Aug 6, 2015
Executives
Brian P. Angeli - Director-Investor Relations Pierre R.
Brondeau - Chairman, President & Chief Executive Officer Paul W. Graves - Chief Financial Officer & Executive Vice President Mark A.
Douglas - President-FMC Agricultural Solutions
Analysts
Matthew Freedman - Credit Suisse Securities (USA) LLC (Broker) Frank J. Mitsch - Wells Fargo Securities LLC Michael J.
Sison - KeyBanc Capital Markets, Inc. Dmitry Silversteyn - Longbow Research LLC Laurence Alexander - Jefferies LLC Peter E.
Butler - Glen Hill Investments Brian P. Maguire - Goldman Sachs & Co.
Rosemarie J. Morbelli - Gabelli & Company
Operator
Good morning, ladies and gentlemen, and welcome to the Second Quarter 2015 Earnings Release Conference Call for FMC Corporation. Phone lines will be placed on listen-only mode throughout the conference.
After the speakers' presentation, there will be a question-and-answer period. I will now turn the conference call to Mr.
Brian Angeli – excuse me, Vice President, Investor Relations for FMC Corporation. Mr.
Angeli, please go ahead.
Brian P. Angeli - Director-Investor Relations
Thank you, and good morning, everyone. Welcome to FMC Corporation's second quarter earnings call.
With me today is Pierre Brondeau, President, Chief Executive Officer and Chairman, who will review our second quarter performance and business segment results, including an update on the integration of Cheminova, and discuss our outlook for the second half of 2015. Also, with me is Paul Graves, Executive Vice President and Chief Financial Officer, who will give an overview of select financial results.
After the prepared remarks, we will be joined by Mark Douglas, President, FMC Agricultural Solutions; Eric Norris, Vice President and Global Business Director, FMC Health & Nutrition; and Tom Schneberger, Vice President and Global Business Director , FMC Lithium, to address your 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 and pro forma, revenue and segment earnings for FMC Agricultural Solutions. A reconciliation and definition of these terms, as well as other non-GAAP financial terms to which we may refer during today's conference call, are provided on our website.
Our 2015 Outlook Statement, which provides guidance for the full year and third quarter of 2015, can also be found on our website. I will now turn the call over to Pierre.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Thank you, Brian, and good morning, everyone. In my comments, I will refer to the Q2 2015 earnings presentation posted on the FMC Investor Relations website.
We have not used slides for previous earnings calls, but we have taken this approach today in order to help explain our results more clearly as we transition through 2015. I will refer to each slide by slide number as I go.
The second quarter of 2015 was perhaps the most significant quarter in the long history of FMC Corporation. We completed the sale of the Alkali business with Tronox and closed the acquisition of Cheminova.
These transactions marked the completion of the transformation of FMC's portfolio to one focused on the Ag, Health and Nutrition markets. Following the close of the Cheminova transaction, we moved quickly to integrate Cheminova into FMC Ag Solutions.
During this quarter, we took multiple actions that will drive strong future performance of FMC and allow us to deliver target synergies of $120 million ahead of 2015 (sic) [2017] (3:51). In particular, we successfully combined commercial organizations in key regions earlier than we had originally expected, which means we are well positioned to deliver the benefit of the acquisition more quickly than initially forecasted.
These recent changes, however, make it more difficult to compare the reported performance of Ag Solutions and Cheminova to their prior year's performance as standalone businesses, even just a few months after closing. Consequently, we will focus on comparing performance of Ag Solutions including Cheminova to the pro forma results for prior period.
The full year 2014 pro forma results were filed with the SEC on June 5. Pro forma results for the second quarter are included in the schedules of the quarterly earnings release issued yesterday.
Before discussing FMC's earnings for the quarter, I will make a few general comments on two of the factors that have had a significant impact on FMC's reported results: the state of the global crop protection market and the impact of foreign exchange movements. The global crop protection market continues to face multiple headwinds that have created one of the most challenging operating environment of the past decade.
Demand for crop protections products remains weak, due to the high channel inventories, poor planting conditions, low pest pressures and soft agricultural commodity prices. Through the first six months of 2015, on a U.S.
dollar basis, we estimate the global crop protection market was down by double digit percent compared to the same period of 2014. Market conditions in Brazil are the most difficult.
We estimate that through June the crop protection market in Brazil was down approximately 25% compared to last year, when measured in U.S. dollars.
Declines in demand reflected in lower volume are compounded by the rapid depreciation of the Brazilian real, which makes it harder for local currency price lists to keep pace with exchange rate movements, resulting in lower revenues when converted into U.S. dollars.
In addition to the real, all of our major currency exposures have weakened against the U.S. dollar, creating a significant headwind to reported revenue and earnings across each of our businesses.
The negative impact of foreign exchange and the challenging crop protection market, particularly in Brazil, overshadowed otherwise strong operating performance across the FMC portfolio. During the call, I will highlight where unfavorable currency exchange fluctuations most impacted FMC's financial results.
Turning to slide one, FMC reported $887 million in second quarter revenue, an increase of 12% over the same period last year. Adjusted operating profit was $159 million for the second quarter, a 5% decrease compared to last year, and we reported $0.70 in adjusted EPS, a decrease of 15% over the second quarter last year.
The benefit of ongoing cost reduction programs and synergies related to the integration of Cheminova largely offset the impact of lower sales volume, higher interest expense and a higher tax rate in the quarter. However, price increases in local currencies were not enough to offset negative foreign currency fluctuation, which I will discuss in more detail in each segment.
Turning to slide two and Ag Solutions. In order to provide greater clarity as well as to be consistent with how FMC is currently operating the combined businesses, I will discuss segment performance on a pro forma basis; that is, as though we owned Cheminova for the full quarter of 2014 and 2015.
On this basis, revenue in the quarter was $684 million and segment earnings were $117 million, a decline of 23% and 30% respectively, compared to the second quarter of 2014. Foreign exchange had a significant negative impact on segment revenue and earnings in the quarter.
Excluding the impact of foreign exchange pro forma revenues declined 14%, while segment earnings increased 5% compared to the second quarter of 2014. Multiple factors contributed to this performance.
First, let me focus on the regional crop protection markets; and in particular Brazil, the primary driver in the decline in sales volume compared to the second quarter of 2014. As I noted earlier, we believe the crop protection market in Brazil was down almost 25% through the first half of 2015.
It is important to understand that this decline was not evenly spread across all product or crop segments. With respect to product segments, the volume decline was concentrated in insecticides.
We estimate that insecticides, which we would typically expect to account for more than 40% of the market, through the first six months of the year were down 50% over this period, reflecting weak insect pressures and high channel inventories. Offsetting this decline was a 16% increase in the fungicide market, making fungicide the largest crop protection category in the first six months of the year.
This mix shift was dramatic and unlikely to persist through the remainder of 2015. However it demonstrates how unusual the crop protection market in Brazil has been so far this year.
Historically, insecticides have contributed the largest part of FMC's revenue in Brazil for the first half of the year, while fungicide is a segment where FMC was historically under-represented. The addition of Cheminova gives FMC a broader and more balanced product portfolio, and enhances our future fungicide offerings.
In other countries in Latin America, we observed encouraging demand growth, particularly for selective herbicides in Argentina and niche crops in Colombia and Mexico. North America delivered another solid quarter.
Demand for FMC's Authority brand herbicide was strong compared to the second quarter of 2014, driven by the continued increase in glyphosate-resistant acreage. In Europe, volumes were stable compared to last year, driven mainly by Cheminova sales in the region.
We are very excited by the opportunities we see in Europe, as we move to sell through Cheminova's direct access model in most of Europe for the 2016 season. In Asia, we saw good results from newly launched product in China, specifically herbicides for wheat, and we saw further growth in Pakistan across the portfolio.
Higher sales in these countries were partially offset by lower sales in Australia and Indonesia. Sales were also weaker in India, largely due to weak early monsoon season.
Contributing to the decline in sales volume in the quarter, where specific actions FMC took related to the way the new Ag Solutions segment will operate. First, we initiated a process to sell our Brazilian subsidiary, Consagro.
This subsidiary is primarily a distributor of third-party product to smaller customers in Brazil. Given the opportunities the Cheminova portfolio brings, Consagro and its business model no longer fits with FMC.
Second, we reduced our investments in certain FMC fungicide in Brazil, electing instead to shift our commercial focus to the fungicides portfolio acquired with Cheminova, which we believe will be better suited to the crops and areas (14:06) that FMC targets. Third, we continue to reduce the level of third-party sales across all regions, in particular, reducing sales of lower margin products that are less valued by our customer.
Lastly, and very importantly, given the underlying market conditions in Brazil, we have remained disciplined in our willingness to extend credit into the Brazilian market. We recognize this would reduce our revenue in the period, but the rising cost of hedging our local currency exposures given the ongoing rapid depreciation of the Brazilian real and the preference of growers to delay their purchasing decision led us to the conclusion that this is the right business decision for FMC.
All these factors taken together had a significant impact on FMC's revenues and segment earnings in the second quarter, but leave FMC in a position to deliver stronger earnings growth and cash generation through the second half of 2015 and beyond. Given the environment in which we are operating today, we are intensely focused on the cost structure of Ag Solutions.
In late 2014, we initiated a series of program intended to reduce costs across the segment. This program, combined with early cost synergies from Cheminova integration, helped to partially offset lower volume in the quarter.
We will continue to implement these cost reduction programs while also driving the cost saving benefits of the Cheminova transaction as quickly as possible. We believe these actions will deliver increasing cost saving over the second half of 2015.
Let me now provide you with an update on the Cheminova integration. On slide three, we have provided additional detail regarding the synergies we discussed during our May 11 Investor Day.
To remind you, we are targeting $120 million in synergies by the end of 2017; $90 million in synergies will come from cost reduction, principally headcounts, with $30 million in synergies coming from various commercial opportunities. Immediately following the close of the Cheminova acquisition, we moved to begin integrating Cheminova and FMC.
The integration is progressing well and gaining momentum, and the results achieved over the first 100 days reinforced our confidence in the ability of FMC Ag Solutions to deliver the targeted synergies of $120 million ahead of 2017. Our first priority was to combine and integrate the commercial organization across key regions.
In North America and Brazil, and in other key countries in Latin America, we have already made changes to our sales organization and internal systems that allow us to approach the market as a single company. This was critical to deliver targeted synergies in the coming quarters, and I'm very pleased with the speed in which it was achieved.
We also initiated our plan to sell FMC products through Cheminova, which for the first time will provide us with the direct market access across the majority of Europe for the 2016 season. As we integrate the commercial organization, we're also focused on reducing cost by streamlining the business and removing overlapping or redundant functions and capabilities.
The majority of the near term cost savings are driven by head count reduction, and we expect more than 75% of all head count actions to be taken by the end of this year. Further cost synergies are expected from a number of different non-head programs, including supply chain efficiencies, procurement savings and closing surplus facilities.
These specific synergies will begin to impact the result in 2016 and throughout 2017. On slide four, we have summarized our progress to-date to achieve the synergy targets.
We are targeting net head count reductions of 500 to 550 position. Through the end of June, we had achieved approximately 65% of that target.
As it relates to the other cost reduction synergies, we have so far identified over 150 procurement project, and by the end of June we had completed a quarter of them. We expect to identify and target additional procurement project in the future.
Turning next to commercial synergies, sales and marketing organization has so far identified approximately 50 targeted growth programs; 60% of these programs have already been launched. Cost savings from our actions are coming in faster than initially planned, and we are pleased to see a number of recently launched commercial initiatives already gaining traction.
As a result, we now expect 2015 earnings to benefit from synergies of $30 million to $40 million, up from our prior guidance of $25 million to $30 million. The impact of these actions will be seen in the second half of 2015 and will serve as a catalyst for future earnings growth for FMC Ag Solutions.
As you might expect, we are finding many opportunities to realize additional synergies that we have not yet quantified. In the coming quarters, we will provide further updates on the progress to achieve our synergy targets and, to the extent possible, quantify the additional synergy opportunities.
Moving on to Health and Nutrition on slide 5, the segment's underlying performance in the quarter was good; although, adverse currency movements led to flat revenue and segment earnings up by just 3% compared to last year. Excluding the impact of foreign currency, revenue increased 6% and segment earnings increased 8% compared to the second quarter of 2014.
Prices remained stable across the portfolio. Sales were driven by continued volume growth in MCC-based product for the pharmaceutical and food end markets.
Demand growth was strongest in the pharmaceutical industry, especially from multinational companies in Europe and generic producers in India. During the quarter, we were encouraged by increased demand for colloidal MCC product in both Asia and North America.
In China, demand for colloidal MCC beverage application remains below peak level. However, volumes are now consistent with historical averages prior to the steep pullback in demand for colloidal MCC product in Asia that we saw in the latter part of 2014.
Slightly offsetting these positive trends is continued weakness in nutraceutical product, specifically omega-3. While sales volume trends have improved, we have yet to see a meaningful rebound in what would bring omega-3 growth rate back to historical levels.
We believe excess production capacity in the omega-3 market will continue to be a headwind for prices, at least for the foreseeable future. The operating performance of the Health and Nutrition segment continues to improve.
We returned to normal level of seaweed supply in our alginate operations during the quarter, and manufacturing excellence programs are delivering higher yields in our Norway facility. As a result, we remain confident that by the end of the year we will be able to recover the earnings impact of the seaweed shortage through the first four months of 2015.
Now turning to Lithium on slide six, reported revenue of $55 million decreased by 3% compared to last year and segment earnings of $5 million were 39% lower than the same quarter in 2014. Foreign currency, specifically the Argentine peso and the euro, continued to have a significant negative impact on Lithium reported results.
Excluding impact of foreign currency, revenue increased 2% while segment earnings increased 17% compared to the prior quarter. The Lithium business continues to operate extremely well.
During the second quarter, the business achieved record production rates at our carbonate operation in Argentina and at our hydroxide plant in U.S. We continue to see improved pricing for both products on the back of strong demand growth.
The Lithium organization continues to focus on the specialty segments in the market, in particular, hydroxide, high purity metals and butyl (24:55). Given our technology strength and product expertise, as well as the market conditions for these segments, these are the areas with the greatest opportunities for growth for FMC.
Turning to the outlook for Q3 and full year 2015, as we discussed, we remain cautious about the strength of the crop protection market compared to last year. The third quarter represents the start of the growing season in the southern hemisphere and, as a result, market condition in Brazil and Latin America will be the primary drivers of our performance in the third quarter and fourth quarter.
Given the difficult market conditions currently seen in Brazil, there are higher than normal levels of uncertainly as to when growers will make purchasing decision, which could impact the timing of sales between the third quarter and fourth quarter. While this will not change our expectations for the second half of the year, it does make it difficult to estimate the balance between Q3 and Q4.
Despite this environment and continued unfavorable foreign currency moves, we expect very strong earnings performance over the next six months driven by ongoing cost saving initiatives, acceleration of cost and revenue synergies from Cheminova and targeted growth programs. Once again, excellent progress to date on the integration underscores the strategic and operational benefit of the Cheminova acquisition to FMC and increases our confidence in Ag Solutions' ability to deliver strong earnings growth during the second half 2015.
We expect full year Ag Solutions segment revenue to be within the range of $2.5 billion to $2.7 billion and full year segment earnings in the range of $510 million to $550 million. Over the next six months, we expect segment earnings of between $315 million to $340 million, an increase of approximately 40% compared to pro forma segment earnings in the second half of 2014.
For the third quarter, we expect segment earnings to be in the range of $105 million to $125 million. Third quarter guidance is a wider range than previous year, reflecting the higher than normal uncertainty in the crop protection market; however, this does not impact our outlook for the future.
In Health and Nutrition, we expect third quarter segment earnings to increase in the mid-single-digit percent over 2014, driven by continued demand for MCC in both pharma and nutrition end markets. For the full year, we are anticipating segment revenue down low single-digit percent, but segment earnings growth in the mid-single-digit percent over 2014 supported by ongoing operational improvements and targeted restructuring program within the segment.
In Lithium, we continue to see strong demand and positive pricing trends for key product. As a result, we reiterate our expectation for third quarter segment earnings of $2 million to $4 million, and full year segment earnings of $15 million to $25 million.
On a consolidated basis, we expect adjusted earnings to be between $3.00 and $3.30 per diluted share, a 3% decrease at the midpoint of the range compared to adjusted earnings per share for 2014. I will now turn the call over to Paul to cover financial highlights.
Paul W. Graves - Chief Financial Officer & Executive Vice President
Thanks, Pierre, and good morning, everyone. So today, I'm going to focus on two main items: first, the impact of recent currency movements on FMC; and second, an update on how we're doing on our stated objective of increasing cash generated from operations.
Starting with FX, Ag Solutions was hardest hit by currency movements, and the two currencies that drove most of this impact were the Brazilian real, which depreciated against the dollar by more than 40% compared to Q2 last year, and the euro, which depreciated by almost 20%. We were able to pass a proportion of this impact onto customers through higher prices, but the earnings impact of the shortfall between the price increases and the FX movements was still approximately $35 million.
This was largely due to the rate at which the currencies moved, as the local currency price lists could not be amended quickly enough to keep pace with the exchange rate movements. In Health and Nutrition, the movement in the euro was the largest single impact; although this reduced revenues more than operating earnings, given our relatively large euro or euro-linked cost base.
For Lithium, failure of the Argentine peso to depreciate at the same rate as local cost inflation was again the main driver, although the depreciation of the euro also contributed. Included in these numbers are the hedging costs we incur in our businesses, driven almost entirely by the cost of hedging Ag receivables in Brazil.
As the base interest rate in Brazil has climbed in recent quarters, the cost to hedge a dollar of exposure has increased accordingly. Today the cost of hedging has increased by 30% per $1.00 of exposure generating almost $4 million of additional costs in Brazil alone for the second quarter, and an expected full year increase of over $10 million.
This hedging cost is included in our segment earnings as an operating expense. Given the extreme volatility we see in the real, and indeed in other currencies, we will continue to hedge our exposures in order to reduce the potential for large swings in our earnings.
However, we will seek to decrease our total hedging cost by reducing wherever possible our real-denominated sales, therefore reducing the need to hedge. We have undertaken a program to identify products or customers which at today's all-in costs don't make economic sense to continue to serve on the same terms.
We do not expect this to result in a significant change to the way we conduct business in Brazil, but we will continue to exercise tighter discipline on what products we sell, to whom, and on what terms. In fact, this is one of the factors that contributed to our decision to reduce sales of third-party products to our customers.
This brings me on to the second topic in cash generation. Slide seven highlights some of the underlying contributors to our cash flow.
As you can see, for the first half of the year our adjusted cash from operations, which excludes all Cheminova, one-off M&A, and integration costs, was more than double last year at $189 million. Perhaps most importantly, our segment operating cash flow, which we define as EBITDA less or plus movements in working capital and before unallocated corporate costs, increased by 44% in the first half of the year despite a year-on-year decrease in EBITDA over this period.
The driver of this improved cash generation is a decrease in the level of working capital in our businesses as a direct result of multiple programs initiated across FMC. Ag Solutions has focused on both inventory and receivables balances this year, with programs designed to ensure we are not making or buying products for resale before they're needed and that we are not selling product sooner than we need to, or to customers that carry an unacceptable credit risk.
Health and Nutrition has also focused on its inventory, reducing levels by over 10% in the year as it uses ongoing manufacturing excellence programs to bring greater reliability to manufacturing operations, reducing the need to carry excess inventory to meet customer needs. Overall, we remain cautiously optimistic regarding our cash flow performance.
We're seeing traction in all of our major focus areas, and we will continue to focus on improving our cash flow performance in the coming quarters. We've also continued to be disciplined in overall capital spending, which in the first-half of 2015 was 30% below the same period last year at $71 million.
We expect total capital spending for this year to be in the range of $150 million to $175 million. Finally, a comment on our quarter ending net debt balance at just over $1.8 billion.
I don't want anyone to get too excited by this number as we have a significant tax payment related to the alkali sale, which has not yet been made. This payment will be approximately $300 million over and above our ongoing tax payments and will be paid across the third and fourth quarters.
The higher than normal cash balance we are carrying at quarter end is a function of these anticipated payments. Adjusting for this timing difference implies a net debt balance closer to $2.1 billion.
Before I hand the call back to Pierre, just a clarification of the increase in interest expense for Q2 and the rest of the year. We saw a temporary increase of approximately $5 million in the quarter, which was caused by certain local debt facilities of Cheminova in India, Brazil and Argentina, which were incurring average annual interest rates in the mid-teens percent.
Although these facilities were relatively small, they had a disproportionate impact on our interest expense in the quarter. The terms of those facilities, which reflect the non-investment grade status of Cheminova, did not allow us to immediately replace them with much lower cost to FMC borrowings.
However, we have now replaced most of these facilities and we'll replace the remainder through the rest of 2015, bringing our interest expenses closer to more normal levels by the fourth quarter. With that, I will pass the call back to Pierre.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Thank you, Paul. To conclude, we are very pleased with the performance how the remainder of the year is shaping up.
Our results from the second quarter were in line with our expectation. But for the unexpected temporary increase in interest expense in the quarter, our results would have been at the top of our guidance range.
As for Ag Solutions business, we are highly focused on controlling what we can control. We are in a down cycle with currency challenges.
We are actually more concerned about currency fluctuations than we are with the market, which is still in line with our views as stated at our Investor Day in May. The cycle will turn around, as it always does, and FMC will be ready with a strong portfolio and a proven business model.
In the meantime, we are very confident that our strategy is staring to pay off. Our focus is to deliver earnings growth via the synergies from Cheminova, including revenue synergies and stringent cost control, regardless of where we are in the Ag cycle; and this starting in the second half of 2015.
The integration of Cheminova is progressing faster than expected. Combined with our FMC portfolio and operated under the FMC business model, we will demonstrate in the coming quarters the potential of the new Ag Solutions business.
We're also very confident that our earnings growth will accelerate rapidly into 2016. Our Health and Nutrition portfolio continues to demonstrate its qualities, specifically, its resilient earnings profile.
The cost control and manufacturing excellence programs undertaken in 2015, combined with our technical strength and strong portfolio, will also see higher earnings growth as we enter 2016. The Lithium business strategy, to focus on downstream specialty product, is now in place and the business continues to operate well.
I am very pleased with the progress we're making in our efforts to reduce capital invested in the business through tighter control of capital spending, multiple efforts focused on reducing our working capital and very tight cost control. With the business environment that we are operating in today, it is extremely important that we continue to prioritize cash flow and capital discipline in all areas.
I will now turn the call over to the operator for questions.
Operator
And we'll go to the line of John McNulty from Credit Suisse. Please go ahead.
Matthew Freedman - Credit Suisse Securities (USA) LLC (Broker)
Good morning. This is Matt Freedman on for John McNulty.
I was wondering if you could please provide us some color on Ag Chem inventories in Brazil. What are the biggest overruns either by crop or type?
Mark A. Douglas - President-FMC Agricultural Solutions
Hi, this is Mark. The inventory situation in Brazil is pretty significant, as we've talked about since the end of last year.
The inventory balances that we see in the channels are pretty much spread across nearly all segments. In Pierre's comments, he talked about the impact on insecticides with channel inventories.
We see, also, significant channel inventories in herbicides and fungicides. Obviously, cotton is one area that we're exposed to and we see channel inventories there; we also see in soy and in corn.
So in summary, for us, channel inventories are pretty widespread. Obviously, we're entering into the growing season and those channel inventories are weighing on growers' decisions of when to buy, which we've commented already, but it's pretty widespread right now.
Matthew Freedman - Credit Suisse Securities (USA) LLC (Broker)
Thanks. That's helpful.
How big was the rationalization of third-party sales on the top-line? You indicated it was $15 million of earnings.
Mark A. Douglas - President-FMC Agricultural Solutions
Yeah, obviously, through third-party sales we make less margin. So it's less than you would normally see in terms of revenue, but in the $50 million – $30 million to $50 million range overall.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
No. I think it's a much higher number.
Mark A. Douglas - President-FMC Agricultural Solutions
That's the third-party, but that does not include Consagro – the Consagro entity.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Oh, yeah. Not including Consagro.
Correct, Mark.
Mark A. Douglas - President-FMC Agricultural Solutions
Yeah.
Matthew Freedman - Credit Suisse Securities (USA) LLC (Broker)
Got you. And then, lastly, if there was consolidation in the Ag market, would you say FMC is more likely a buyer or a seller of assets?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
In term of – you know, if you look at M&A, we've made our move. We have acquired Cheminova.
We are integrating Cheminova. We believe that with that strategic move we now have a very solid geographical balance and very solid portfolio.
So we are not a seller and we are not a buyer. We are very pleased with where we are right now and this is the way we intend to operate our business.
Matthew Freedman - Credit Suisse Securities (USA) LLC (Broker)
Thank you.
Operator
Our next question is from the line of Frank Mitsch with Wells Fargo Securities. Please go ahead.
Frank J. Mitsch - Wells Fargo Securities LLC
My assumption is that if you were a seller of Ag, you're basically a seller of the company because that's what you guys are. You've done a great job of focusing the company there.
Of course, we are – we've hit a little bit of an air pocket here on the Ag side, given the commentary. But, Pierre, I wanted to just take a moment and – the guidance for 2015 of $510 million to $550 million, at Investor Day you outlined, I think it was, $635 million to $685 million, which would be a 25% increase for 2016.
Is it still feasible that you'd be able to increase your Ag earnings by 25% at the midpoint for next year?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Yes, Frank. If you look at – first to your comment, yes, selling Ag would mean selling FMC, and we are not selling FMC.
That's a true comment. Regarding the earnings for 2016, if you look at the speed at which we are increasing our synergies and the way they will impact 2016 with a full year benefit, I think the targets we have ahead of us for 2016, at this stage, are unchanged.
We are not banking on any change in the Ag cycle for next year. We believe and we are still at the same place, our vision for – our view for the Ag market has not changed since Investor Day, which is it's going to be a rough second half of 2015.
And 2016, we'll look at it as a bit similar as 2015: no down, no up, about the same. Within those condition, targeted growth on key technologies plus revenue synergies plus cost synergies should still bring us to the same level we had forecasted for 2016.
Frank J. Mitsch - Wells Fargo Securities LLC
All right, terrific. That's very helpful.
And clearly, with the acceleration of the synergies or the benefits on the Cheminova integration, that would be a positive now that you've owned the property for several months here. What about on the other side of the ledger?
Have there been any – what other sort of positive surprises have you found in – or perhaps negative surprises have you found with the transaction?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
I think Cheminova is all we expected. It's really the company we wanted to buy.
What I would say is that the biggest surprise is the easiness in which we are capable of integrating the two companies. And that's why we are seeing the revenue synergies and cost synergies coming that fast.
The culture are matching, and there is no pushback from one company to the other. So when you look at places, Latin America, Brazil, Europe, we are operating truly as a single company, and that's why we are seeing this acceleration of synergies.
There is no big issue we've uncovered. Actually there is none.
So far it's as good, if not better, than what we were expecting.
Frank J. Mitsch - Wells Fargo Securities LLC
Thank you. That's helpful (44:13).
Thanks.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Thanks, Frank.
Operator
And your next question is from Mike Sison with KeyBanc. Please go ahead.
Michael J. Sison - KeyBanc Capital Markets, Inc.
Hi, guys.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Hi, Mike.
Michael J. Sison - KeyBanc Capital Markets, Inc.
When you think about the second half, just curious if you can – third quarter is going to be difficult for Ag, and then you have a big fourth quarter. I know Brazil tends to be stronger, but just could you frame up maybe what needs to happen to sort of hit that really strong fourth quarter for Ag Solutions?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Sure. Yes.
Thanks for the question, because it's really an important second half for us because we've – the way we've been preparing the second half with the acceleration of synergies in the second quarter, I think it's when things start to come together. I know the numbers look big, but there is a solid logic behind those numbers.
So if you think about year-on-year, what we've said is second half of 2015 will be about 40% up versus second half of 2014. Think about it that way.
It's about $100 million of EBIT increase. Two big buckets: the $100 million EBIT increase in the second half of 2015 versus 2014 is about $70 million of cost control and cost synergies.
And then, there is another bucket, I would call, of about $30 million of commercial benefit net of FX. So if I look at the commercial benefit, it's in a few categories.
First, as you know – and we've been relying on it for many years now. We have a very strong herbicides portfolio and we are seeing growth and market share gain in the herbicide portfolio.
We are seeing, as I said in my script, quick synergies, specifically in Brazil and Latin America, on fungicide. There is some specific pest pressure on cotton we are seeing in Brazil, which – from which we will benefit.
So, all of those three, we believe, will be bringing the growth. Now we believe that would be less a – the impact of the lower insecticide demand for Latin America, mostly Brazil, and as I said before, less impact of FX.
So think about that $17 million cost control, cost synergies, $30 million commercial benefit net of FX impact.
Michael J. Sison - KeyBanc Capital Markets, Inc.
Okay. Great.
And then, 2015 obviously a difficult year. What are your initial thoughts on – obviously, you're going to get a lot of integration and savings in 2016, but how would you help us think about how Ag Solutions could do in 2016; maybe is there a couple of scenarios, depending on what crop protection globally could potentially do as a market?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Yes. It's – as I said in my closing comments, we are very, very highly focused on controlling what we can control.
So our assumption today and the plans as we have defined – actually, if you look at the way we are looking at the market today, we are still exactly at the same place as we were at Investor Day in May. We see a very tough back end of 2015, and we see no improvement in 2016.
Now, looking at what is in the channels, all indication we have is we should start to see products being flushed out of the channel by the beginning of 2017. That's what we're expecting to see the cycle ending.
Under that, the focus will be on revenue synergies, cost synergies and cost control. And the numbers, the one Frank mentioned are the one we still believe we could achieve.
Today, where we are, we believe our view of the markets is correct. That's what we're expecting.
I can tell you that where we have the highest level of uncertainty, and there isn't much we can do about it, is around currency. I mean, the real is depreciating at incredible speed.
We believe the euro has stabilized. Still very hard to know what's going to happen with the – in Argentina and what will happen with their currency.
It could be positive. So, that's where we have the highest uncertainty.
So right now, the scenario we have is about the same as the one we were outlining in Investor Day, potentially with harder currency situation which could be balanced by faster synergies coming into 2016.
Michael J. Sison - KeyBanc Capital Markets, Inc.
Okay. So in short, that sort of the range of the growth that you thought in 2016 you can get versus 2015 is still generally in the cards?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Correct. We have no reason to change.
Michael J. Sison - KeyBanc Capital Markets, Inc.
Great. Thank you.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Thank you.
Operator
Our next question is from Dmitry Silversteyn with Longbow Research. Please go ahead.
Dmitry Silversteyn - Longbow Research LLC
Good morning, guys.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Hey, Dmitry.
Dmitry Silversteyn - Longbow Research LLC
Most of my questions have been answered, but – excuse me, just a couple of follow-ups, if I can. Can you repeat your CapEx guidance for the year?
I'm sorry, I missed it.
Paul W. Graves - Chief Financial Officer & Executive Vice President
Sure; and it's in the outlook sheet. It's $150 million to $175 million for the full year.
Dmitry Silversteyn - Longbow Research LLC
Okay. That's a significant reduction off of the rates you've been running at.
Is that a sustainable level going forward or is this just one year, given that Cheminova is bringing a lot of capacity that you can do something with?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Yeah. I think it's very sustainable.
That's our target. That is the number we are looking at going forward.
Remember, today one of the big CapEx user was Health and Nutrition, and that business is very well capitalized for the years to come. So it will be Ag growth, and I can't wait to have to increased capacity for the Ag business, and Lithium, if we decide to increase capacity in lithium hydroxide; so much more focused capital spending.
So $150 million to $170 (sic) [$175] (50:46) million is about the number we have to look forward for the years to come.
Paul W. Graves - Chief Financial Officer & Executive Vice President
Just bear in mind as well, Dmitry, that if you think about historical numbers, you're probably remembering numbers that had Alkali in there, too.
Dmitry Silversteyn - Longbow Research LLC
Yeah, you're right. So, then, you got about $100 million a year relief of CapEx from selling the Alkali business.
Okay. The decline in Lithium operating profit sequentially, what – I mean, looking back, it doesn't seem to be a seasonal pattern to it.
So what drove the sequential decline in operating profitability of Lithium?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
You know, it's always – and I hate to get into those discussions because I hate when a leader of this business explained to me that way, but it's just the way accounting works. When you have – when you operate in Argentina, there is always operational difficulties and permits, and the way you focus your standard cost is very hard to do because you don't always have the permit or the surprise you have on the cost endpoint.
The problem is you always get those negative impact in the time when the products are sold. So you capitalize your variances.
So some of the earnings decrease you see are mostly linked to issues operating in Argentina which are due to previous quarters.
Dmitry Silversteyn - Longbow Research LLC
Got you.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
It's just the way the GAAP accounting works.
Dmitry Silversteyn - Longbow Research LLC
Okay. All right.
Thank you, Pierre. That's all the questions I had.
Thank you.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
All right. Thank you, Dmitry.
Operator
And next, we go to Laurence Alexander with Jefferies. Please go ahead.
Laurence Alexander - Jefferies LLC
Good morning.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Good morning.
Laurence Alexander - Jefferies LLC
I guess, two quick ones. First, can you – as you look at the market environment in Brazil, how severe would things need to get to change your working capital strategy?
Paul W. Graves - Chief Financial Officer & Executive Vice President
I'm sorry. How 'what' would things need to get?
Laurence Alexander - Jefferies LLC
I guess, what flexibility do you have to change your working capital strategy if conditions – assuming that the tough conditions do spill over into 2016, what is your thinking about managing working capital days down there?
Paul W. Graves - Chief Financial Officer & Executive Vice President
It's a great question. We've done, as you can imagine, an enormous amount of work and spend a lot of time focused on this.
We – the whole industry operates on exactly the same terms. It is extremely difficult for any one of us down there, in my view, to individually change the terms on which we do business without having a significant and serious impact on the commercial operations down there.
The most important factor that we're really focused on today is ensuring that we think very carefully about who we extend credit to, which products economically make sense to be sold on those terms. And that does change rapidly when you have interest rates of 15% and a real depreciating rapidly.
And also thinking about credit risk, we think very carefully about credit risk, as you can imagine. And so, I don't think you will see a fundamental change in the terms of business, but I think discipline around who we sell to and when we sell to them is really the biggest tool that we have, and we've been very disciplined around that in the first half of the year.
I think we'll continue to be disciplined, and our outlook assumes that discipline continues through the rest of the year.
Laurence Alexander - Jefferies LLC
And then, secondly, can you give an update on your thinking around the biologicals partnership with Chr. Hansen, field trial data, what sort of products testing you're going to be doing next year?
Any sort of updates that you have there?
Mark A. Douglas - President-FMC Agricultural Solutions
Yeah, Laurence, this is Mark. The alliance is going very well indeed.
As we talked about at our Investor Day in May, we have seven really large projects that we're working on. The first of those projects is due to be launched at the end of this year and it's for North America, and it is a bio-stimulant that we will be using with some of our synthetic in-soil insecticides.
Trials have gone very well. And that product will be coming to market on target.
Following that, we have some seed treatments coming in in the 2016 timeframe, and then high value bio-fungicides, mainly for the fruit and veg and specialty niche crop markets. And then, following that are the more difficult areas, the bio-nematicides and the bio-insecticides, and they'll come through in the 2018 timeframe.
But the collaboration goes very well; it's exactly what we thought it would be. We have a pipeline of products and, obviously, that pipeline is growing.
So right now, we feel very confident about our BioSolutions platform.
Laurence Alexander - Jefferies LLC
Thank you.
Operator
Our next question is from Peter Butler with Glen Hill Investments. Please go ahead.
Peter E. Butler - Glen Hill Investments
Hi. Good morning, good morning.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Good morning, Peter.
Peter E. Butler - Glen Hill Investments
Regarding your very important Ag program, there is a company called Origin Agritech in China who is talking about starting to sell corn seed technology, GMO technology, globally, outside of China, and it claims to have better and cheaper technology than Monsanto. Would something like this be of interest as a way to get into the GMO business, say, in a country like Brazil?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Peter, I think we are an Ag chemical company. That's what we do and that's what we do best.
We believe it would be highly distractive for us and, truthfully, very expensive to try to be a competitor in the seed business. There is formidable companies in the seed business, like a Monsanto.
We are very good at what we do and they are very good at what they do. So I think we're going to stay where we belong, which is really the Ag chemical segment.
Peter E. Butler - Glen Hill Investments
How are you feeling about you're research productivity? Have there been any new developments?
Are there any vibes coming from the laboratory on new stuff that you haven't talked about?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
I'm going ask Mark to give you more detail, but from where I sit we are confirming everything we talked about in term of platforms at Investor Day.
Mark A. Douglas - President-FMC Agricultural Solutions
Yeah, Peter, this is Mark. Peter, I just talked about the BioSolutions platform that continues to grow, and you know at Investor Day I talked about the nine active ingredients we have in the pipeline.
They are all on track. They're due – the first ones come in in 2015 and it goes all the way through into the early part of the next decade.
We're not stopping there. We have a number of leads that we're following up in areas where we think we have gaps that we'll need to fill as we go into the next decade.
But right now I can tell you that I really believe that the platform and the pipeline we have in Ag right now is probably the best we've had in a number of decades, and it will bear fruit as we go through into the end of this decade, early next decade.
Peter E. Butler - Glen Hill Investments
Sounds good, thanks.
Operator
Our next question is from Brian Maguire with Goldman Sachs. Please go ahead.
Brian P. Maguire - Goldman Sachs & Co.
Hey, good morning and thanks for taking my questions today. Thanks again, also, for the slides.
I think that helps separate out what was a pretty noisy quarter. But I was struck on slide two by the amount of the FX hit to the Ag segment and I can't recall FX being a major driver of the earnings, one way or the other, in the past.
So just wondering if there has been a – and I realize currencies have moved a lot in the last year, but just wondering if there's been a change in the hedging policy or if there is some impact of hedges in here? And maybe on the flipside, would the impact have been any worse if you hadn't done some hedging activity or – I guess just trying to disaggregate the number there from what it would have been without any hedging activity?
Paul W. Graves - Chief Financial Officer & Executive Vice President
Sure, no, if you think about it, Brian, there's two factors to bear in mind. We can only hedge at the prevailing rate, and the prevailing rate itself has moved year-on-year.
And so, ultimately, without price movements on our real price list, we're always going to have that headwind simply because the forward rates as well as the spot rates are significantly different. So our hedging policy has not changed; the extent to which we hedge has not changed.
The cost of that hedging has increased. So a significant portion in the quarter, I think it's about $4 million, increased year-on-year of hedging costs as a result of the real.
A second factor is bringing in Cheminova. Cheminova has a big European business, and so we have a big euro exposure compared to last year that we historically would not have had.
So we wouldn't have suffered in quite the same way, because our European business was so much smaller. They also have a sensible sized Brazilian business, so it's magnified the impact of those two.
So, it's really those factors. It is really, though, the extent of the exposure to those two major currencies has increased and those two currencies have depreciated significantly, as you know.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Brian, the – it's unprecedented. I mean, it had an impact in the past, but, as Paul said, with hedging we're able to be more predictable.
But when you have a 40% change over the real during a period of 12 month, and I think 20% for the euro, the speed at which it was impacting our results is never happened in the last five or 10 years. And then, consequently, the hedging cost is also becoming much higher.
So it's just the magnitude of the problem which has changed with us being bigger and bigger in Latin America and Brazil.
Paul W. Graves - Chief Financial Officer & Executive Vice President
And just to give you just another data point, when we had our Investor Day in May, the forward rate for the real against the dollar was sort of 3.30-ish, and the most estimates about a 3.30, 3.35 end of year rate. We hit 3.47 yesterday.
So it's moving in a way that's incredibly rapid and incredibly unpredictable.
Brian P. Maguire - Goldman Sachs & Co.
Okay, I think that explains it very well. Paul, I was wondering if you could also comment on any change in collection behavior you are seeing from your customers in Brazil as they come under some pressure either from the currency or weak Ag markets.
Do you see any change in your ability to collect on receivables down there? Thanks.
Paul W. Graves - Chief Financial Officer & Executive Vice President
It's an interesting dynamic down there. One of the beneficiaries of the depreciation of the real is essentially the Brazilian farmer because as the real depreciates, his real profitability is going up significantly.
Unfortunately, he is getting paid too wait. He is getting paid to wait with selling his dollar currency commodities, and he is also getting paid to wait because of the pace of the depreciation.
So, we are not having any real meaningful change in credit profile of our customer base. It remains an important core competence of ours to get out there and collect what is owed to us.
Those conversations are no more easy today largely because of the inherent preference of a Brazilian farmer to not pay until he absolutely has to. So it's difficult.
It's difficult to collect, but not because of credit reasons, but largely because it's just a battle to get out there and persuade the growers to pay us what they owe us. And that's true for everybody.
Brian P. Maguire - Goldman Sachs & Co.
Okay. Thanks very much.
Operator
Our last question will be from the line of Rosemarie Morbelli with Gabelli & Company. Please go ahead.
Rosemarie J. Morbelli - Gabelli & Company
Thank you. Good morning, everyone.
Pierre, I was wondering if you could talk to us about the omega-3. You have this new plant in the UK.
The game plan was to go after pharma application as opposed to food application, but it doesn't look as though anything much is happening. Could you give us a feel for what is going on and what you expect in 2016, for example?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Sure. I think omega-3 – I have to admit that our acquisition we did faced two significant problem.
There was a slowdown in the market, whether it's pharmaceutical or nutraceutical, mostly nutraceutical, because of some comments – article which are public even if they were based on junk science, but it had a very big impact on the market; and the fact that it is a market when we came in there were three suppliers, and by now we have about 11 suppliers of omega-3; so a very strong over-capacity. So we are fighting two fronts right now.
One front is price, as any market facing over-capacity would face; and a market where demand, even if it's coming back a bit, is still not back to historical level. Our focus for us, as you said, has never been the food industry, but I would say the big difference, even what you're seeing, it's more in pharma.
I mean, our real focus is to penetrate strongly the high-end nutraceutical market. So the two markets where we should be playing are pharmaceutical and high-end nutraceutical.
We are making some progress, but needless to say that it is not at the level that we were expecting when we made that acquisition. So right now we're focusing on multiple front: increasing our product offering in the nutraceutical, still participating in the pharmaceutical, and our team in Health and Nutrition is looking very, very strongly on cost and what are options to be even more competitive than we are today.
Rosemarie J. Morbelli - Gabelli & Company
Is that an area in which you need to be in order to gain customers, for example, by offering omega-3 as well as your other products, or you can dispose of it?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
We could dispose of it without impacting – it's more like – if you think about it, we believe that we could penetrate the omega-3 market faster than others by using our relationship with nutraceutical companies and pharmaceutical – it is the case. I have to say that the larger product offering to a customer base we have is – our customers are happy we're in omega-3.
We aren't as happy because the price is not where we would like it to be and the opportunities are not as strong as what we would like to be. So from a strategic standpoint, could we be out?
Yes, we could be out. Is it time for us to get out?
No, it is not time. I think we still have opportunities to participate in this market and see a return on our investment, but more challenging than what we were expecting.
So we're going to keep on driving that business as well as we can through 2016.
Rosemarie J. Morbelli - Gabelli & Company
That's very helpful. Thank you.
And I was wondering if you could bring us up to date on the new MCC plant in Asia, and is it ready to offer products to your pharmaceutical customers or not, yet?
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
So MCC, as you heard in the script, it is becoming very tight. The growth has been strong.
Health and Nutrition is looking at a strong back end of the year and on both side, which is the pharmaceutical part and the beverage food application for colloidal MCC. So we are at a place now that we have made – actually, we made that decision yesterday to go ahead.
We're starting the plant. We are expecting the plant to open up in 2016 and we also have confirmed the decision we're very well advanced on the engineering side to do the pharmaceutical lines.
So the plant will start up in 2016; if not, we're going to be too tight in capacity. I think we're going to get close next year to 95% capacity utilization.
So, we're going to start up the plants in both MCC food and pharmaceutical.
Rosemarie J. Morbelli - Gabelli & Company
Okay. Thank you very much.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
Thank you.
Pierre R. Brondeau - Chairman, President & Chief Executive Officer
So, I think I'll close the session. Thank you very much to all of you for joining and, as I said before, very critical second half for us where things are going to come together.
So, talk to you again very soon. Thanks a lot.
Operator
Ladies and gentlemen, this concludes the FMC Corporation second quarter 2015 earnings release conference call. We thank you for your participation.
You may now disconnect.