May 3, 2017
Executives
Michael Wherley - FMC Corp. Pierre R.
Brondeau - FMC Corp. Paul W.
Graves - FMC Corp. Mark A.
Douglas - FMC Corp. Thomas Schneberger - FMC Corp.
Analysts
Ben Richardson - Susquehanna Financial Group LLLP Michael J. Harrison - Seaport Global Securities LLC Christopher S.
Parkinson - Credit Suisse Securities (USA) LLC Frank J. Mitsch - Wells Fargo Securities LLC Michael J.
Sison - KeyBanc Capital Markets, Inc. Dmitry Silversteyn - Longbow Research LLC Joel Jackson - BMO Capital Markets (Canada) Brett W.
S. Wong - Piper Jaffray & Co.
Robert Andrew Koort - Goldman Sachs & Co. Daniel Rizzo - Jefferies LLC Daniel Jester - Citigroup Global Markets, Inc.
Operator
Good morning, and welcome to the First Quarter 2017 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. And as a reminder, this conference is being recorded.
I'd now like to turn the conference over to Mr. Michael Wherley, Director, Investor Relations for FMC Corporation.
Mr. Wherley, you may begin.
Michael Wherley - FMC Corp.
Thank you, and good morning, everyone. Welcome to FMC Corporation's first quarter earnings call.
Joining me today are Pierre Brondeau, President and Chief Executive Officer and Chairman; and Paul Graves, Executive Vice President and Chief Financial Officer. Pierre will begin the call with a review of FMC's first quarter performance, and then discuss the outlook for the remainder of 2017.
Paul will provide an overview of select financial results. The slide presentation that accompanies our results, along with our earnings release and the 2017 outlook statement, are available on our website, and the prepared remarks from today's discussion will be made available at the conclusion of the call.
Mark Douglas, President, FMC Agricultural Solutions; and Tom Schneberger, Vice President and Global Business Director, FMC Lithium, will then join to address the questions. Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to those factors identified in our release and in our filings with the Securities and Exchange Commission.
Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties.
Today's discussion will focus on adjusted earnings for all income statement and EPS references. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website.
With that, I will now turn the call over to Pierre.
Pierre R. Brondeau - FMC Corp.
Thank you, Michael, and good morning, everyone. FMC has had a strong start of 2017.
A previously announced transaction with DuPont, which we will transform FMC into the fifth largest agchem company globally, and significantly enhance our R&D capabilities, remain on track for a Q4 close. And we are pleased to announce solid performances of both our ag solutions and lithium businesses in the first quarter, reflecting FMC's competitive position.
I will focus on the performance of these two segments today and will also provide a few more thoughts on the acquisition, in particular, what we expect from the business immediately after the transaction closes. Turning to slide 3, FMC reported revenue of approximately $600 million, which excludes $177 million of revenue attributable to Health and Nutrition.
Adjusted EPS was $0.43, which excludes approximately $0.21 attributable to the reporting of Health and Nutrition in discontinued operation. On a like basis, with our initial guidance of $0.50 to $0.60 per share, adjusted EPS would have been $0.64, which is $0.09 or $0.16 – $0.16 above the midpoint of our guidance range.
Later on this call, Paul will walk through how the move to have Health and Nutrition to discontinued operation impacted adjusted EPS in Q1 and how it impacts our full year guidance assumptions. For the full year, we have amended our adjusted EPS guidance to reflect the removal of Health and Nutrition and now expect to report adjusted EPS of $2.20 per share to $2.60 per share.
To be clear, this guidance excludes any earnings from the acquisition of the DuPont business that we may benefit from in the last few months of the year. Before I get into specifics regarding our Ag Solutions results, let me start with a market update.
As you may recall, when we gave guidance in February, we talked about how we saw the market performing by regions. We saw North America down from the prior year, in Europe flat to slightly up.
For Asia, we expected an improving market with mid single digit growth and in Latin America, we expected to see improved market performance, primarily benefiting the second half of the year. We expected the bulk of the revenue and earnings from the two Northern Hemisphere regions to be delivered in the first half of the calendar year and noted that the timing of sales between Q1 and Q2 was difficult to predict.
North America remains a difficult market and our review of the market hasn't changed. Europe has gotten off to a slow start, especially in the large Northern markets where the weather has been poor.
We now expect the European market to be flat to slightly down in 2017. In Asia, we have seen even more favorable conditions than expected in Australia so far, which we expect to continue, and I'm now slightly more bullish on the region as a whole than we were three months ago.
In Latin America, we are pleased with what we have seen in the region with a large selling (6:23) crop enhancing grower finances, improved fundamentals in areas such as sugarcane and cotton, and lower inventory in the channel compared to the same period last year. We are therefore confident today that this market will grow as we head into the second half of 2017.
In the context of these market conditions, let me now move onto FMC's performance on slide 4. First quarter revenue of $530 million was down 3% compared to the same quarter last year and earnings of $83 million were up 1%.
This is a significant improvement over where we guided for the quarter. However, it appears to us to be mainly a shift in timing from Q2 to Q1.
As I will discuss later, we feel confident confirming our full-year guidance as a result of this strong quarter and overall solid market in Asia and expectations of a strong Latin America season in the second half of the year. Overall, we believe that our strategy of maintaining discipline on price and terms, and limiting credit risk while pursuing top line growth only where it makes sense for our business is the right one.
We see opportunities in Asia and Latin America and we will act responsibly in pursuing those opportunities continuing to balance earnings growth with earnings quality, credit risk and cash flow generation. Turning to slide 5, I will provide additional comments on Ag Solutions regional performance starting with North America.
Revenue increased 1% in the quarter, ahead of our expectation. These reflect a shift of demand from Q2 to Q1, rather than improvement in conditions for the market as a whole.
Distributors and retailers in North America continue to purchase pre-herbicides earlier, and we have seen this in the strong performance of our Authority brand. In Latin America, sales were down 6% compared to last year.
Mexico has performed well, despite the challenges from the movements in the peso against the dollar. We continued to grow in Latin America outside Brazil and our move to direct access in Argentina has been a success.
In Brazil, we continue to be encouraged by the benefits of our decisions to focus on collections and drawing down customer inventory. Compared to the same time last year, we believe channel inventory of FMC products has declined by 35% and by over 50% since the end of 2015, which sets us up well for the Q3 and Q4 selling season.
And as Paul will comment on later, we are seeing strong cash collection performance in the region. However, I will remind you that Q1 and Q2 are relatively quiet periods in Latin America for us.
And we remain focused on conditions heading into Q3 as a predictor of our performance in the region. In Europe, revenue declined from last year by 14% in the quarter.
Much of this was timing as Northern Europe started slowly as well as some impact from the strengthening of the euro. For the first half of the year, we expect revenues to be slightly down, largely due to this currency headwind.
European markets are an important focus for FMC and we are very happy with our performance given our country, crop and product mixes. In Asia, revenue increased 19% in the quarter due to favorable conditions in Australia driving strong demand for herbicides and successful launches of new rice herbicide in China.
In Indonesia, we saw increased demand for rice insecticides as favorable weather extended the rice growing season. We continue to expect that Ag Solutions 2017 revenue will be between $2.2 billion and $2.4 billon, which is roughly flat to 2016.
Our view on segment earnings is also unchanged with segment earnings of $410 million to $450 million, an 8% year-over-year increase at the midpoint. Earnings performance will be driven largely by improved mix, new product introductions and lower operating cost, which will be partially offset by FX headwinds.
We expect continued margin improvement with high teens margins for the full year. We expect second quarter segment earnings in the range of $80 million to $100 million, with mid to high teens segments earnings margins.
This will result in a first half of 2017 that is slightly down compared to the first half of 2016, with earnings decline in North America and Europe offsetting increases in Asia and Latin America. Our implied guidance for the second half of 2017 is for year-on-year earnings growth in the high teens percent.
This reflects the improvement in conditions in Brazil that we have already discussed as well as an improved pricing and lower cost, particularly with regard to factors such as aging, bad debt and product returns. In addition, the restructuring of our market access model in Argentina will continue to deliver significant additional opportunities in the second half of 2017 compared to 2016.
As you see on slide 6, Lithium delivered another strong quarter. Revenue of $66 million was up 9% as lower volumes were offset by improvements in prices in both product and customer mix.
Segment earnings increased 45% from Q1 2016 to $22 million in the quarter as significantly higher prices and improved mix offset headwinds from lower volumes. The lower volumes were caused by reduced carbonate sales as we continue to divert carbonate to China for the ramp up of the new lithium hydroxide facility.
Segment earnings margins was 33%. Approximately 11% of Q1 revenue was generated from the sales of upstream products, like chloride and carbonate, and this will decline to around 8% of second half revenues.
As you know, we have built two new 4,000-ton lithium hydroxide units in China this year. And we are well into customer qualification processes.
Our quality and application testing shows the hydroxide we are producing in China is equivalent to the hydroxide that we produce in Bessemer City. We believe that our customers will reach the same conclusion, allowing us to move to commercial sales by the start of the third quarter.
It is these additional hydroxide sales that will drive most of the growth in the second half of the year, when hydroxide is expected to represent over 50% of the segment revenue compared to about one-third of first half revenue. We expect lithium segment revenue in 2017 to be $325 million to $365 million, an increase of over 30% at the midpoint, driven by a combination of increased volume and higher prices.
The combination of increased hydroxide volumes, higher prices and improved mix as well as greater confidence of the timing of full commercial operation for hydroxide expansion, gives us the confidence to increase our guidance for full year segment earnings to $100 million to $120 million. This represents over 55% growth at the midpoint of the range.
We also expect to achieve the low 30%s earnings margin percentage for the full year. We expect second quarter segment earnings in the range of $19 million to $23 million.
Let me spend a few minutes on where we see the Lithium business going in the near future. As we stated in March, it is our firm intention to separate Lithium into a standalone public company and we will continue to assess the appropriate timing.
There are two factors driving our decision on timing. First, practically speaking, our organization is focused on the successful integration of the DuPont acquisition and we do not believe it would be wise to distract ourselves from this in the next 12 months or so.
Second, we believe that we need to further develop key areas before pursuing a separation. The first of these areas is the Phase 2 expansion of the lithium hydroxide operations.
Our first phase has gone extremely well. The units have come online quicker than planned and at a lower capital cost.
As I mentioned earlier, our tests show that the product produced is equivalent to that produced in Bessemer City. So, we have very high confidence that we can pursue Phase 2 when the market demand warrants it.
And in this regard, the rates of growth of hydroxide demand continues to be greater than the rate of increase in capacity. As a result, we expect starting Phase 2, we will add a further 12,000 tons of capacity across three separate units.
All three of these units will be online before the end of 2019. We will give more details on the timing, the cost, and the locations of these additional units later this year.
A second key area is securing the carbonate supply we need to serve our downstream operations. Today, we are not exposed to the market price of carbonate in any meaningful way.
In the second half of 2017, when the two additional hydroxide units are in full commercial operations, only about 5% of our revenue will be generated by sales of carbonate as we will use the majority of our product internally. As we look to continue to grow our hydroxide capacity, we recognize the need to secure reliable cost effective supply of lithium carbonate, and we have always stated that we will pursue multiple paths to do this.
Our agreement with Nemaska to buy 8,000 tons a year of carbonate, starting in late 2018 is an example of one path we will continue to explore. A second path is to produce more carbonate from our existing facility in Argentina.
We have therefore initiated a program of debottlenecking and other small capital investments that will increase our carbonate production by 4,000 tons a year by the end of 2018. These investments will require less than $30 million in total capital.
The third path we are considering is a significant expansion in capacity at our Argentina location. This location is one of the lowest cost producer in the world, and we have started the process of assessing the doubling of capacity through a major expansion there.
We are progressing the engineering work and are in discussions with local authorities regarding this investment. We expect to complete our analysis on the economic merits of such an investment this year and we expect to announce our plans including timing, capital cost and total capacity to be added before the end of 2017.
Moving briefly to slide 7, which summarizes our outlook for the second quarter and the full year. On a consolidated basis, our guidance for second quarter adjusted earnings is a range of $0.40 to $0.50 per share.
As I mentioned previously, we are maintaining full year earnings guidance for Ag Solutions, while raising it by 10% at the midpoint for Lithium. I will now turn the call over to Paul.
Paul W. Graves - FMC Corp.
Thank you, Pierre. Clearly, our results this quarter are impacted by the move of the Health and Nutrition segment to discontinued operations.
The Health and Nutrition segment itself delivered operating earnings in line with our prior guidance range. The move of these results to discontinued operations impacts our results in three primary ways: first, the segment operating income is excluded from our adjusted earnings per share and will be excluded for the entire year; second, a portion of the interest expense, around a quarter of it will be allocated to discontinued operations until the transaction closes; and third, the tax rate now reflects only the tax rate on the earnings of continuing operations, that is Ag Solutions and Lithium.
This tax rate on continuing operations earnings is much lower, since the Health and Nutrition earnings are taxed at a higher rate. We expect it to be in the 12% to 15% rate for the full year.
For those who wish to reconcile our adjusted EPS back to the guidance range of $0.50 per share to $0.60 per share for the quarter. And as Pierre mentioned at the start of today's call, that on the same basis as t guidance, our adjusted EPS would have been approximately $0.64 per share for the quarter or 16% above the midpoint of our guidance range.
Moving onto cash flow on slide 8. As with the income statement there is a large impact of the move of Health and Nutrition to discontinued operations embedded in here.
In the first quarter, we lose around $50 million of reported operating cash flow as a result of reclassification. And for the full year compared to our prior guidance, almost $250 million of the $350 million reduction is related to the move of the business out of continuing operations.
To be clear, the majority of this cash will still be received by FMC during our ownership of Health and Nutrition through the end of October, and our net debt balances will reflect that cash collection. Regarding Q1, overall cash collection was seasonally strong for FMC.
As you know, Q1 has historically seen a large cash outflow driven by the Ag segment and we have been working to reduce that outflow over the last few years. Last year, we benefited from a one-off early collection in North America, which we chose not to repeat this year.
Once you adjust for this item, our Q1 operating cash flow in Ag Solutions was roughly flat with Q1 2016. In Lithium, we saw a small reduction in cash flow despite higher earnings related to a build in inventory associated with the start-up of the hydroxide units.
Our focus on Brazil collections continues to pay off with Q1 cash generation in Brazil up over 50% compared to the same quarter last year. Equally important, the quality of the remaining receivables continues to improve.
Total past due receivables continue to fall in dollar terms while the collateral we hold against the receivables whether in forms of crop liens or other legal claims continues to climb as a percentage of total balances. Supporting the comments Pierre made earlier regarding the Latin American market, FMC is heading into the Brazil season in four or five months' time with a far healthier balance sheet than in either of the last two years.
For the full year, we expect to see continued benefits from the reduction in receivables in Brazil, reflecting the healthier financial condition of many of our most important customers. However, against this we see two headwinds that will result in full year operating cash flow for Ag Solutions being lower year-over-year.
The first and largest factor is a planned build in inventory for sale. This reflects our view, that there is a real possibility that demand will be greater in Latin America and parts of Asia than we have seen in recent years, and given the long supply chains in our business, we do not want to find ourselves short of products to meet that demand.
This inventory build should be viewed as an insurance on our part in the event we are being overly cautious on demand in these markets. The second factor is our expectation that prepayments in North America may be lower in 2017 than 2016, reflecting the reality of the market conditions in North America.
The net effect of these three items is a reduction in cash flow for the segment of around $100 million, compared to 2016. Foreign currency had a somewhat limited impact on our earnings in the quarter with the real particularly stable compared to recent volatility.
The one area that we did see some impact in the quarter was in Ag Solutions in Europe, as the euro strengthened against the dollar, creating a small headwind to both revenues and earnings. And with that, I will turn the call back to Pierre.
Pierre R. Brondeau - FMC Corp.
Thank you, Paul. As I mentioned at the start of the call, that I would give some more thoughts on how we view the performance of the business we are acquiring from DuPont.
A couple of weeks ago, Paul shared with you some modeling assumptions and we thought it would make sense to update you on where we are on those assumptions today. As you can see on slide 9, we continue refine each line item in our model, reflecting work our financial, commercial and integration teams are performing.
We remain confident in the numbers we presented to you in late-March and our underlying assumptions as to what will drive the increased earnings have not changed. We are starting to look at weather range estimates to some of these numbers, particularly in areas such as the potential for earnings growth in 2018 over 2017.
We also are starting to refine our estimate of the accounting treatment of certain items, particularly taxes. Clearly, the item that we are most focused on refining is the year-over-year earnings performance of the acquired business.
Given today's market conditions, we have been quite cautious in our assumptions as to earnings growth. We have assumed a lower rate of revenue growth than was presented to us by the seller.
We believe this is the right approach to take until we own the business and can therefore develop our own views as to the near-term growth potential. The same is true as to our assumptions on cost synergies as we have not yet quantified the short-term cost synergies impact versus the acquisition-spending model.
The end results remains clear, however. We expect an increase in earnings per share over the $1 per share in 2018 as a result of this transaction.
In summary, we feel very good about where FMC is today. Our current Ag Solutions business delivered a good Q1 on the back of a strong performance in Asia and North America.
We are reaffirming our full year earnings guidance at $430 million at the midpoint, with the growth driven by a strong second half in Latin America and a strong year in Asia. Lithium also had a good first quarter, and is on track to deliver higher earnings in the second half of the year, as the hydroxide units commence full commercial operations.
We are therefore increasing our guidance for earnings for the full year by 10% to $110 million at the midpoint. And we have received very positive feedback from our customers, shareholders and employees on the announced transaction with DuPont, which will fundamentally transform our position in the global crop protection industry and bring greater clarity to the FMC investment story.
I want to thank you for your attention and I will now turn the call back to the operator for questions.
Operator
Thank you. And our first question will go to Don Carson with Susquehanna.
Please go ahead.
Ben Richardson - Susquehanna Financial Group LLLP
This is Ben Richardson sitting in for Don. Thanks for the question.
So, just on the issue of sales timing and sales being pulled forward from the second quarter into the first. Is it the case that, given the wet conditions in North America and Europe, you might see sales pushed now to the third quarter?
Pierre R. Brondeau - FMC Corp.
So, I think we're facing a situation which is not surprising. You've seen that with many of our competitors.
We've said that also in the previous earnings call. We have a difficult time today under the current market condition to exactly understand the timing at which customers are buying.
And it seems like in this market and you've seen that with many of our competitors, lot of our customers decided to make purchase of pre-emergent products in the first quarter rather than the second quarter. I think, we are trying to think more in term of first half and second half.
So, the first half is going to be very much in line with what we're expecting in total, but with a shift in North America from Q2 into Q1. Europe is also pretty much in line, except that there was a slow start with cold weather in the Northern part of Europe.
H2 is still the same, we don't see any move to Q3, Q4 from the first half of the year and H2, second half is very much for us based on the strength of our Latin America and Brazil market. Actually, on the (33:41) side, Mark and I, we were in Brazil last week.
It feels very, very different than it did a year ago. We met with our sales organization.
We met with customers. Discussions are strong.
Confidence is strong. If you look at what we need to meet our objective in the second half we believe that last week, which was the last week of April, we already bought half in the book, half of the orders we need to do our second half, which is much better than where we used to be in previous years.
So a first half, which will be pretty much in line with what we are expecting with a tough market in North America, despite the very strong first quarter. And a second half, which is looking very good right now, with what we have in hand in Latin America and Brazil.
And across the entire year, a very solid Asia. Mark, you may want to add something on customers, Latin America.
Mark A. Douglas - FMC Corp.
No, I think what Pierre said is exactly what we saw, the customers are – obviously, they've come off a bumper crop, so they have cash. As Paul commented, we saw better cash collection that's indicative of the way they feel about their business today.
We feel very good going into the second half of the year, both in Brazil, but also in Argentina and Mexico, we performed well in those two countries, which are growing for us. But overall, I think we are very solid on Brazil.
Obviously, it'll be interesting to see how the North American market develops in terms of yield as we go through this year, but I can tell you, Brazil for us is in much better shape than it was. And we talked about this a lot over the last few calls, so if you looked at our growth rates over the last 18 months, we've been lower and we've been unwinding our inventories deliberately in the field so that we could get to this position where we had a good forward view, and that's exactly where we are.
Pierre R. Brondeau - FMC Corp.
So, as a summary, only surprise so far this year, if I can call that a surprise, we're potentially expecting it is movement in North America from Q2 to Q1. And the other positive is we feel stronger than we felt in a long time around Asia, Latin America and Brazil.
Ben Richardson - Susquehanna Financial Group LLLP
All right. And are you seeing a tail from any Cheminova synergies?
Are those done or do we still have any to come here in 2017?
Mark A. Douglas - FMC Corp.
I think all the hard synergies are done at this point. We talked a lot about that over the last few calls.
I think where we're starting to see and continue to see is opportunities with some of the active ingredients and formulations that we acquired, we're seeing progress in North America on fungicides and also in Europe with fungicides and insecticides. Latin America, distribution is helping us, continues to help.
So, yeah, I think we're very much where we said we would be, and more to come in terms of growth from the active ingredients.
Ben Richardson - Susquehanna Financial Group LLLP
Excellent. Thank you much.
Operator
And we'll go to Mike Harrison with Seaport Global Securities. Please go ahead.
Michael J. Harrison - Seaport Global Securities LLC
Hi, good morning.
Pierre R. Brondeau - FMC Corp.
Good morning.
Michael J. Harrison - Seaport Global Securities LLC
Pierre, I was wondering if you could go back and give us a little bit more color on operations in Argentina. First of all, it looked like costs were a little bit of a drag in the quarter, can you comment on that?
And then I just wanted to make sure I understood that in Argentina you're pursuing a debottlenecking effort that's going to cost you $30 million and would bring on 4,000 metric tons of new material, but then you're also considering a bigger expansion down the road?
Pierre R. Brondeau - FMC Corp.
That is correct, Mike. So, cost in Argentina is nothing to be worried about.
You see that every year, it is very seasonal, depending upon summer, winter, and rainy period in the towns. We do have quarterly changes in manufacturing cost very often, hitting us in a quarter, which is not the quarter where the challenge were or the conditions were because of the way you are accounting for manufacturing cost, but it's just the seasonality of the manufacturing cost in Argentina.
You are correct, you got it right, we are right now working on debottlenecking and we have a strong certainty that the spending of $30 million will drive to an increase of capacity by 4,000 tons by the end of this year regarding – at the end of 2018. We are also considering the possibility to double the capacity of Argentina with a full-blown expansion we would do in the same location where we are currently producing lithium carbonate.
We are doing the pre-engineering work now. We believe we'll come to conclusion sometime end of the third quarter or fourth quarter in terms of the spending the timing, the exact capacity and we're currently in discussion with the authorities in Argentina.
That would be roughly an additional 20,000 tons of lithium carbonate. So, if you think about it, today we're in the 18,000 tons range, we're adding 4,000 tons, we'll take it to 22,000 tons and then we're considering doubling the capacity.
Michael J. Harrison - Seaport Global Securities LLC
All right. Thank you for that.
And then question on the Ag Business. Just going back to this North America issue where you're seeing pre-emergent demand being pulled forward, but still sounds like channel inventories are still elevated in some areas.
Can you help us understand kind of where you're seeing the inventory channels still at higher levels and how you expect that to play out over the next several months?
Mark A. Douglas - FMC Corp.
Yeah. Mike, certainly on insecticides, we see inventory levels are high in insecticides.
We've – I think as most people know, there's been low pest pressure in North America the last few years. So that's an area that we've been focused on.
For us, pre-emergents get used very early in the season. So, yeah inventories are high now, but they should be because product needs to be moved to the field.
So that's normal where we would expect it. We're not a big player in fungicides, so I can't really comment on that.
It's an area that's growing for us. Assuming, we have pest pressures this year, I would expect to see insecticides come down, but it may take more than one season to get us back to normal levels.
Michael J. Harrison - Seaport Global Securities LLC
Thank you very much.
Operator
And we'll go to Chris Parkinson with Credit Suisse. Please go ahead.
Christopher S. Parkinson - Credit Suisse Securities (USA) LLC
Thank you. It's clear that Asia remains a solid opportunity for you guys, but can you just breakdown any other key trends pertaining to the recent product launches in China as well as any similar initiatives in Central or Southeast Asia or even Australia.
Just trying to get a sense of how you should perform versus the market in the next two years to three years. And then also any comments on how we should think about Rynaxypyr, adding Rynaxypyr to your Asian portfolio.
Thank you.
Mark A. Douglas - FMC Corp.
Yeah. Chris, China has – the market has been difficult in China.
I think a number of people have commented on that over the last month or so. We saw a great success with a new product that we've launched for rice herbicides, weed resistance in rice continues to be a problem.
We've had good success there. I see that continuing as we go through this season and into the next season, the team is very focused on that.
I would also say an area that we've highlighted before is plant health. These are micronutrient products, biostimulants.
We have invested a lot in China and other parts of Southeast Asia and we're starting to see the benefits of those investments pay off. Other parts of the region that we should look for Indonesia, we have very good rice exposure there, markets doing well, the weather was good.
So, we saw an extended season. In Australia, really it's a herbicide play for us with some insecticides, weather conditions have been good.
I suspect over the next few years, you will see us grow faster than the market in Asia. With regards to Rynaxypyr applications, obviously we're still learning that business, but given the scale of Rynaxypyr in Asia and our markets to, and our channels to market are very strong.
I would expect to see growth with Rynaxypyr in Asia over the coming years.
Christopher S. Parkinson - Credit Suisse Securities (USA) LLC
Great. And just another long-term question, over the last two major crop protection acquisitions, you've diversified yourself from a regional sense and also balanced both your insecticide and herbicide portfolios.
But on the fungicide front, just how are you thinking about your owned portfolio, you have a few in the pipeline, I guess, you have four or so in discovery from DuPont. So just from a strategic sense, how should we think about this in your kind of intermediate to long-term total solution offering to growers?
Thanks.
Mark A. Douglas - FMC Corp.
Yeah. It is a focus, we've talked about it a lot.
Our pipeline, we have two fungicides coming from the pipeline that launched – our own pipeline, that launch in 2020. Obviously with the acquisition we are making and the discovery capabilities that we will have, fungicides will be an area of focus for us.
We will also look as usual to partner with other people who have fungicide active ingredients from a technology standpoint. So, I mean, all areas are of a focus, but more so than most will be the fungicides piece.
Christopher S. Parkinson - Credit Suisse Securities (USA) LLC
Awesome. Thank you.
Operator
And we'll go to Frank Mitsch with Wells Fargo Securities. Please go ahead.
Frank J. Mitsch - Wells Fargo Securities LLC
Good morning, gentlemen.
Mark A. Douglas - FMC Corp.
Good morning, Frank.
Frank J. Mitsch - Wells Fargo Securities LLC
Hey, Pierre, couple of questions on the DuPont transaction. One is, do you guys have some visibility on how the portion that you are going to acquire performed in Q1 and the expectation for that here in Q2 relative to what your expectations were?
As you mentioned, I think you said that you were expecting – you are forecasting a lowered growth rate. Is there anything that was indicative of what's happened so far this year that leads you to that conclusion.
Pierre R. Brondeau - FMC Corp.
Frank, we don't have visibility at the level of the product line growth. As you know, we manage the business very independently.
The comment we are making is through the process of buying the product lines from DuPont, we got their historical numbers and their forecast for the years to come based on historical numbers in the market. And DuPont tends to look at product lines like Rynaxypyr and Cyazypyr as long as those products are under patent protection to be mid-single digit to high-single digit growth rate, pretty much regardless of the market.
So we have not, in any of our projection and in the model we have here, come close to this right now. The only thing we have factored is a low single-digit growth rate more as a placeholder.
But our numbers we have in the model are more conservative than numbers they have been able to demonstrate in the past or they have in their future forecast.
Frank J. Mitsch - Wells Fargo Securities LLC
I'm stunned that DuPont's investment bankers would try and project a very rosy outlook for their products, that's absolutely stunning. But on slide 9, just staying with the DuPont transaction and adjusting the incremental EPS for 2018, what – can you update us on your thoughts on the synergy side between – for that transaction?
Pierre R. Brondeau - FMC Corp.
Yes, Frank. Once again, this number we have here is pretty much of a placeholder.
The synergies – it's a very different type of synergy process than what you usually experience when you do an acquisition. Pretty much, we're going to get a couple 1,000 people coming – from 2,000 people coming from DuPont.
Think about that as 1,000 people in manufacturing, 500 people in technology position and 500 people in commercial. Very few back office people finance, IT, supply chain or communication et cetera.
The question is we have a model, which we presented, which had a 16% to 18% SG&A spend. The question is how many people will we have to add in addition to the TSA, which will result in our 2018 spending and that's what will create the synergies.
We don't believe at all that we will need to add as much cost as the one we had factored in the acquisition model, which was based on a standalone business. But we have not yet defined the delta between the cost we have in the model and the number of people we will need to operate the business by November 1, when we close on the acquisition.
That's what will create the synergies, those are easier synergies to create than when you do a Cheminova where you have to let go people and it takes time. Those synergies hit you right away, but we just don't know the number yet.
Frank J. Mitsch - Wells Fargo Securities LLC
That's very helpful. Thank you.
Pierre R. Brondeau - FMC Corp.
Thank you.
Operator
And we'll go to Mike Sison with KeyBanc. Please go ahead
Michael J. Sison - KeyBanc Capital Markets, Inc.
Hey guys. Nice start of the year there.
Pierre R. Brondeau - FMC Corp.
Thank you, Mike.
Michael J. Sison - KeyBanc Capital Markets, Inc.
Pierre, I think you guys talked or Paul might have mentioned that, you're building inventory – just in case demand is a little bit better in Asia and South America. Are there any particular crops or areas that you think could come in better that the inventory is being built on or is it fairly across the board?.
Pierre R. Brondeau - FMC Corp.
I'll make a couple of comments and then have Mark adding on. I think, we worked a lot to lower the inventory of our product in the channel and it's starting to show significant result.
Plus I have to say that the financial conditions of the growers in Brazil with the soybean situation have improved and our trip last week was very telling in term of the potential demand. If you look at the orders we have in hand, at this point of the year for what we need to accomplish in the back end of the year are much higher than what we had in previous year.
All of those indications are leading to a potential strong Brazil and Latin America season. This is why we are looking at building inventory to face a demand, which could be at least what we're expecting potentially better.
Mark A. Douglas - FMC Corp.
Yeah. Mike, herbicides is a key focus for us given when we get into the later part of the year, obviously, we're looking at inventory builds for the future North American season.
Obviously, Brazil is well on the way by then, and then looking at Asia, and especially Europe. So, herbicide is a big focus, also fungicides from the Cheminova portfolio, also a focus for us.
And then selective insecticides in certain parts of the world, Brazil being one and Asia being the second. So, it's across the board, but with more emphasis on herbicides.
Michael J. Sison - KeyBanc Capital Markets, Inc.
Great. And a quick follow-up, on slide 9, you gave us $1.09 to $1.41 incremental EPS for 2018.
Just to make sure that excludes potential synergy and a low growth rate for DuPont's business that you're buying. What does it assume for just kind of ag crop protection, recovery, growth for the industry?
Pierre R. Brondeau - FMC Corp.
What we decided to do, if you look the line before last, which has 2018 incremental pre-tax earnings. We have set as a place order again, and we feel it's a conservative number, we agree we – anybody could challenge us on this number.
We've put a $50 million to $80 million of earnings growth. If you think about it, it would be a $30 million, $40 million of synergies, a $30 million, $40 million of top line growth, which would mean minimum synergies and low-single digit growth rate in a fairly flattish market or a low-single digit growth market.
So those are very conservative assumptions. We intend to refine that as soon as we have our hands on the business.
So what you could expect from this $50 million to $80 million. The part which is cost synergies, we believe we'll have that sometime in the third quarter.
We will know better this number. The part which is business growth, it will be more once we have our hands on the business toward the end of the year.
Michael J. Sison - KeyBanc Capital Markets, Inc.
Great. Thank you.
Operator
Thank you. And at this time, we ask that you limit yourself to one question.
And we'll go to Dmitry Silversteyn with Longbow Research. Please go ahead.
Dmitry Silversteyn - Longbow Research LLC
Good morning. Just wanted to sort of get back on the Ag business a little bit, but obviously when the first quarter guidance was provided, there was a talk of pull forward into the fourth quarter from the first quarter.
But it sounds like you've also experienced a pull forward from the second into the first here. So, I guess, the explanation or the interpretation is that the second quarter is going to be a little bit weaker.
Is all of this timing sort of transitory or is the market evolving as we go through this or. I'm just trying to understand kind of all of these pull forwards from quarter-to-quarter and whether or not they are just related to this season and this weather or whether this is something that we look forward to next year, we should be cognizant of?
Pierre R. Brondeau - FMC Corp.
I think, those movements are very much North American movements in a market where there is a difficult situation from an inventory standpoint. And I think growers are making the decision to buy the product they absolutely need to buy.
They tend to buy those earlier to secure the product, and buy then at the last minute the product which are not needed early. So, I would say, what we've seen depending upon the market situation, inventory and we tend to reason to think more in term of adds of years or in crop season, then we really tend to think in term of calendar quarters.
And that's something we've seen more and more over the years. When the markets are very strong, then we tend to buy early.
When the market become a bit more challenged, people buy when they have to buy and you see those kind of movements.
Dmitry Silversteyn - Longbow Research LLC
Okay. So, I guess, does that mean that the pre-buy indicates that there is a little bit of a stronger expectation for the market?
Pierre R. Brondeau - FMC Corp.
No. I think it's for pre-emergents, it's just timing of the crops and they want to make sure for the product, which are required early in the season, they have those on the shelf.
But it doesn't mean it creates a lot of expectations that the business will be stronger in North America.
Dmitry Silversteyn - Longbow Research LLC
Got it. And as a follow-up just on the lithium really quick, I mean obviously you're scrambling as quickly as you can to build out the lithium hydroxide capacity and covert as much of carbonates to it as possible.
What happens to this market, as everybody is sort of trying to follow that playbook? What happens to the supply and pricing, and sort of the service in the butyllithium and some of these other derivatives that are not going into the sexy EV part of the business, but are still critical to the market segments where they do go?
Is there a danger that those markets will get shorted or is that a good thing?
Thomas Schneberger - FMC Corp.
Hi, Dmitry, it's Tom. Yeah, the market has been recovering from being short for probably going on 24 months now, starting to see a little bit more balance in the products that everybody can supply.
The way that we're approaching this is to very specifically target applications that we want to serve and most of that is on long-term contracts. So, we're identifying the demand, locking up the demand and building the capacity to do that.
And as we do that, as we ramp up our hydroxide production, these debottlenecks that are taking place in Argentina, it's not one big project, it's a lot of small projects. So, the 4,000 tons that Pierre spoke about earlier, we'll get more than half of that or at least half of that to more than half of that by the end of this year.
Dmitry Silversteyn - Longbow Research LLC
Okay. Thank you.
Operator
We'll go to Joel Jackson with BMO Capital Markets. Please go ahead.
Joel Jackson - BMO Capital Markets (Canada)
Hi. Good morning.
I just want to understand some of your commentary on lithium, as it seems like you do have a lot of opportunities on the go, whether expanding some carbonate, expanding hydroxide in different places, spinouts, versus a month or so ago when you talked about some of the options of spinning out the Lithium business, has your thought been that this could take a bit longer? Because you think you have more on the table, looking at the supply/demand for carbonate and hydroxide, looking at what you can do that maybe there is more things that you can do in this business before looking to spin it out.
So, has your timing delayed a little bit out of some positivity in the business or maybe give a little color on that? Thanks.
Pierre R. Brondeau - FMC Corp.
I think there is no fundamental change to the timing. We do not want to be in a situation, where we make a decision to spin this business, without most of the key projects being on their way with a very clear strategy.
We are not going to wait, for example, to have the doubling of the carbonate expansion in Argentina finished to spin the business. But we want to make sure that we have total clarity when we – when we're going to be on a road show for this business to become a standalone company, we'll have a full story around capacity.
So, what we believe at this stage is we should be able to make a decision, as we said before, toward the end of 2018 or early 2019, but there is no change to what we said before.
Operator
And we'll go to the line of Brett Wong with Piper Jaffray. Please go ahead.
Brett W. S. Wong - Piper Jaffray & Co.
Hey, guys. Thanks for fitting me in here at the end.
On a regional basis, are you seeing any pressure on CP pricing given the ongoing lighter volumes and elevated inventories, again, in certain regions? And I get that that's going to be product specific.
And then also, are you seeing any pressure on pricing in the channel? Thanks.
Mark A. Douglas - FMC Corp.
Yeah. Brett, it's Mark.
Let's quickly run around the world. In Europe, not a lot of pricing pressure.
We're seeing improved margins in Europe mainly through our mix. We've gone through a lot of portfolio rationalization.
So, things are looking reasonably good in Europe. In Asia, overall, pretty good, less channel inventory pressure with the exception of, I would say, India right now.
Everywhere else is looking good. In Latin America, currency has been pretty stable.
So, pricing movements have been limited. Hopefully, the currency stays stable as we go through the rest of the year.
So, not so much there. Obviously, price – a significant price increases in Mexico given where the peso has been moving.
And then, I would say, North America, yeah, there is pricing pressure in North America. We talked about how the market has inventory in the channel and growers are under pressure.
So, I would say, around the world, it's pretty balanced with the exception of North America.
Operator
Now, we will go to the line of Robert Koort with Goldman Sachs. Please go ahead.
Robert Andrew Koort - Goldman Sachs & Co.
Thanks very much. Maybe question for Tom, just trying to understand better the competitive dynamic in the hydroxide battery markets.
I guess, specifically, is there something different or unique about your own hydroxide versus the growing production in China from the Australian spodumene base production, is there a threat to your business there? Is there an opportunity for you?
And as you change to an external lithium carbonate supply, does that complicate matters for you? Thanks.
Thomas Schneberger - FMC Corp.
Yeah, Bob. Thanks for the question.
Our product does perform differently than the competitive products. If you look at the applications we are targeting there is really two producers who have been capable over a number of years of serving that application and we are able to use multiple inputs of carbonate in order to produce the products we make.
So they see a benefit on the production of the cathode material and we expect that to continue.
Robert Andrew Koort - Goldman Sachs & Co.
And Pierre, if I might, since those before me snuck in a second one. In Argentina, you're mentioning spinning the business.
Is there a limitation and can you explain a limitation to a sale of the business there?
Pierre R. Brondeau - FMC Corp.
So, the only reason for which we want to spin the business versus a sale is purely tax. It is the fact that we have a very low tax base for our Lithium business, I think it's about a $100 million.
So if you look at potentially the value of this business, looking at where the EBITDA could be in next couple of years, it would be a very significant tax bill. So, we believe the best way for us to return the value of this business to the shareholders is a spin.
Now, shareholders after that could decide whether they want to keep or sell the stock, but we believe it's more responsible to spin and not to pay such a big tax bill.
Robert Andrew Koort - Goldman Sachs & Co.
Perfect. Thank you.
Pierre R. Brondeau - FMC Corp.
Thank you.
Operator
We'll go to Laurence Alexander with Jefferies. Please go ahead.
Daniel Rizzo - Jefferies LLC
Hi. This is Dan Rizzo on for Laurence.
You mentioned a couple times about pre-buying or just some sales shifting from the second to the first in North America. I was wondering, if a similar scenario could unfold in South America and Brazil in particular?
Mark A. Douglas - FMC Corp.
No. I don't think so, I think the market in Brazil for us, especially as we said is a lot stronger.
I think what you have to realize when we talk about this subject, in North America the difference between buying in March and buying in April is very dependent on conditions and of course that's Q1 to Q2. The same thing occurs in Brazil, September is a very large month, but so is October.
So, you can have flow between the two months, which is a very short timeframe in the ag space, yet it falls in different quarters. So, I think you've got to be careful of how you look at this, but I fundamentally don't see any reason why we would see a shift from Q4 into Q3 in Brazil in particular.
Pierre R. Brondeau - FMC Corp.
It is something and we'll have the same comment when we'll come to Q3, Q4 guidance, most likely for Latin America, we're going to give numbers, but we're going to make the same comment. There could be shift from Q4 to Q3.
I think today, our level of confidence for Latin America and Brazil is the highest in a long time, but as Mark said, a Q4 to Q3 or Q3 to Q4 movement is still possible. What we believe is H2, H2 to H2, it will be a high teens growth, that's what we have in the forecast.
How it will then flow between Q3 and Q4 is still to be defined.
Daniel Rizzo - Jefferies LLC
Okay. And then you – we've talked extensively about your big push into fungicides and just expanding the product portfolio.
In the future, would that include maybe moving into biologicals or is that kind of too far outside the core business or just too different to consider via M&A or just organically growing into that field or putting R&D towards that?
Mark A. Douglas - FMC Corp.
Laurence (sic) [Dan] (1:03:38), we are already pretty significantly into biologicals. We have an alliance with Chr.
Hansen that we've been running for the last three plus years very successfully. And we have products in the marketplace.
We consider ourselves already in biologicals. We have about nine new microbial biologicals in the pipeline, expect those to come to market within the next two years to three years.
But yeah, microbiologicals are a very much part of our portfolio as we go forward.
Daniel Rizzo - Jefferies LLC
Thanks very much.
Operator
And our last question will come from Daniel Jester from Citi. Please go ahead.
Daniel Jester - Citigroup Global Markets, Inc.
Hey, thanks for taking my question. So, just two quick ones on the DuPont transaction.
The manufacturing assets you're acquiring with that. Do you have any updated thoughts about how you can optimize your supply chain.
Is there a possibility to shift some of your total active ingredient production into these sites and save on cost that way? And secondly you definitely have been spending some or trying boost your working capital efficiency.
So I am wondering how that program fits in as you acquire these DuPont assets? Thanks.
Pierre R. Brondeau - FMC Corp.
It's a highly regulated industry, so over the long-term owning large assets like the one we have plus our network of processors would allow us to do, to think strategically about a subtraction in where we make product, but there is not much options you have in the very short-term because of product registration. And you know, re-registering a product could take anywhere from two years to five years, and depending upon, and the manufacturing location matters in the registration process.
So in the long run, yes, in the very short term, if you talk about the next two years, there will not be a lot of changes in places where we manufacture a product.
Daniel Jester - Citigroup Global Markets, Inc.
Thank you.
Pierre R. Brondeau - FMC Corp.
The working capital, I think we're going to be – we're going to be pretty much on the same track as we are today, it's a very high focus. We don't believe that the acquisition we did from DuPont is going to fundamentally change the work we do.
One good thing about working capital is the situation where we can rebuild. As you know we discussed DuPont retaining the receivable.
So we're rebuilding that, so we're starting with a blank sheet of paper allowing us to do that in a very organized way, and maybe not falling in the traps we fell in a few years ago. So no fundamental change, maybe more flexibility for a very structured approach to it.
Operator
And speakers, I'll turn it back to you for closing comments.
Michael Wherley - FMC Corp.
Thank you. That's all we have for today.
As always, I'm available following the call to address any questions you may have. Thank you and have a good day.
Operator
That's all the time we have for today. This concludes the FMC Corporation's first quarter 2017 earnings release conference call.
Thank you.