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Edited Transcript of FMC earnings conference call or presentation 31-Jul-19 1:00pm GMT

Q2 2019 FMC Corp Earnings Call

PHILADELPHIA Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of FMC Corp earnings conference call or presentation Wednesday, July 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew D. Sandifer

FMC Corporation - Executive VP & CFO

* Mark A. Douglas

FMC Corporation - President & COO

* Michael J. Wherley

FMC Corporation - Director of IR

* Pierre R. Brondeau

FMC Corporation - Chairman & CEO

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Conference Call Participants

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* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Frank Joseph Mitsch

Fermium Research, LLC - Senior MD

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning, and welcome to the Second Quarter 2019 Earnings Release Conference Call for FMC Corporation. (Operator Instructions) As a reminder, this conference is being recorded.

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

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Michael J. Wherley, FMC Corporation - Director of IR [2]

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Thank you, and good morning, everyone. Welcome to FMC Corporation's Second Quarter Earnings Call. Joining me today are Pierre Brondeau, Chief Executive Officer and Chairman; Mark Douglas, President and Chief Operating Officer; and Andrew Sandifer, Executive Vice President and Chief Financial Officer.

Pierre will review FMC's second quarter performance and provide the outlook for the rest of 2019. Andrew will provide an overview of select financial results. Mark will then address the long-term sustainable growth for Rynaxypyr and Cyazypyr insect controls. We will then address your questions.

The slide presentation that accompanies our results along with our earnings release and 2019 outlook statement are available on our website, and the prepared remarks from today's discussion will be made available after the call.

Finally, let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors including, but not limited to, those factors identified in our press release and in our filings with the SEC.

Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties.

Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations and free cash flow, all of which are non-GAAP financial measures. Please note that earnings shall mean adjusted earnings, and EBITDA shall mean adjusted EBITDA for all income statement references. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's call are provided on our website.

With that, I'll now turn the call over to Pierre.

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [3]

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Thank you, Michael, and good morning, everyone. As you saw in our earnings release, FMC continued to outperform the market, as we have for the past 7 quarters. We delivered results in line with the forecast and adjusted to specific global conditions in the quarter.

Turning to Slide 3. FMC reported $1.2 billion in second quarter revenue, which reflects a year-over-year increase of 4.5% on a reported basis and 9% organic growth, excluding FX headwinds. This increase was mostly driven by strength in Brazil, India and the EMEA.

Adjusted company EBITDA was $330 million, an increase of 6% compared to recast financials from last year and $3 million above the midpoint of our guidance. Company EBITDA margins were 28%, up year-over-year, despite $64 million in combined headwinds from raw material costs and foreign currencies.

Adjusted EPS was $1.66 in the quarter, an increase of 11% versus recast Q2 2018 and $0.01 above the midpoint of our guidance. The strong year-over-year EPS growth was driven by price increase, higher volume and the lower share count.

Moving now to second quarter revenue on Slide 4. Q2 revenue grew 4.5% versus prior year, with volume contributing 5% growth and price/mix another 3% growth. This was offset partially by a 4% headwind from FX. Although Q2 is a seasonally smaller quarter of the year in Latin America, sales in that region grew 29% year-over-year or 34% organically, continuing the trend from Q1. Drivers include strong revenue growth in Brazil across the portfolio with high demand for applications on cotton and sugarcane and price decreases that more than offset the impact of FX on both revenue and earnings.

Following such a strong first half in Latin America, it is important to note that we continue to monitor channel inventory levels of FMC products very closely in Brazil. They are at an all-time low for this point in this year.

In EMEA, improved market conditions in Russia and Ukraine, good demand in Southwest Europe and new country registrations for Cyazypyr insect control drove year-over-year revenue growth of 4%. Organic growth was 10%.

In Asia, revenue was down 2% overall, but increased 4% organically year-over-year. We were especially pleased with the strong performance in India where our sales grew over 20% driven by growth in herbicides for sugarcane and the benefits of our new commercial organization structure, which we put in place about a year ago.

In North America, revenue was down 2% year-over-year as the well-understood weather issues in the quarter caused a reduction in demand from our row-crop customers. This low demand was offset in part by strong sales of Rynaxypyr insect control, especially in niche crops in California, and our new fungicide, Lucento.

Turning to Slide 5. Second quarter EBITDA was $338 million. Price increases in all regions, and strong volume demand everywhere but North America combined to more than offset the headwinds from raw material costs and FX, leading to 6% growth versus recast results from Q2 2018.

Moving to our 2019 outlook on Slide 6. We are maintaining our guidance for 2019 revenue and EBITDA. We expect full year 2019 revenue to grow 6% at the midpoint or 9% organic growth, excluding a forecasted 3% FX headwind. We expect total company EBITDA to grow 8%. We are increasing our 2019 EPS guidance to a range of $5.68 to $5.88, which represents a gain of 10% at the midpoint over recast 2018.

Our EPS guidance now reflects the $200 million of buybacks completed in the first half of 2019 as well as an additional $200 million of buyback anticipated in the second half. We continue to plan to make $400 million to $500 million in total share repurchase in 2019, but our EPS reflects the lower end of this range.

For the third quarter, we expect revenue to be in the range of $960 million to $990 million, which represents year-over-year growth of 6% at the midpoint. We are also forecasting EBITDA of $190 million to $210 million in Q3, which would be an increase of 7% year-over-year at the midpoint.

As expected, the impact from FX will be more muted in the second half of the year. We expect third quarter EPS to be in the range of $0.75 to $0.85, up 13% at the midpoint versus recast results from Q3 2019.

The third quarter is a seasonally smaller quarter for FMC, which is in line with the quarterly pattern from 2018, as Q3 is not a high season in any of our regions. The healthy growth we forecast is in line with our full year growth expectation, and our Q3 guidance is essentially in line with the prior year period as a percent of annual sales, annual EBITDA and annual EPS.

Guidance for Q4 implies a very soft quarter with sales growth of 7%, EBITDA growth of 17% and EPS growth of 10%, all at the midpoint of the ranges versus recast Q4 2018 results. Q4 performance will be driven by Latin America.

In Brazil, similar to last year, we have already received nearly 70% of the orders needed to deliver our second half forecast. This is giving us a very strong confidence in our ability to deliver our financial target for the second half. However, we are carefully monitoring the North America market and channel inventories.

For 2019, we now expect the overall global crop protection market will be flat on a U.S. dollar basis, down slightly from our previous outlook. We expect Latin America to grow faster in the high single digit and North America to be weaker, down mid-single-digit. These adjustments in market forecast does not change our overall outlook for FMC's financial outperformance related to the market.

Turning now to our full year EBITDA bridge and revenue drivers on Slide 7.

Our full year cost headwind is higher than our prior forecast, mainly due to increased tariffs in the U.S. and a delayed reopening of a key tolling partner in China. However, strong pricing is now expected to offset over 70% of the $220 million in combined headwinds from costs and FX.

Moving to Slide 8. We provide the key drivers for EBITDA and revenue growth in Q3 and Q4. Volume growth and price increases are expected to be a consistent drivers of the revenue and earnings performance.

I will now turn the call over to Andrew.

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Andrew D. Sandifer, FMC Corporation - Executive VP & CFO [4]

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Thanks, Pierre.

Let me start this morning with a few specific income statement items. Interest expense for the quarter was $4 million higher than implied by our prior full year guidance due to higher interest rates on foreign borrowings and higher-than-anticipated commercial paper balances. Interest expense for the full year is now expected to be in the range of $144 million to $148 million.

The adjusted effective tax rate for the quarter was 15%. We are maintaining our full year tax rate guidance of 14% to 16%.

Weighted average diluted shares outstanding for the second quarter was 132.3 million, down nearly 4 million shares versus the prior year period, reflecting the benefit of the $400 million in share repurchases we've made over the past 3 quarters.

Moving on to the balance sheet and cash flow. Gross debt as of June 30 was $3.2 billion, up roughly $100 million from the end of March. Gross debt to trailing 12-month EBITDA at quarter-end was 2.8x. This is above our targeted leverage of 2.5x due to the seasonality of our cash flow and the timing of share repurchases. We continue to expect to see leverage drop to 2.5x or lower for the full year.

Turning to Slide 9. Adjusted cash from operations was negative $174 million in the first half of 2019, below the prior year period. Nonrecurring impacts that benefited working capital in the prior year period, as discussed in our last earnings call, remain the largest contributor to the year-on-year change. Additionally, cash from operations in the second quarter was also impacted by credit term accommodations made to certain North American customers in light of extreme market conditions, more than half of which have already been paid to us in Q3.

We also had higher sales in Latin America and India, where normal terms extend beyond the quarter-end. These additional factors will unwind over the following 2 quarters. And as such, we are maintaining our full year guidance for adjusted cash from operations at $750 million to $850 million, with strong operating cash generation in both the third and fourth quarters.

Capital investment through midyear, while lagging the pace implied by our full year guidance, is in line with project schedule.

We are maintaining our full year guidance for free cash flow of $375 million to $475 million. However, we are currently exploring a few product line acquisitions as well as certain capital investments to support the rapid growth of our diamides platform. These opportunities, if pursued, would reduce full year free cash flow somewhat, so they would further reinforce our growth trajectory.

We repurchased 2.56 million FMC shares year-to-date at an average price of $78.11 for a total of approximately $200 million. It is our intent to remain a regular purchaser of FMC shares throughout the year. Though we have not purchased any shares since quarter-end, you should expect that we will make further repurchases during the third and fourth quarters. As Pierre said, we intend to repurchase a total of $400 million to $500 million of FMC shares in 2019.

I note that our full year EPS guidance reflects the benefit of repurchases at the lower end of this range, in light of the potential additional investment opportunities I just mentioned.

And with that, I'll turn the call over to Mark.

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Mark A. Douglas, FMC Corporation - President & COO [5]

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Thank you, Andrew.

Over the last few months, we've seen numerous published reports discussing our diamide insecticide portfolio, speculating on the timing of patent expirations and the impact these may have on the long-term profitability and growth of these important active ingredients.

I want to take the time today to provide further clarity on not only our patent estate and the timing of key patent milestones, but also on other critical elements that will allow FMC to continue to profitably grow the diamide franchise well beyond the expiration of key patents.

These other critical elements include registration and data protection, commercial strategies, brand recognition as well as manufacturing and supply chain complexity.

Our diamide portfolio consists of 2 key molecules, Rynaxypyr and Cyazypyr insect controls, with current combined annual revenues of approximately $1.5 billion. It's important to note that Rynaxypyr and Cyazypyr are FMC's trademark brand names for the active ingredients, chlorantraniliprole and cyantraniliprole. These 2 molecules are class-leading in terms of performance, combining highly effective low-dose rates with fast-acting, systemic, long residual control. These attributes quickly established Rynaxypyr as the world's leading insect control technology, and we expect it to continue a strong growth trajectory.

Moving to Slide 11 to begin our discussion of the diamide patent estate, let me first pause to recognize DuPont. Out of all the quality assets we acquired in 2017, the IP estate and thought that went into building the IP protection of these molecules was extremely well done. Today, I will largely confine my comments to Rynaxypyr, though the same comments are generally true for Cyazypyr with the extended timelines by 18 months.

The Rynaxypyr patent estate is made up of several different patent families, which cover composition of matter, both the active ingredient and certain intermediates; manufacturing processes, both the active ingredients and certain intermediates; formulations; uses; and applications.

For Rynaxypyr, we have 21 patent families filed in 76 countries with a total of 639 granted and pending patents. Together with Cyazypyr-related patents, we have over 30 patent families and close to 1,000 granted and pending patents.

Composition of matter patents cover the structure of the molecule and are generally the patents that most observers are focused on. Process patents cover the manufacturing processes for both active ingredients, chlorantraniliprole and cyantraniliprole, as well as the key intermediates that are used to make the final products.

In the case of Rynaxypyr and Cyazypyr, these process patents are extremely important.

Chlorantraniliprole is a complex molecule to produce. In fact, its production requires 16 separate steps, many of which produce an intermediate that's sole use is in the production of chlorantraniliprole. This is very important as it means there are no other commercial uses for these intermediates, and, hence, no other commercial outlets for them.

Importantly, FMC has many of these 16 process steps separately patented. Several of these intermediate process patents run well past the expiration of the composition of matter patents, and, in some cases, stretch all the way to the end of the next decade.

Third parties that intend to manufacture and sell generic chlorantraniliprole and cyantraniliprole and rely on FMC's product safety data will be required to demonstrate that their product has the same regulatory safety profile as FMC's Rynaxypyr and Cyazypyr insect controls. To meet these stringent regulatory requirements for such a difficult-to-manufacture molecule, the AIs will have to be made the way we're making it, which is protected by FMC process patents.

Process patents can also include manufacturing processes that are not currently used but are alternative ways to manufacture our diamides. We hold patents on several alternate processes, but it is important to note that these alternate processes do not match our diamide impurity profile.

Formulation patents cover the use of an active ingredient in specific formulations while use and application patents cover how the products are used and how they are applied. In addition to the patent estate, various regulatory bodies around the world also offer added protection to the holder of patented molecules in the form of data protection and registration timelines that can extend after the composition or process patents have expired. This means that the patent holder is afforded a further period of exclusive use after the applicable patents have expired.

Over the coming slides, I'll show by major country how the patent estate registration time line and data protection come together. These highlighted countries currently account for over 70% of our diamide revenue.

Turning to Slide 12, you can see how we view the entire time line for Europe.

We have 2 parts of protection. First, we have patent protection for the composition of matter through August 2022 and later in certain EU countries. In addition, and importantly, we have patent protection through December 2025 for key processes that are required to manufacture Rynaxypyr. In effect, this means that no one will be able to manufacture or import chlorantraniliprole in the EU until December 2025 as they would be infringing our process patents.

Second, in Europe, owners of patented active ingredients are also granted exclusive data protection, which, for chlorantraniliprole, effectively means that a third party cannot use the FMC data to gain a registration for a period of 13 years after the first registration.

In addition, a further 2.5 years of data protection will be given at the initial reregistration of the active ingredient. Practically speaking, this means that no one seeking to register chlorantraniliprole can use FMC-generated data to apply for registration during the data protection period, which runs through the end of October 2026.

A third party can start to generate their own product-specific data for registration purposes during this period. And after the data protection period has expired, they could then apply for registration, which, under EU rules, should take 18 months, but generally takes 2 years.

This multilayered framework means that we will not see competitive sales of chlorantraniliprole until Q2 2027 at the earliest in the EU, unless it is sales of products sourced from or under license from FMC.

On Slide 13, you can see a similar chart to what we had in the EU with regards to patent protection, but with a different registration process. The U.S. does not have the same type of data protection as in the EU. However, under U.S. patent law, a third party cannot test or generate data or sell a product in the U.S. prior to patent expiration. This means that any third-party company wishing to gain registration to manufacture and sell chlorantraniliprole cannot start the regulatory process until our main process patents begin expiring in December 2025.

At that time, the third-party company can apply for a federal registration, which, under normal circumstances, will take about 12 months. After the federal registration has been granted, a state registration is also needed for each state where the product will be sold. These state registrations normally take an additional 6 months to be granted.

In addition, the third party's legally required to compensate the data holder, in this case FMC, for using FMC's data to gain a registration. This robust patent protection and regulatory time line means that we do not expect third party to be able to sell chlorantraniliprole in the U.S. until June 2027 at the earliest, unless they are supplied or licensed by FMC.

Moving to Slide 14, which shows the time line for 2 other key countries for diamides, China and India. Similar to other countries we've reviewed, you can see that the AI composition of matter patents expire in August 2022, and the key process patents begin expiring in December 2025.

In India and China, a third party can start applying for registration for a product during the time frame that a molecule has patent protection. However, in both these countries, we have the key manufacturing processes patented, which effectively means that even if the registration is granted, a third party could not start selling competitive chlorantraniliprole until Q1 2026 at the earliest.

Finally, the last country I will cover is Brazil on Slide 15. The patent timelines for Rynaxypyr in Brazil are longer than most other countries. The composition of matter patent on the active ingredient will expire in April 2023, and our key process patents will begin expiring in August 2026.

On the current Brazilian regulatory practices, a third party can apply for registration before the patents have expired. However, Brazil has a law protecting the exclusive use of initial registrant's data for a period of time after the initial registration. FMC believes that any company that files for registration during the period of our continued data exclusivity falls foul of this Brazilian law.

We have initiated a legal process with the Brazilian regulatory authorities to have FMC's data exclusivity respected. Taking this into account, it means first competitive sales of chlorantraniliprole will not occur before September 2026.

Turning to Slide 16. The second part of our growth strategy for the diamides is our commercial approach. It should be very clear that we have an airtight patent coverage for the process of manufacturing the diamides. However, we are also advancing a strategy of allowing others to sell Rynaxypyr and Cyazypyr insect controls as long as they purchase the active ingredient or formulations from FMC and license the trademarks.

Selling the active ingredients to third parties is a profitable way for us to grow our business as it increases the market reach for the molecule. It is not EBITDA-margin-dilutive. As a reasonable gross margin, the absence of SG&A expense for FMC means incremental gross margin drops straight to EBITDA. The third party bears all costs related to formulating the active ingredient into a marketable product as well as selling and distributing the product to the customer.

As of today, we have commercial agreements already in place or are actively negotiating new agreements with more than 15 companies to supply Rynaxypyr and Cyazypyr on a global or country basis before patent expiration. We are continuing to explore opportunities with additional companies beyond the 15 we're already engaged with today.

The duration of the agreements extends well beyond the patent expiration dates and are exclusive in nature. This means our third-party partners will be required to purchase a large majority of their diamide requirements from FMC over the lifetime of the agreement and all their needs prior to the expiration of our process patents.

The number of companies where we already have signed supply contacts or have ongoing negotiations demonstrates that many competitors would prefer to partner with us rather than attempt to manufacture a complex product that is highly protected by IP.

Our commercial strategy ensures that the diamide technologies will continue to gain share. These new commercial partners will leverage different market access in different geographies and crops with different formulations than FMC has today.

These actives will be additive to the overall growth of the FMC diamide franchise.

For years past the patent expiration date, FMC will have a growing diamide business with a strong share of the market at the grower level and an even stronger share of the molecule at the manufacturing level.

Beyond our significant patent protection and commercial strategy, the complexity of manufacturing and scale of economies FMC enjoys are further underappreciated aspects of the long-term strength of the diamide platform.

Today, FMC manufactures all the required intermediates in the 16-step process as well as the final Rynaxypyr products at our own active ingredient manufacturing plant or via partners under exclusive long-term agreements. For a third party to replicate this complex supply chain and manufacturing network would be a major undertaking with very large capital requirements.

In addition, given the know-how, we have and the scale of our operations, FMC's manufacturing costs will be substantially lower than any new entrant. This explains why we are confident most companies that want to participate in the formulated diamide market will choose to do so in partnership with FMC.

In closing, I hope I've addressed many -- any misperceptions about the long-term sustainable growth of FMC's diamide franchise. Our deep patent estate, proprietary regulatory data, manufacturing scale and knowledge, strong brand recognition as well as commercial approach will ensure that FMC is the company of choice to supply diamides to third-party partners. This will further ensure that the diamides franchise continues to be a major driver of value for FMC through the end of the next decade and beyond.

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

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [6]

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Thank you, Mark, for covering that important topic.

To conclude our prepared remarks, FMC delivered another quarter of financial outperformance despite the challenging Ag environment in the U.S.

Volume demand and price increases in other regions around the world are continuing to deliver strong revenue and EBITDA growth. At the beginning of this month, we successfully launched our new SAP system with a pilot in Brazil.

The new system is performing very well. 20% of FMC now operates on the new S/4HANA system, and we expect to complete the full implementation in Q2 2020. The Brazil launch is a major milestone in the implementation process, which is giving us strong confidence that we will be able to implement the full system without disrupting our operations.

In May, we indicated that we would provide an update on the R&D pipeline on today's call, but we felt it more important to dispel misperceptions about our diamide franchise. Rather than squeeze an R&D update into a future earnings call, we will have a more comprehensive and in-depth R&D investor event in the first half of next year.

FMC remains well positioned to outperform the industry and our focus on crop chemicals and biological product is an advantage. Short-term execution is delivering superior quarterly results, and we are confident that our current portfolio and technology pipeline will deliver longer-term growth.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to the line of Chris Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [2]

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As we enter 2020, you have a few moving parts on the cost front including a new baseline for raw materials. Just given what's happening in '19, the SAP, what you mentioned, as well as the role for the TSA, among a few others, can you just update us on your thoughts regarding the setup for the second half and also just into 2020 kind of run rates, et cetera, your general line of sight into these variables and your conviction on your ability to drive margins higher?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [3]

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Sure, Chris. We -- as you know, we had adverse costs, and the -- a part of those costs will not be seen next year. So we know we're going to start 2020 with a tailwind from a cost standpoint and also from an FX standpoint. There is also the fact that we are expecting to get out of the TSA with the bond and settle by Q2 2020 the new S/4HANA system.

I look at 2 buckets. The total costs will be -- the increase in costs we are facing in 2019 will not repeat themselves in 2020, but we will still see only a part of that coming as a tailwind. We have not yet quantified exactly how this will be impacting next year. We know it will be a tailwind, but don't take the entire cost increase into 2020.

From an S/4HANA implementation in TSA, we still believe that the cost saving on an annual basis will be in the $60 million to $100 million a year, but we will only see a fraction of that in 2020. And same thing, we've not yet quantified. So we have 2 source of benefits from a cost standpoint, but we're going to need a bit more time most likely at the Q3 earnings call to give you a more quantified number.

The other thing, which is positive as we are seeing today and we are pleased with, as the cost increase are decreasing in H2 as well as FX, price is sticking quite well. So it's also a third tailwind we will see in 2020.

You guys have to give us a bit more time. We are highly focused on 2019. Those are tailwinds for 2020, but we're hoping to quantify that in the next 2, 3 months.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [4]

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And just on the cash generation front, you've put some targets out there which are kind of in the stark contrast to the old FMC, but obviously in a good way.

Can you just comment on your progress on the cash conversion for '19? What else needs to be done in the second half and into 2021 to kind of further drive that conversion up to a peak level of potentially, let's say, 80-ish percent? Just any incremental color on the moving parts will be greatly appreciated.

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [5]

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Yes. We -- the cash are -- in fact, there is not much change on the cash forecast for the year versus what we were expecting. The difference, as Andrew said in the prepared remarks, was Q2 was not as cash-generative as we are hoping because we made the commercial decision to support our customers, distributors and growers in Q2 while facing tough, very challenging time and gave them some break on the cash collection. A big part of that has been paid, as was promised, and will be seen in Q3 and Q4. So not much change in terms of the forecast outlook for the year, maybe a bit more weighted toward Q3, Q4 than we're expecting. Andrew, you want to add anything?

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Andrew D. Sandifer, FMC Corporation - Executive VP & CFO [6]

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I think for the current year, I think Pierre's comments are spot-on. I do remind everyone that in the first half of last year, we did have some benefits to working capital that don't repeat related to the DuPont transaction, both on inventories and payables as well as a pretty marked step-down in past dues in Brazil. So that comparison is a bit extreme.

I think looking beyond 2019, I do think that long-term 80%-ish conversion of free cash flow from net income is still very much in reach. We do need to see a step-down in our legacy and transformation spending, which we anticipate as we move past the S/4HANA implementation and the finalization of the DuPont integration, and continue to drive efficiency in working capital. But very much in reach. I think this year's -- the cash flow forecast, as Pierre mentioned, is staying where we are and really does give us the capacity to commit to a large return of capital to shareholders, both through share repurchases and the dividend and the flexibility to do some incremental investment depending on opportunities through the rest of the year.

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Operator [7]

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Next, we'll go to the line of Mark Connelly with Stephens Inc.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [8]

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Pierre, every quarter, we get questions about whether the diamide growth can continue. I think in addition to the confusion over the patents, there's some misunderstanding about how FMC goes to market with products versus the way the previous owner did. So can you talk about your market penetration and why you're confident about diamide growth?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [9]

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I think there is not a fundamental difference in the way we go to market versus the previous owner. I think we just have a very different profile in terms of the crops to which we sell and the region of the world to which we sell. So it allows us to keep on penetrating markets, which were underpenetrated in the past by DuPont, not because there is as much of a difference of approach and, in fact, just because of the fact we are a different company and we are benefiting from position in crops, which are very strong crops for Rynaxypyr and Cyazypyr. There is also the fact that, as we said in the prepared remarks, we keep on getting registrations, especially for Cyazypyr in multiple countries, and that is generating more growth.

So when we look at the long term, I would not say that we would continue in the 15% to 25% growth rate of the franchise as we had last year and this year, but a long-range plan we would be doing, taking us way into the next 10 years, looking for a mid-single-digit to high single-digit growth rate for the diamide is very appropriate. Mark, do you want to add any color to this?

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Mark A. Douglas, FMC Corporation - President & COO [10]

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Yes. I think we're not finished with the sales synergies. So that's where a lot of the growth is coming from. So greater market access. As I said, for Cyazypyr, we had -- this year, we've had 8 new registrations in 8 different countries, both in Europe and in Africa. We continue to leverage our position with major co-ops and distributors in the south of Latin America, in the U.S. And we have our new channel access in India, which is a large market for us. So wherever those niche crops are in terms of what I would consider fruits and vegetables, that's where we're seeing continued growth. So you can focus on Asia. You can focus on the south of Europe. You can focus on the south of Latin America or Mexico.

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [11]

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There is a final point where -- maybe this point is a bit different from what the previous owner did. Those are the comments made by Mark. We are looking at Rynaxypyr and Cyazypyr as a great partnering tool with other Ag companies. And as we say, we have partnership and are negotiating with about 15 companies. We are allowing those companies under some conditions to sell Rynaxypyr and Cyazypyr in different crops, different parts of the world. So those companies are increasing dramatically our market reach and allowing us to grow faster.

And that is very profitable way for us to grow the franchise. It's not at all EBITDA-dilutive, and it's a tool we intend to use for the years to come. I think our competitors understand well the quality of the patent estate and are very willing to enter into those 10-years contract or more to partner with FMC on those molecules.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [12]

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I want to follow up with a question about Brazil. You've obviously been exceptionally strong there, and that's been a core strength of FMC for pretty much forever. We're starting to see some big retail players and distribution struggle down there, and we've got a major North American retailer talking enthusiastically about that market. If we do see the Brazil Ag retail market gradually shift to be more like the U.S., how is that going to affect you in Brazil? And how realistic do you think it is that, that happens, given the massive differences in market structure down there?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [13]

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So first, let me make a statement. As a large supplier of crop chemicals to the Ag market, we like the U.S. structure. We do like to have large buyers, well-established companies, public or private or co-ops, which play by the rules of the time and pay in time. So we are not adverse at all to a market outside of the U.S. starting to structure itself more like a U.S. market. It is not -- it's good from a cost standpoint. It's good from a cash standpoint. It's good from an operations standpoint.

Now I still believe, if you look at the size of the growers in Brazil that we will see large distribution -- distributors of our U.S. model happening, but it's going to take some time. It's a very big market. It's a market where there is a large number of large players as well, growers. So to see a market where you go down to 5 or 6 or 7 large distributors like we have in the U.S., I don't see that in the foreseeable future. Nevertheless, a transition more toward the U.S. market is not a negative for us. Mark?

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Mark A. Douglas, FMC Corporation - President & COO [14]

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Yes. The only thing I would add to that, Mark, is you've got some extremely large co-ops in the south of Brazil, which operate in a very similar way to the U.S. model in terms of scale and breadth of capabilities. So I think in parts of Brazil, you already have more of a U.S.-type model. I do think the market is consolidating in terms of distribution, you are seeing acquisitions and roll-ups. I think that will continue. But as Pierre said, I think it will take some time to get to where we are in the U.S., for instance, but I do see it going in that direction.

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [15]

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And we don't see that as a negative at all.

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Mark A. Douglas, FMC Corporation - President & COO [16]

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No, not at all.

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Operator [17]

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And next, we go to the line of Frank Mitsch with Fermium Research.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [18]

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Mark, I appreciate the review of the Rynaxypyr, Cyazypyr patent protection time line. Obviously, you mentioned it's the $1.5 billion in terms of sales today. So very attractive. I just want to drill into one of the comments you made that it would be very capital-intensive for someone else to duplicate your supply chain. Can you give us an order of magnitude of what would be involved there in terms of dollars and cents?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [19]

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Yes. Frank, thanks. It's complex to do because understand that when you have a process, which is 16 steps, which, for us, is done through a series of partners who are manufacturing some of the intermediates and some of the final steps, which are made by us, it is a very, very complex network. You would not imagine somebody building that in a short period of time over a single site. So it would require not only capital spending at the level of the company itself, which intends to, but most likely to find others to produce some of the intermediates. None of these partners could be the partners we do have today, who are in exclusive arrangements with our sales for the long term. That number is -- certainly it's -- we have not quantified if somebody would try to replicate all or part of our product. But I'd say for parts of the total to see numbers more in the billion range would not be surprising.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [20]

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All right, that's helpful. And Pierre, I believe you mentioned that at this point, here we sit on July 31, you have 70% of orders already received to meet your second half objectives. I'm just curious, how does that stand in prior years in terms of the percent of orders that you would already have in-house? Is that somewhat typical? Or is that higher than normal sort of percentages?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [21]

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It is the same as last year, which was a very strong year. So I would say the last 2 years, we reached that 70% number. Usually by this time of the year, we're about 50%, 40% -- 40% to 50%, maybe 40% range at this time of the year. Last year, for the first time, we hit the 70% range, which was positive and resulted into a very strong second half. And once again, this year, we are in the same place. So we view that as a positive versus a normalized year.

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Operator [22]

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We do have a question from the line of P.J. Juvekar with Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [23]

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Pierre, do you want to delay the planting inventories in the channel question on that? If I look at your inventories, they're up year-over-year, so like compared to the second quarter of last year. So was there any missed early application that led to inventory increase? And where do we stand of about inventories?

And the reason I'm asking is, a couple of years ago, we had this inventory situation in Brazil. It was painful and took some long time to get that inventories down. So how do you compare that situation?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [24]

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Sure. So first of all, let me make a comment outside of North America. We are in low to normal level of inventories. So we currently have a features -- in Brazil, actually, we have a new process in place, as we said before. I think it's the lowest-ever level of inventory in the channel we are having. In other parts of the world, we are under a more normal situation.

We recognize that there was missed application in North America. We are taking that into account in our forecast for the rest of the year, where we have made plans, which are contemplating not selling some product, which will already be in inventory at our customers or in the channel or we have also accounted for returns. So that's the place where we are facing fundamental difference from Brazil in 2015.

Brazil in 2015 was a consequence of a process from all of the Ag players over multiple years. We had multiple years of selling too much into the channel. Here, it's a more isolated event over this year because of weather conditions. So we have a year which is difficult versus multiple years in 2015, where the channel was too loaded. So it is not good, but it is manageable, accounted for in our forecast, but we're actually watching it.

Mark, you want to say...

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Mark A. Douglas, FMC Corporation - President & COO [25]

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Yes. P.J., the only nuance I would put to what Pierre said about the U.S. is the U.S., for us, is really 2 core markets, what we call the heartlands, which is the Midwest, mainly row-crop business; and then the horseshoe, which stretches all the way from California through the Southern states up the East Coast. Very different situation in those 2 markets. I would say where we know we have what or we think we have higher channel inventories is in the heartland on the row crops, where we believe pre-emergent herbicides were missed in certain areas. But in the rest of the U.S, where all the niche crops are grown, we're in absolutely normal condition. So it's very, very isolated to that part of the U.S. and that part of the business.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [26]

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Great. And a quick one for Andrew. Andrew, you mentioned extended terms of payments in the U.S. for growers. Can you talk about when did you do that last time? And what was your experience back then?

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Andrew D. Sandifer, FMC Corporation - Executive VP & CFO [27]

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Yes. I think we've done it on a very limited basis in the past. Our experience has always been that we catch right back up as agreed. And I think as I've mentioned, over half of the accommodations we gave in Q2 have already been paid at this point in Q3, and the rest will be cleared out by year-end. So really just trying to support our customers as they work through their quarter-end in what's been a tough year. But historically, in this year, I think no concerns about collection timing or ability on those.

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [28]

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Just a quick comment, P.J. I mean we made that decision. It is not something we've done in the past or we used to do. It was just exceptional to this. Especially in the Midwest, our customers were facing a situation where we felt we had to support them. Lots of them, as we said, are big corporations. They live by their word. They pay when they said they will repay. And as Andrew said, half of it has already been done with a very precise schedule. So no concern. It's an exceptional situation, but no concern on that.

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Operator [29]

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Next, we move on to the line of Vincent Andrews with Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [30]

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A question on the CapEx potential expansion of diamides. So just wondering, is that decision a function of sort of your assessment of how much incremental inventory you want to have for your own needs? Or is it a function of perhaps, as you referenced in the patent discussion, maybe extending some of the license agreements or creating new license agreements with other interested parties? Or is it a bit of both? And is this a significant capital expenditure? What time period would it be over? And potentially where would it be located?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [31]

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The CapEx increase we are looking at today are simply due to the fact that when we made our capital -- 3-year capital spend plan when we acquired the DuPont business, as you remember, we were forecasting a high single-digit growth rate for those products. We've been in the 16% to 25% range since the acquisition. So we are getting tight on capacity. Those are not big capacity. It's for part of the chain of manufacturing, where we're doing it, especially including some of the intermediates. You're talking about tens of millions of dollars. You're not talking hundreds of millions of dollars for the one, which are taking place potentially this year. And as we said before, from a location standpoint, we have a couple of locations. But as we said before, the idea for us is to manufacture as much as we can today outside of China. So those expansions will take place outside of China. It's not huge, but it's necessary to ensure we can keep on growing at the speed at which we are growing.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [32]

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And if I could just follow up. There's been a lot written recently about armyworm infestation in new geographies. I would assume that it's an attractive opportunity for your diamides portfolio. So is that something that you've already contemplated sort of as we think about your long-term growth rate? Or would that be incremental?

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Mark A. Douglas, FMC Corporation - President & COO [33]

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Yes, it definitely is. The diamides are right at the top of the tree when it comes to impacting fall armyworm. We've seen the growth of this pest in India. We see it in China, and it's now moving through Southeast Asia, Vietnam, Thailand, moving south. So we already have, in our forecast, some incremental revenue from Rynaxypyr essentially for -- in those countries, but we believe there's more upside as this pest becomes more prevalent, especially throughout the rest of South Asia.

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Operator [34]

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(Operator Instructions) We'll go to the line of Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [35]

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So you've guided down the market growth to about flat. So on rough math, to me, that would be like $100 million or $200 million a year -- excuse me, $120 million of headwinds on the sort of top line macro pressures. You've maintained your guidance, like you said, despite that. Could you talk about what's offsetting some of that pressure down on the macro?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [36]

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Yes. I think the pressures down in the market is mostly driven by North America, as we said. So what does it do to us? If you look at the disproportionate strength of our business versus many competitors outside of North America, plus the fact that within North America, we do have a very balanced crop profile with lots of specialty crops, the slowdown of the world growth in Ag is impacting us not as much as it could impact other competitors. So yes, it is a bit of a headwind, but you know what? We are very well positioned to compensate that either by growing more into specialty crops in North America or by using the strength of a business in places like Brazil, Latin America or India. But remember, as we said, we only do 25% of our business in North America. So all in all, it's balancing out quite well for us.

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Operator [37]

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Next, we go to the line of Don Carson with Susquehanna Financial.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [38]

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Yes. Mark, a question for you on these commercial arrangements you're negotiating with other parties. You say you've got up to 15 now. What is the margin profitability on that? And then as you bifurcate that into supplying generic AIs post patent, what's the margin implications for that versus selling your own branded product?

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Mark A. Douglas, FMC Corporation - President & COO [39]

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So we don't obviously give out the margin expectations, but what I've put in my prepared remarks were the fact that when we have these agreements and we make the sales, they're not EBITDA-dilutive to our overall business. So when you think about it, they're a highly profitable marketing exercise for us.

Now on a pricing standpoint, again, I'm not going to disclose the types of conditions we have in these various contracts, but they are very long term in nature. And obviously, these -- the prices that we agreed with our third parties allow them to make a more-than-adequate margin on their sales. So both parties are compensated for what we're doing in the marketplace.

So the bottom line is these are highly attractive relationships for us and our third-party partners, and they're there for the long term.

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [40]

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Let me quantify a bit by using information we've already shared with you. As you know, we do have, depending upon the quarters, an EBITDA margin for this business in the 27%, 28%. This EBITDA margin, of course, is driven, and we've said that when we made the acquisition of DuPont with the diamides which are expected to be north of 30% from an EBITDA margin. That's what we are able, through this process, to protect. So we are selling this product, the active part, to a partner, and it's generating for us with limited SG&A spending and R&D and formulation spending an EBITDA margin north of 30%.

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Operator [41]

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Next, we'll go to the line of Laurence Alexander with Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [42]

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Just one last one on the diamide discussion. As you've looked at the manufacturing chain that already exists for these products and FMC's historical approach to reengineering the chain and finding new manufacturing partners, how should we think about the 5- to 10-year opportunity for bringing down the cost of manufacturing? And should we see that in terms of lower market prices, so basically protecting the growth rates and protecting the margins, which we see it as margin expansion over time?

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Andrew D. Sandifer, FMC Corporation - Executive VP & CFO [43]

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Yes. Laurence, I mean, we have our whole engineering group looking at the diamide manufacturing processes and looking at how we can bring costs down over the mid to long term. So that's certainly something that we're not going to let pass. We know how to do this. We've done it very successfully with not our -- not only our own molecules, but other molecules as well.

I wouldn't comment on this point about price volume relationships in the marketplace going longer term. In today's world, these molecules are highly valued. They produce tremendous results for their cost and use. So right now, we're growing the market at the right margin, at the right price, and I don't see that changing in the near term at all. So whatever we get in terms of manufacturing cost reductions over the midterm will stay within FMC.

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [44]

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And we've already done in 2 years. In 2 years, we've already done multiple debottlenecking, brought new partners into the process. So we're already actively increasing capacity at very low costs. We've not seen a major increase so far in capital spending despite the fact that we've already increased our capacity in a significant way for diamides. So your point is correct. For both Cyazypyr and Rynaxypyr, we are doing it and intend to continue to do it.

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Operator [45]

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And our last question is from the line of Kevin McCarthy with Vertical Research.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [46]

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A 2-part question on your capital budget. First part is that you affirmed your range for the year at $140 million to $160 million, yet you spent only $34 million in the first half. It looks like the last couple of years, the spend has been quite back-end loaded. So I was wondering if you could speak to what is driving that kind of quarterly cadence, number one.

And then number two, do you have any preliminary thoughts on how the budget could trend in 2020 versus 2019?

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [47]

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So from a capital spending, I've been doing that for years now. And I think it's been the same thing year-after -year, which means, usually, you start your big project -- also your big projects are starting with a year -- the beginning of the year when you start with a new capital spending. So you usually have a process where there is a lot of planning and engineering study, which do not represent a lot of spending. And then it accelerates by the middle of the year when things are already put in place and you start to spend the cash. So I don't think there is anything abnormal. I would say that 70% or 80% of my years in the industry, I've always seen back-end loaded being in engineering products and capital expenditure. I think for next year, today, we've not been yet through the process. We believe we'll have a higher capital spend mostly due to capacity increase for the product we are commercializing, new product or the existing product as diamide.

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Mark A. Douglas, FMC Corporation - President & COO [48]

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Yes. Kevin, the only thing -- the additive piece to what Pierre has said is, basically, we have 2 new active ingredients that are coming out of our pipeline that come to market in 2021. We're putting stake in the ground next year for that capacity expansion. So it's a combination of both current products and new pipeline products.

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Pierre R. Brondeau, FMC Corporation - Chairman & CEO [49]

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So you'll see a slightly elevated number next year for capital spend.

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Michael J. Wherley, FMC Corporation - Director of IR [50]

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That's all the time that we have for the call today. Thank you, and have a good day.

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Operator [51]

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Ladies and gentlemen, this does conclude the FMC Corporation conference call. Thank you for your participation. You may now disconnect.