainty of price. While price is always important, the conversations and the contracts are far more focused on security of supply, especially as the demand pattern for hydroxide in the coming years is significantly greater growth than it is for any other product.

It really reflects the move of our customers towards different cathode technologies which require hydroxide, and they all recognize that this is not a straightforward product to manufacture. It's not a straightforward product to source on their part. And it's a key question in their own supply chain that they have to answer to their customers, is do you have the security of supply of all of the required metals for your product.

So they are dynamics that are at play, and that's what's driving the contract terms. It's what's driving customer behavior, and it's what's driving, frankly, the degree of confidence we have in our business today.

And your next question is from Bob Koort from Goldman Sachs.

Chris Evans, on for Bob. I was -- I took note of the -- in your guide for ag EBITDA, you've got a margin, an implied margin that's below the 1Q level for the second quarter and for the full year. So I thought maybe that would be a good opportunity to talk about the seasonality of the business, maybe the costs and how they flow through, and just maybe why you guys are expecting the second quarter profitability to be below the first.

Yes. What is happening, and if you think about the way the business is now distributed, the first reason for which you have a Q1, and then Q2 for that matter and overall first half at a higher EBITDA margin, it is because there is a higher percentage in our business mix of the acquired portfolio, which itself has carried a higher margin than the FMC legacy portfolio. So that's one of the driver to have the first half and mostly a first quarter higher EBITDA margin.

The second reason is that the beginning of the year is a much stronger business in North America and Europe, which also are regions which are carrying higher margin. So those are the reasons. There is nothing else to it than the percentage of new business versus legacy FMC business and the regional distribution of the first half versus the second half.

Your next question is from Steve Byrne from Bank of America.

This is Ian Bennett, on for Steve. You commented earlier about having really strong growth in ag and being able to cross-sell, and I wanted to dive into that. How much of these products had the existing necessary registrations and there just wasn't a historical relationship with the distributors? And how do you think about the longer-term outlook to expand product registrations in different crops and regions?

This is Mark. So I think, clearly, when we look at distribution, I think Pierre mentioned a number of statistics, and it's on the slide there. You can see that we have a much broader market access in many of the major ag countries and growing regions. That's a key development for us because to be able to walk into a major co-op or distributor or retailer and have a broader portfolio is very advantageous. It's something we've been looking for, for a while, and this acquisition really brings that to life.

I would say the second piece that you're mentioning is registrations, and it's an important part of the ag space. I think everybody knows without the registrations, you can't sell. If you think about Rynaxypyr and Cyazypyr as 2 active ingredients, we have today over 200 new registrations and label extensions around the world. They'll be coming through in the next 48 months. That is all new potential for us. It is new countries. It is new crops.

And I have numerous examples where we're looking at niche crops in smaller countries that we don't participate in today. Now that is what is already rolling through the process. And I think a lot of people know it can take anywhere from 3 to 5 years, depending on which country we're in for registration.

We ourselves, after 6 months of ownership of this business, have some very novel ideas of how we intend to use Rynaxypyr and Cyazypyr in the future. We have a whole suite of new active ingredients coming through our pipeline that will actually go very well with these products. So we have a mixture strategy that we will be executing over the coming years that will further enhance that growth into different crops with different pest spectrums.

And your next question is from Daniel Jester from Citi.

So we're hearing from some of your competitors that there might be some inflation coming out of China on the active ingredient front. And I was just wondering, can you comment on what you're seeing and how you think that can have any impact on the pricing environment as the year progresses?

Yes. Yes, there is. Today, there is issues of restriction of manufacturing for some of our raw material -- I say, some of our -- some of the industry raw material suppliers and active ingredient suppliers, who have limitation in manufacturing because of environmental issues.

It is a problem the industry is facing. It is a problem we are facing and we are dealing with. In some places, it's creating tight supply. And in some other places, it's creating pressure on cost of raw material. It's all factored in the guidance we have going forward. So it's there. It is not today a dramatic impact and all accounted for and -- but something which is real and we are dealing with on a daily basis.

Your next question is from Joel Jackson from BMO Capital Markets.

Could you maybe speak to -- as much as you can about what the 2 balance sheets might look like of the 2 companies once -- post split, and what your plans are for the proceeds from the IPO?

Sure. It's pretty straightforward. I think, look, our view on the Lithium business, given its investment needs, is that it will be separated with a very clean balance sheet. There's not a lot of logic to piling it up. There's some structural challenges even if we wanted to, on a tax basis, et cetera.

But frankly, the right decision for the business is to let it go public with the ability to finance its investment plans in the future without stressing the balance sheet. The proceeds will, frankly, on day 1 be used for debt pay down, so we will raise proceeds in the IPO, and we will attempt to raise enough proceeds to make the transaction leverage-neutral for FMC as a whole, which will allow us to keep our net leverage at about 2.5x EBITDA after the IPO.

Your next question is from Mike Harrison with Seaport Global Securities.

I was wondering if you can just address the margin performance in the Lithium business. What things went right for you, and can you talk about what happens in the rest of the year that would lead the margin to be a little bit lower than the Q1 level?

Sure. The punch line is pretty straightforward, and I think we've mentioned this before. On a full year basis, we expect the margin to be largely where we said it was at the start of the year in the low to mid-40% range. We do have, in this industry, different customers on different prices, and with different margins, depending on who they are, how long their contract's been in place, or ultimately, what kind of product they're taking.

And so we will see, and we'll always see, like in a quarter-to-quarter basis, customer mix impacting the reported margin. There's no fundamental change. We have full year plans as to when we ship to which customers. This is not a shock to us, which is why it came in largely where we guided. And it's nothing more than a simple customer mix issue, or effect, should I say.

Your next question is from Mike Sison from KeyBanc.

Pierre, I think you mentioned that you felt prices for lithium will be higher in '18 versus '17 across all product categories, and you expect prices to be up in '19 and through the end of the decade. Is that largely because of your contracts?

And can you maybe just give us some color -- in the last presentation, you had a really nice supply outlook -- exactly what you think, on an LCE basis, demand will be in '19 and '20 and what you think industry supply will be in those 2 years?

I think, Mike, it's always a difficult topic to address like that because it looks like there is the bulls and there is the bears, and there is the believers and there is nonbelievers. So we build a model from 2 things: demand from our customers and what are their plans, as well as the contract we have and the prices we have in those contracts, which are multiyear contract.

Then we apply our knowledge around manufacturing and how much the capacity, the actual real capacity with usable product, will hit the market. When we bring these together, and our customers view it the same way, if not, you know the automotive industry, they are not known to overpay for any products. Everybody looking at the real capacity potential which will be in place.

And the demand, you have a situation where every numbers point to a very tight supply-demand situation on the lithium hydroxide front, also on the lithium carbonate. And that is creating a set of contracts with our customers which have price escalation every year. So between our understanding of the market, supply/demand and the actual contract we have and some certainty around price increase every year, we are pretty sure that we're going to see price going up next year and the year after.

Your next question is from Dmitry Silversteyn from Longbow Research.

I just want to go back and understand what you meant when you said your costs were lower than expected in the ag business. Was it just from faster sort of rationalization of headcount or manufacturing efficiencies and maybe putting some of your products into the existing plants? Kind of -- can you provide a little bit more detail around the -- I understand the sale synergies, but I'm just looking at the cost-outs, which seem to be happening a little bit faster.

Yes, Dmitry. So go back to November 1. We closed on the business, and at that time, we do have 2 distinct business: the FMC legacy and the DuPont legacy, each of them having a budget.

The DuPont legacy business which is coming to us from DuPont is an extract of their ag chemical business. And this business is coming to us with a need for resources to run the back office and to run the sales and technical organizations, and we knew it. There was no surprise there.

The management team of DuPont had analyzed where they would believe we would need to add cost by adding resources to be able to run the front end and the back office of the company. That's what we put into the budget. After operating the business now for 5 months, we realize that, I would say, until the beginning of -- beginning to mid of first quarter, there is different way to operate.

First of all, we are finding ways to leverage the FMC and DuPont sales, marketing and the field engineer organization across different regions without having systematically to add resources. We were also able to leverage much more the structure we have at FMC, our back office, to run the DuPont part of the business.

So all of this led to a much lower SG&A cost that was expected by the management team of the previous business, and for that matter for, to some extent, from us.

On the plant operations, we are looking at opportunities, and it's not big change on the way we carry the plant, but lots of small contracts you have in plant services where we are able to do things a little bit differently, which are bringing savings at the level of gross margin.

So all in all, it's just a matter of finding ways to operate the business by leveraging much more the existing efficiency infrastructure rather than adding resources to operate the DuPont business.

Our next question is from Aleksey Yefremov from Nomura Instinet.

Pierre, you just mentioned certainty in lithium price increases for some years. Is this -- are you referring to your belief? Or is this part of the contract structure that you have with your customers?

It's definitely in the contract with customers. I mean, there is yearly annual price escalation in the contract with customers. There is a formula base which guides if the price should go up or down with a bias to a price increase in the contract.

So that is the main driver of the certainty. But as important for us is maybe the way we look at the real capacity, which will be hitting -- not capacity, supply, which will be hitting the market versus the demand our customers are contemplating.

Our next question is from Chris Kapsch from Loop Capital Markets.

So if I had sort of one takeaway from this call this morning, it would be probably the previously underappreciated top line synergy story associated with the DuPont transaction. So sort of a follow-up on the opportunities you're seeing there, clearly, the Rynaxypyr is a story with broad expansion of registrations and uptake for that product.

But can you just talk about the registrations in other areas? And over what timeframe do you see the development of those, the expansion in the market -- the addressable market opportunity that you referenced?

Yes, I'm going to ask Mark to go into more detail around registration label, label expansion and maybe give some example (inaudible). But before he does that, I would like to say, Rynaxypyr is one of the critical elements for growth, but it is also Cyazypyr, which is an important molecule.

It is also, and we should not forget, that the complementarity of the 2 portfolio, remember, there is very little overlap. So we leverage the relationship of the DuPont business with some customers to sell more of the FMC products and vice versa.

So it's a very broad base. I would dare to say it's a multibillion dollars broad-based growth opportunity we see, which will be accelerating even beyond what we see today in '19 and '20. So, and Mark, maybe you can talk a bit more about label and registration for Rynaxypyr, on even others?

Sure. I mean, we all focus on Rynaxypyr because, obviously, it's the largest molecule. But we've said many times that we believe Cyazypyr is far from its peak in sales. And indeed, it's a later product. It was launched later. Its patent estate runs much longer than Rynaxypyr.

If you think about registrations and label extensions, we have pretty much approximately 50 coming this year, 50 coming in '19. Going all the way through 2022, we have approximately 130 to 150. So we know that this year and next year, we are going to expand the opportunity for Cyazypyr considerably. Our sales force is ready for it. We have plans to exploit and aggressively grow Cyazypyr.

So you can see why we feel that Cyazypyr has a strong growth trajectory ahead of it, certainly, through the next 4 to 5 years, and it's those label expansions and brand-new registrations that really drive all of that.

I do also want to say though that we have the new portfolio coming. Those products are starting to hit in '19. We're well advanced for 2020 and '21 with new products from our existing legacy FMC portfolio. That also adds to those billions of dollars of market opportunity that Pierre is talking about. So it's multifaceted. It's not based around one product or one technology.

And our next question is from Mark Connelly from Stephens.

As you talk about all these new opportunities, I'm wondering whether your view on R&D is changing. You had talked earlier about finding some savings in R&D, but it almost sounds like maybe you need to be expanding R&D with the strength you've got in the pipe in these market opportunities.

I think if we have given the impression at any point that we are looking for savings in R&D, I think it's -- we gave the wrong impression. There is no intent to realize cost savings in R&D. If anything, we're investing more. And it was part of our contract with the European Commission to make sure that we would protect DuPont and FMC R&D investments once we did the acquisition.

The European Commission was very strong about creating the fifth large technology-based company, and their requirement was for us not to create cost synergies in R&D. So I know pretty much what we had in FMC and what we had in DuPont is what will be adding up this year, plus the normal R&D increase you'll see on a yearly basis.

Our next question is from Arun Viswanathan from RBC.

Just a question on ag, and one in ag and one lithium, if I may. So in ag, looking at the second half, it looks like it implies a little bit lower result than what I was expecting. And I guess I was just wondering if that's due to greater strength in the northern hemisphere in the first half.

And then secondly, in lithium, do you still feel confident on hydroxide prices longer term? We've seen some recent pressure on carbonate in China, but I would imagine that that's not as relevant for you guys. So just wanted to get your thoughts on that.

I think H2 performance for the ag business is very much in line, but even above. I mean, you look at our growth rate overall for the year, 7% to 8% is above what we've been indicating in any previous conversation or call. So we are feeling very strong about our second half business, driven of course as always by Latin America, specifically in the fourth quarter.

Now as we said before, the H2 will be more based on legacy FMC business, which means lower gross margin. And also, it is based on regions like Latin America where margins are lower than North America or Europe. So de facto, you're going to see a business with a lower EBITDA margin. That's why we like to talk about across the year.

Our target this year is a 29% EBITDA margin, but above 30% in the first half and below 30% in the second half. Paul, you want -- I think I talked about the hydroxide, but maybe, Paul, you want to reiterate differently what I said?

Yes. I'll just repeat what Pierre said. We have both, for this year at least and beyond, pretty strong contractual protections around price. When we look at the supply demand dynamics in hydroxide, it is tight. It's extremely tight, and the demand is growing incredibly rapidly. And so we don't see that tightness changing in any meaningful way. I'll keep making a point that maybe people miss with our business. There's no connection between carbonate pricing and hydroxide pricing in our conversations with customers. And the fact that the 2 have moved together just reflects the fact that there's been tightness in both markets. Carbonate will -- is and will always be a raw material to FMC's lithium business. And so the hydroxide market, you really have to understand completely separately and independently today from the carbonate market.

And your last question will come from the line of Laurence Alexander from Jeffries.

Could you address, I guess, just maybe some areas where you have some optionality? And I guess what I'm thinking about, sort of an update on the Chr. Hansen biologicals effort and when that could be meaningful, whether the terms have changed in the Roundup Ready PLUS cross-marketing effort with Monsanto, and how you're thinking about sort of CapEx for the 2 separate businesses once the SAP and TSA have dropped off.

Yes, I'll address the 2 related to ag. Chr. Hansen, our relationship continues to grow. We are investing in what we call our plant health platform. Plant health for us is biologicals, micronutrients and seed treatment. That business is growing rapidly around the world. It is now north of $100 million in revenue. As I said, we continue to invest. We're seeing great opportunities in Asia on micronutrients. But more importantly, on biologicals, we're seeing growth in Brazil, and certainly, growth in the U.S. As we've said many times over many calls, this is a platform that we intend to continue to invest in. We see both opportunities for standalone biologicals, but also standalone -- biologicals with synthetic chemistry, and we're seeing growth in both areas. So for us, very important, and we'll continue to invest. On the Monsanto Roundup Ready, FMC last year made the decision, along with Monsanto, that we would not be part of the Roundup Ready program. We have instituted in North America our own Freedom Pass program, which has been extremely successful in the first year. We are aligning with our retailers around the products that we sell and how they can benefit from various activities. It doesn't mean to say that we don't have a very strong relationship with Monsanto in other areas, which we do, and we continue to both enjoy that relationship and both grow. But I am very excited about the Freedom Pass program that we put in place in the U.S. and especially how well it's taken off in its first year.

Yes. On the -- what do you call it? On the CapEx question, one of the reasons for separating the Lithium business is to really demonstrate the fact that the 2 business have different capital requirements. The ag business will probably be in the $80 million to $120 million of CapEx range in any given year, largely maintenance CapEx, some expansion. You heard about the growth plans for Cyazypyr and Rynaxypyr and other molecules. So there's likely to be some expansion in those numbers. The Lithium business is obviously a completely different beast. There's a large expansion in Argentina planned between now and 2025. And we've talked about somewhere between $550 million and $700 million for that, plus the hydroxide expansion, which while much lower capital is coming sooner, we talked about anywhere between $100 million and $200 million coming in the next 3 or 4 years on the hydroxide piece as well.

Thank you, and Mr. Wherley, please go ahead with your closing remarks.

That's all the time we have for the call today. As always, I'm available following the call to address any questions that you may have. Thank you, and have a good day.

Thank you, and that does conclude the FMC Corporation First Quarter 2018 Earnings Release Conference Call. Thank you.