FMC Q3 2021 Earnings Call Transcript

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Provided by AlphaStreet
November 3, 2021
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Operator

Good morning, and welcome to the Third Quarter 2021 Earnings Call for FMC Corporation. This event is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Zack Zaki, Director of Investor Relations for FMC Corporation. Please go ahead.

Abizar Zaki
Investor Relations Director at FMC

Thank you, Chad, and good morning, everyone. Welcome to FMC Corporation's Third Quarter Earnings Call. Joining me today are Mark Douglas, President and Chief Executive Officer; and Andrew Sandifer, Executive Vice President and Chief Financial Officer. Mark will review our third quarter performance and provide an outlook for the rest of the year as well as an initial view of 2022. Andrew will provide an overview of select financial results. Following the prepared remarks, we will take questions. Our earnings release and today's slide presentation are available on our website, and the prepared remarks from today's discussion will be made available after the call. Let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to, those factors identified in our earnings release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based upon these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, free cash flow and organic revenue growth, all of which are non-GAAP financial measures. Please note that as used in today's discussion, earnings means adjusted earnings and EBITDA means adjusted EBITDA. 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 Mark.

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Thank you, Zack, and good morning, everyone. FMC delivered record third quarter results. We grew our revenue by 10%, EBITDA by 12%, EPS by 17% and importantly, expanded our EBITDA margins despite continuing cost pressures. Performance in the quarter was driven by broad based volume growth and price increases. New products introduced in the last 12 months continue to gain momentum, and we are now forecasting sales from these products to account for more than 1/3 of our revenue growth this year. In addition, FMC's Plant Health business had an excellent quarter with 40% year over year growth led by biologicals. Looking ahead, we continue to expect a strong finish to the year, driven by high margin volume gains and accelerated pricing actions as well as a robust global market backdrop. I'd like to take a moment to acknowledge our operations and procurement teams for their contribution to our third quarter performance. The supply chain and logistics challenges highlighted in our last earnings call continued to disrupt ag chem and other industries around the world. FMC was able to meet the strong grower demand for our products in a timely manner. Thanks to the work of these teams. Let me also briefly comment on COVID-19's impact on FMC. All our manufacturing facilities and distribution warehouses remain operational and properly staffed. Our research laboratories and greenhouses continue to be fully active, and we have resumed in office operation in many parts of the world. FMC continues to follow all guidance given by local authorities. Turning to our Q3 results on slide three.

We reported $1.2 billion in third quarter revenue, which reflects a 10% increase on a reported basis and a 9% increase organically. Growth was broad-based with 11 of our top 20 countries posting double digit growth in the quarter. We had strong growth in all product categories, led by greater than 20% growth in herbicides. This was partially offset by registration losses in EMEA and Latin America. Adjusted EBITDA was $293 million, an increase of 12% compared to the prior year period and $18 million above the midpoint of our guidance range. EBITDA margins were 24.6%, an increase of 40 basis points compared to the prior year, driven by mix improvement as well as operational discipline and price increases in all regions. Adjusted earnings were $1.43 per diluted share in the quarter, an increase of 17% versus Q3 2020. The year over year increase was primarily driven by an increase in EBITDA with the benefit of share repurchases and lower interest expenses, largely offset by other factors. Relative to our Q3 guidance, the $0.12 beat was driven almost entirely by EBITDA. Moving now to slide four. Sales in Asia increased 20% year over year and 19% organically, driven by strong diamide sales across the region as well as pricing actions. In Australia, we had a successful launch of Vantacor insect control, which is the new higher concentration formulation of Rynaxypyr active. Vantacor is applied to specialty crops such as chickpeas. The Australian market also benefited from positive grower sentiment, favorable weather conditions and strong insect pressure. India had another growth quarter despite an erratic monsoon, which resulted in drive spells in parts of the country. India's growth was driven by diamide sales in rice as well as continued expansion of the rest of our portfolio, leveraging our strong market presence. In Latin America, sales increased 11% year over year and 9% organically, driven by double digit growth of insecticides in Brazil and Argentina as well as pricing actions across the region. Corn, soy and cotton were the key crops driving growth in the quarter. This is a direct result of our strategy to improve market access and increase penetration of our technologies, particularly in the Brazilian soybean market. Chile is another good example of this as sales nearly doubled compared to this time last year as we leveraged our enhanced market presence.

Plant Health products grew approximately 50% in the region led by biologicals and seed treatment. Latin America was impacted partially by registration cancellations and rationalizations of products in the quarter. EMEA grew revenue 12% and 10% organically, driven by strong demand for our herbicides and diamides across the whole region despite headwinds from registration cancellations. Among others, Russia, France, Germany and the U.K. grew double digits in the quarter. Demand was especially strong for herbicide applications in cereals and oilsee rape. South Africa double digit sales in the period compared to the previous year, driven by the continued penetration of diamides, mainly on citrus and top roots. This is a great demonstration of the untapped potential in new markets for our diamides. Our U.S. and Canada branded business grew greater than 20%, driven by strong demand for our diamides and four herbicide applications as well as pricing actions. Vantacor had a successful introduction in the U.S., where it is used to target pest in a range of crops, including soybean, corn and cotton. The Vantacor launch was timely and welcomed by growers who are battling extended fall [Indecipherable] pressure from the southern markets up through the middle of the country.

Overall, North America sales decreased 6% year over year and 6% organically due to the continued shift of diamide global partner sales in the quarter from North America to other regions as we have described in previous calls. Moving to slide five. Despite continuing supply issues across the industry, FMC's third quarter revenue increased by 10% versus prior year, driven by a 9% contribution from volume. Gross prices increased 1% in the quarter as our most recent pricing actions went into effect. EBITDA in the third quarter was up 12% year over year, primarily due to broad based volume gains. We also had a $12 million contribution in the quarter from price increases as invoiced to customers. The benefit of our pricing action was masked in the quarter by some favorable rebate and other adjustments in the prior year period that did not repeat this quarter. Costs continue to be a headwind. However, the total amount incurred in the third quarter was less pronounced than previously projected, mainly due to timing. We still expect second half cost to be consistent with previous guidance and FX was a $10 million tailwind in the quarter. Turning to slide six. Before I review FMC's full year 2021 and Q4 earnings outlook, let me share our view of the overall market conditions. We continue to expect the global crop protection market will be up mid single digits this year on a U.S. dollar basis. Breaking this down by region, we continue to anticipate high single digit growth in the Latin American market, mid single digit growth in the EMEA market, low to mid single digit growth in the Asian market and low single digit growth in the North American market.

We are raising FMC's full year 2021 earnings guidance to the range of $6.59 to $6.99 per diluted share, a year over year increase of 10% at the midpoint, reflecting the impact of share repurchases completed year to date. Our 2021 revenue forecast remains in the range of $4.9 billion to $5.1 billion, an increase of 8% at the midpoint versus 2020. EBITDA remains in the range of $1.29 billion to $1.35 billion, representing 6% year over year growth at the midpoint. Guidance for Q4 implies year over year revenue growth of 19% at the midpoint on a reported basis with no FX impact anticipated. We forecast EBITDA growth of 29% at the midpoint versus Q4 2020 and EPS is forecasted to be up 41% year over year. Approximately 3/4 of the EBITDA growth is driven by the return of business missed in Q4 2020 due to supply chain disruptions in North America and weather impact in Latin America. Turning to Slide seven and full year EBITDA and revenue drivers. Revenue is expected to benefit from 6% volume growth, a 1% price contribution from higher prices and a 1% benefit from FX. We anticipate continued strong volume growth led by Latin America, North America and Asia. We have increased our forecast again for revenue from products launched in 2021. These sales are now expected to contribute $140 million in year over year growth, up from our last forecast of $130 million and our initial view of $100 million. Pricing actions in Q3 will continue to accelerate in Q4.

We will continue to raise prices across all regions going into next year. Despite the shift of costs from Q3 to Q4, estimates of full year cost headwinds have not changed since our detailed comments on the last call. This is why our full year outlook remains unchanged. Moving to slide eight and our fourth quarter drivers. Revenue is expected to benefit from strong volume gains. In Brazil, the strength of soft commodity prices, projected increases in planted areas as well as good weather conditions are all leading to a good cadence of incoming orders and give us confidence in our expectations for a strong fourth quarter. In the U.S., channel inventories are normal for this time of year. our new product launches are gaining significant traction and market sentiment supports our expectations for a robust fourth quarter. As I noted earlier, we've also moved on price increases with higher prices already in effect in the Brazilian and U.S. markets. Similar actions are underway in other countries across the globe, such as Australia, Russia, France, Mexico and Argentina, and you should expect us to continue raising prices through the year end and well into next year. Cost increases are consistent with our guidance for the second half. We continue to pursue cost improvement opportunities and remain vigilant with our cost controls, all without impacting our R&D pipeline or growth trajectory. I'll now turn the call over to Andrew.

Andrew D. Sandifer
Executive Vice President and Chief Financial Officer at FMC

Thanks, Mark. Let me start this morning with a few highlights from the income statement. FX was a modest tailwind to revenue growth in the quarter as expected. With the U.S. dollar weaker against many key currencies, most significantly in Latin America with the strengthening of the Brazilian real and the Mexican peso. Interest expense for the quarter was $33.1 million, down $2.4 million from the prior year period, driven by the benefit of lower debt balances and lower LIBOR rates. We continue to expect interest expense to be between $130 million and $135 million for the full year. Our effective tax rate on adjusted earnings for the third quarter was 13.5% as anticipated and in line with our expectation for a full year tax rate between 13% and 14%. Moving next to the balance sheet and liquidity. Gross debt at quarter end was $3.4 billion, down roughly $400 million from the prior quarter. Gross debt to trailing 12-month EBITDA was 2.7 times at the end of the third quarter while net debt to EBITDA was 2.5 times. Both metrics improved sequentially.

Though still slightly above our targeted full year average leverage levels, we expect to be at target leverage levels at year end. Moving on to slide nine in cash flow and cash deployment. Free cash flow for the third quarter was $300 million. Adjusted cash from operations was lower than the prior year period, largely due to our decision to build inventory to help manage continued supply chain volatility and to be prepared to fulfill strong demand in the fourth quarter and in early 2022. Capital additions were somewhat higher as we continue to ramp up spending following the deferral of projects last year due to COVID. Nearly 50% of this year's capital addition support capacity expansion. Legacy and transformation spending was down substantially with the benefit of the completion of our SAP program and lower legacy spending. We are maintaining our expectation for free cash flow in a range of $480 million to $570 million, with continued expectations for seasonally strong cash flow in the fourth quarter. We returned $262 million to shareholders in the quarter via $62 million in dividends and $200 million of share repurchases, buying back 2.1 million shares in the quarter at an average price of $95.26 per share. We have now repurchased just over three million shares this year, reducing our share count by nearly 2.5% since the beginning of the year. Year to date, we've returned $486 million to shareholders through dividends and repurchases. For the full year, we continue to anticipate paying dividends of roughly $250 million and to repurchase $350 million to $450 million of FMC shares. And with that, I'll turn the call back over to Mark.

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Turning to slide 10. I want to provide an early look at the key dynamics underpinning our planning process for next year. We view 2022 as another year with a good macro environment. Obviously, notwithstanding the impact weather can have on any single quarter. We expect that soft commodity pricing momentum will carry into next year with global demand for crops remaining healthy. As a result, we are assuming the overall crop protection market will grow in the low to mid single digit range next year on a U.S. dollar basis. FMC's growth will be driven by broad based volume gains across our portfolio. Pricing actions reflective of cost increases, continued expansion of diamide volumes in existing and new markets and further penetration of new products and expansion of our market access in underserved geographies. We expect cost pressures this year will persist well into 2022 as the industry grapples with global supply demand imbalances, structural changes in China's industrial policy and energy supply, tight ocean freight capacity and labor cost inflation. Taking all this into consideration, our current early thinking would suggest year over year revenue growth of 5% to 7%, EBITDA growth of 7% to 9% and EPS growth at over 10%, in line with our long range plan. We will share more detailed guidance for 2022 in our February call. To conclude our prepared remarks, the second half of the year is playing out as we forecasted. We executed very well in the quarter, not only from an external perspective in driving demand and pricing across all regions, but also importantly, internally by fulfilling that demand with product in a timely manner under challenging supply chain conditions. The only change in the second half is a timing shift of costs, and hence, we're not changing our full year guidance. The overall crop protection market fundamentals are positive, and we remain confident in our ability to deliver our fourth quarter forecast. I'll now turn the call back to the operator for questions.

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Operator

[Operator Instructions] And the first question will be from Christopher Parkinson from Mizuho.

Christopher Parkinson
Analyst at Mizuho

So given all the challenges of FMC and everybody else in the industry is facing on both raw material supply chains and transportation logistics, here today, where we stand, can you just give us an update on the market, as the market heads into 2022, regional price initiatives and how you're ultimately poised to combat these challenges?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Thanks, Chris. A lot to unpack there. When we look at the market today and some of the dynamics that we've outlined in, certainly as we look forward to 2022, why don't I take a look at the cost elements first and just what are we seeing? I think on a raw material perspective, raw materials are still staying high. But more importantly, it's not just the cost here, it's the supply side that is causing, I would say, the most sleepless nights as we go through the end of the year. I think we're starting to see some of the very large commodities come back a little bit, such as propylene and ethylene, which we believe will help the pricing in packaging because we're seeing tremendous accelerations in packaging costs. I don't think that's necessarily going to help with the supply side in terms of how long it takes to get packaging. That has been a big problem for us and many other people this year. I think the specialty chemicals continue to be disrupted. We are obviously seeing much higher prices in that area, but we're also seeing continued disruptions out of China. I mean a lot of people hear the latest news around the energy controls that we're seeing in many of the major producing provinces. We don't see that going away, particularly quickly.

There are now diesel constraints in China related to the amount of fuel they have. So that's potentially going to constrict movement of goods within China that could cause us problems as we go into next year. And then I think the last one really is freight. We continue to see tightness in ocean freight. I noticed a couple of the big ocean freight companies have released earnings and said don't expect that to change as we go through midyear, next year into the second half of year next year. We would agree with that. We think ocean freight is going to remain tight and availability will be somewhat spotty. So I think the environment is pretty much what we expected with the exception of the potential for further disruption in China in Q1 as we go through Chinese New Year, as we go through the Winter Olympic shutdowns. We are planning for all of that, obviously. We've known about that for some time, but that doesn't mean to say there won't be disruptions. I think my view has changed from our August call where we talked about the potential softening of raw material prices, availability in the second half of the year. I'm somewhat less confident of that now, given how we're seeing things develop. So I'm taking a little more of a conservative view on raw materials and cost and availability as we go through our planning process.

What does that mean for us from a demand perspective? Well, as I said in the script, demand is good. I mean no mistake, ag is pretty robust around the world. Our growth was very consistent across all regions. I think we'll see that continue next year. Soft commodity prices are robust. We see good demand for fruit and vegetables and specialty crops around the world, which, frankly, is the vast majority of our portfolio. On the pricing front, we have been much more aggressive in moving prices in the second half of the year. They're starting to bear fruit now. I think you've got to remember that the agricultural industry is a specialty chemical industry in general, and we certainly, we sell on value. This is not selling propylene or ethylene where prices move quickly. Now there are parts of the industry like the nonselective herbicides that do move quickly. They are, tend to be more formularic, more generic. We don't participate in those markets. However, having said that, we have put mid single digit price increases into many countries in the world. They have been accepted and the orders are flowing at the new levels. We will take a look in Q1 pricing again, see where raw materials are, and we will continue to move price in tandem to regain the cost impacts that we've seen over the last 12 months. That's rather a long answer to what was a long question, but hopefully you get the flavor of how we're thinking.

Operator

And the next question comes from Joel Jackson from BMO Capital Markets.

Joel Jackson
Analyst at BMO Capital Markets

Just one first clarification, Mark. When you, I think I heard you say you expect 10% EPS growth in 2022 right now, EPS, for you guys, usually doesn't include share buybacks. So is that using $6.79 midpoint for this year, excluding buybacks you did in the second half of this year and buybacks next year to get the 10%? And the other question I wanted to ask was following up on Chris' question. If you look into the first half of the year or even Q1, so you had where you had a bit of margin expansion in the third quarter, and you're guiding to a little bit of margin expansion in the fourth quarter. So would we expect, do you expect the margin expansion also in Q1 and the first half of the year?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes, Joe, let me take the first one, the second piece first, and then Andrew can answer the share count question. Yes, listen, when you look at our margins, you're right, in the second half of the year, we have started to improve the margins again. We've been on that track for the last three years. We do know that we're going to see higher raw material costs in the first half of next year. However, pricing is kicking in. And then don't forget, you've got the impact of the new products that we're bringing to market. We are on a track to sell about $140 million of new product launches this year, from products launched this year. They tend to be at higher margins. So that takes to, that starts to improve your margin. Q1 this year was a low quarter for us. So yes, I would expect Q1 margins to look a little better than they did in Q1 2020 and then continue that normal trajectory that we have of improving margins as we go through the rest of the year. Obviously, I'll caveat that with saying whatever happens to raw materials and the pricing balance as we go through the year. Andrew, do you want to comment on the share count and the mid year?

Andrew D. Sandifer
Executive Vice President and Chief Financial Officer at FMC

Yes, sure. I think, Joel, absolutely right. When we give indications of EPS growth, that does not include any benefit from share repurchases. We haven't yet, haven't completed. So we're assuming in that look forward for next year of 10% EPS growth, that's just reflecting the growth of EBITDA, change in items between EBITDA and net income and the benefit of the share repurchases that we are doing in 2021, right? We've done $300 million to date, not all of which do you get that benefit and share count in the year that you do it that feathers in over time and the weighted average share count calculations. So again, that 10% EPS outlook for next year. And look, we're still working the budget, it's not firm. But certainly no, nothing is built into that, assuming benefit of any additional share repurchases in '22 as is consistent with the way we have provided guidance in the past.

Operator

The next question will be from Steve Byrne with Bank of America Securities.

Steve Byrne
Analyst at America Securities

Mark, can you talk through how you distribute your products in the distribution channels in Brazil? I ask because we understand there have been some changes in that channel. We have the formation of some big farmer buying groups, Syngenta selling through their own stores and some consolidation at the independence. So is any of that making it more challenging to get price and or is that comment you've made a quarter ago about going after volume over price, has that changed now?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Steve, let me talk about Brazil. And maybe I can tackle your very last comment there. What I actually said, and I think there was some confusion here. I said there were opportunities for us to take volume around the world with our high profitability products, which we were doing. We were increasing prices then, and we're not forgoing price for volumes. I just want to be perfectly clear. You can see that in Q3. You can certainly see it in Q4, and you'll see it next year. Price is a very important mechanism of how we move against cost and FX. We continue to utilize that, but volume is also very important to us. In Brazil, taking the second piece on Brazil, there are three main channels to market in Brazil. First of all, there are other co-ops, which are very dominant in the south, very large farmer owned co-ops that service the marketplace. In the North and the mid, you do have some co-ops, but you also have distribution and retail. So you have large distribution and some locally owned retail. And then third is direct to growers. That occurs really where you have very large mega growers, mainly in the Matagroso area, in Bayer, especially formulated around soy, corn and cotton. So those are three pretty big defined channels. I think you're right in your assumption and your statement that there are changes occurring in the Brazilian distribution market. There's nothing that we would say would change the way we view the market. We actually sell through all three different routes: direct to grower, distribution retail and through the co-ops. We don't see that changing and certainly in the midterm, given that the market is so large and there is so much fragmentation, especially through the distribution and retail channels that we don't see some of the changes out there impacting our ability, either: A, to grow the portfolio with the new products we're introducing; or b, to get price in Brazil.

Operator

The next question will come from John Roberts from UBS.

John Roberts
Analyst at UBS Group

Nice quarter. It looks like you're expecting 4% price in the fourth quarter and prices accelerating upward, I think. So how do I square that with the 5% to 7% 2022 revenue growth? Will revenue growth be primarily price in 2022?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

No, it will be a mixture, John. Obviously, you'll see where we are in terms of the, sort of the mid single digits. We do continue to see volume expansion as we go through next year. I think the 5% to 7% is a rough number today, as we said. Once we get through all our analysis of where the volume flows out, we'll see where that sits. And then we'll see where price ends up at the end of the fourth quarter and how that plays out for either a future price increases in Q1 and Q2 as we go through the year. But it's too early to make that delineation between what's exactly price, what's exactly volume and exactly how much of the top line is going to grow 5% to 7%.

Operator

Next question comes from Adam Samuelson from Goldman Sachs.

Adam Samuelson
Analyst at The Goldman Sachs Group

Mark, I was hoping to come back to, you think you came up in Steve's question from the comments on the second quarter call about maybe leaning into the volume growth on your higher margin products, I think the comments are directed more around some emerging markets in Asia and India specifically. And I guess just can you give any thoughts or update on how you think you're doing or success of that in terms of gaining or trying to get some new market share for some of those active ingredients? And I guess in that context, you listed a whole bunch of countries where you're putting in price actions in the fourth quarter that are already in place? And maybe it was purposeful, maybe it wasn't, but I didn't hear India on that list. And so just any kind of clarification or comments there.

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

No. I think, listen, I mean, when you have a 9% to 10% top line growth, you're obviously doing something right in the marketplace, whether it's moving your price and or gaining market share in certain parts of the world. I think both of those pieces play out. India has had a good quarter for us. We grew in India despite the fact, and I think I've put this in the script. The monsoon was very spotty in India. There were some markets, particularly the soy market, was impacted by very dry weather. We are moving prices all across Asia, including India. The specialty markets in India are very good for us. The diamide portfolio continues to grow well, taking share from some of the older chemistries out there that we talked about on the last call. And I would say Southeast Asia is also very strong in terms of how we're growing. And then last but not least, in Asia, is Australia. Australia has been a very good market for us with the launch of our new Isoflex herbicide, but also the Vantacor insecticide, the first launch was there in Australia as well. So price is pretty much across, I only give a couple of examples of countries, but we've moved price and are moving price pretty much in every country in the world as we move through the end of the third quarter into the fourth quarter. So you should certainly see that benefit starting to play out as we move into early next year.

Operator

And the next question will be from Kevin McCarthy from Vertical Research Partners.

Kevin McCarthy
Analyst at Vertical Research Partners

Mark, I was wondering if you could speak to the cost shift from the third quarter to the fourth quarter. If I look at slide five, it appears as though costs came in $23 million lower than you had previously anticipated and you left the back half unchanged. So $81 million is the expectation apparently for 4Q. Maybe just kind of help us understand what is going on there? And is the $81 million perhaps conservative given the experience in the third quarter?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Thanks, Kevin. It's a pretty simple move actually in terms of what we saw in costs. There's two main elements, and I'll talk about them both high level and Andrew, if you want to talk about one of the pieces. You can split it 50-50 essentially. We had some SG&A and R&D expense that we thought would fall in Q3 when we originally forecasted the second half of the year, and it didn't. It's going to fall in Q4. So we're seeing about half that change really due to some R&D project work as well as some SG&A expense that we thought would hit Q3. And then the second half is really just how some costs have flown through our income statement. And Andrew, do you want to talk about that from a, just a pure procurement perspective?

Andrew D. Sandifer
Executive Vice President and Chief Financial Officer at FMC

Sure. Look, I think, as Mark said, it's an equal driver between SG&A, R&D spending timing as well as COGS increases. And it really, it's essentially a cost mix issue in terms of what's sold and what came out of inventory this quarter versus what we had initially modeled when we gave guidance. So that cost we are seeing in our inventory and certainly in the step-up of inventory, you see year on year and sequentially on our balance sheet, you can see evidence of the higher cost sitting in our inventory. It just flowed through the P&L a little more slowly than we had anticipated when we gave guidance. That $80 million headwind, $81 million headwind for the second half still feels like the right number for us. The things that are being spent in R&D are around a lot of field trial investments, other things that are part of supporting our long-term development pipeline. SG&A spending will be a part of supporting the sales growth and then the COGS, again, it's sitting in inventory. It just hasn't flowed through yet through the P&L. So with the strong volume growth in Q4, you'll see that.

Operator

And the next question will be from Vincent Andrews from Morgan Stanley.

Vincent Andrews
Analyst at Morgan Stanley

Maybe, Mark, you could just discuss or compare and contrast the South American operating environment looks a lot healthier this year versus last year just given a much better start to the planting season, which generally portends to good news for the second crop and so forth. So we also have higher coffee and sugar prices. So are you seeing better demand than maybe anticipated a few months ago when we didn't know how that was going to play out? And are you more optimistic about 1Q or sort of 4Q, 1Q as a result?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Thanks, Vincent. Listen, Latin America, you're right. I mean the planting season is underway. It's much better than it was last year. The rains came at the right time. Last year, we had very dry drought weather which impacted the industry. This year, we're not seeing any of that. I think on the back of, as you just said, very good commodity prices and a lot of people concentrate on soy and corn, but you highlighted sugar is very high, $0.19 is a good number for sugar. Coffee is high. More importantly for us, cotton is high as well. And if you remember earlier in the year, we talked about how we were thinking about the cotton business acreage declined in the '21 to '20 season by about 15% we're expecting and that we're seeing that coming back as we said earlier in the year, so the '22, '21 season will be very robust, price is high, demand coming back after COVID. So all of that is very positive. I would say don't focus just on Brazil. Argentina is also a very important market for us now. It is well in excess of $200 million. I think it's our fourth largest country now in the world. We have a good portfolio on soy and cereals in Argentina. Their market is also moving in the right direction better than it did last year. And then the rest of the region, not to be missed for us is Mexico. Mexico is a very important country for our specialty products on specialty crops. We do a lot of business on corn, on fruit and vegetables. There is a tremendous business for us on avocados, those types of high-value commodities. Mexico is growing well. Season is going well there. The weather conditions have been good. So yes, I would say, overall, Latin America feels much more robust than it did this time last year. And that's how we felt it would play out and so far so good.

Operator

And the next question will come from Mike Sison from Wells Fargo.

Mike Sison
Analyst at Wells Fargo & Company

Can you maybe talk about the diamides heading into '22? Any, what type of growth do you see? You got some new products there. And then maybe how much of that growth could come from the licensing agreements that you've had set up over the last couple of years?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Thanks, Mike. Yes, diamides. So we've talked in the past about our growth algorithm and how we're in the nine sort of high single digits, low double digits range year in, year out. I would expect that type of number next year as well. We are seeing traction with all the agreements that we put in place. We're not going to split out on a regular basis, the, what we sell into the partners versus what we sell ourselves. But periodically, we'll give an update on how that's playing out, but the growth is good. I think you highlighted one area, which is the new formulations, the Vantacor launch that we put in place. This is a very, very novel formulation. It is much higher concentration. Therefore, it's easier to use. It's very easy to disperse in other mixes as growers use it. We've already seen tremendous traction in the two countries we've launched. There'll be more countries launched next year on Vantacor. We expect that new formulation to cannibalize and grow the market for us. So some of the old Rynaxypyr formulations will disappear, and Vantacor will continue to take that business but also grow the overall market share. And then there are some other things we have planned next year for product launches. So diamides continue to be successful. I think a lot of people who think about the diamides focus on Rynaxypyr. We're also seeing a lot of growth on Cyazypyr. It was launched slightly behind Rynaxypyr. It has a slightly different mode of action. It covers a different crop spectrum, and we're now starting to see that product really move on the specialty crops. We're seeing a growth, we're seeing significant growth in Europe, parts of Asia, are really the two markets we're focused on. So we like the prospects for Cyazypyr. It's not to say that Rynaxypyr doesn't continue to grow, it does and it will do. But I think Cyazypyr over the next couple of years will come into its own.

Operator

And the next question will come from Mike Harrison from Seaport Global Securities.

Mike Harrison
Analyst at Seaport Global Securities

You noted that the North American business would have been up around 20% or more if we adjusted for the diamide partner sales. Can you talk about some of the underlying drivers in that North American business for the second half? Is there some inventory restocking going on, some share gains, or are we really just lapping some of the disruption that we saw in the prior year? It seems like there are a lot of moving pieces, and I was hoping you could help us parse those out.

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Certainly, Mike. You won't really lap until we get through Q4. We did not have a good Q4 in North America last year. So really, you'll see that lapping occurring in Q4. Now I think that, listen, the real energy in our North American business is how we're changing the portfolio. You've heard us talk in the past a lot about our pre-emergent herbicides, the authority brands, which really were a bedrock of how we grow our North American business. Overall, our pre-emergent business, while still growing, is shrinking in terms of parts of the portfolio. Our business is actually accelerating because of the new products we're introducing. We introduced Lucento last year, which is a more specialty fungicide. We launched Xyway another fungicide for us, a new area. It's an in-ground fungicide for corn applications where we've never participated before. So that's a market that is a very large market. We have some very unique technology with Xyway. And in its first year, it far exceeded our expectations, and we have big growth plans for 2022 season. And then you have the insecticide launches, Elevest and Vantacor in the U.S., which are targeted more towards the specialty crops. So the growth you're seeing in North America is nothing to do with restocking, etc. It is all to do with how the portfolio is shifting and new products are accelerating our growth. So we do feel very good about what we expect next year in North America. The market itself is robust. So as you're launching products into a robust market, you should get that good growth, and we're seeing that now.

Operator

And the next question will be from Chris Kapsch from Loop Capital Markets.

Chris Kapsch
Analyst at Loop Capital Markets

Just peeling back the onion a bit more here and no pun intended, but on the challenges in and around the raw material and packaging sourcing, despite all the focus on these challenges across the broader industrial sector and while you are certainly incurring higher costs, you guys were able to deliver pretty good organic growth in 3Q and the implied organic growth for 4Q remains intact. So in other words, your volumes don't seem to be, have been constrained all that much despite the disruptions. So just wondering, is that a fair characterization? And also just looking for more color here. Do you think you're simply doing better than the rest of the industry? Or does this reflect maybe a more, your more balanced geographic footprint where the challenges may have been more acute in North America? Just some more color on that. And then I had a follow-up.

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Listen, I don't want to make it sound like it's easy because it is not. And every company in the space is going through the same things. We face similar disruptions. It may be in different parts of the portfolio for different people, but I think we all have inherently the same fundamental issues that we're dealing with. Now we do have a pretty good network around the world. Our reliance on China has dropped dramatically over the last five to seven years. I think today, we're at about 45% reliant on all intermediates, fine chemicals and active ingredients. That's way, way lower than it used to be for the traditional FMC Ag business when I joined way back in 2012. So I think that's one aspect. We have lost sales over the last six months in terms of looking at the portfolio and where we couldn't deliver. But I think with a strong portfolio, we did correct our inventories as we went through this year. We have built inventories and Andrew can talk about the impact on working capital there. But I think we've tended to weather it rather well, but make no mistake, I think we've left revenue out there that somebody else has probably picked up. It's not significant. It's in the tens of millions of dollars, but it's still a business that we could have had that we've missed. So we're not immune to this by any means. And I expect that to continue as we go into next year. Do you want to talk about, sorry.

Chris Kapsch
Analyst at Loop Capital Markets

Yes. Now the follow-up, and you touched upon this a little bit in mentioning your dependence on China being down to 45%. It seems like you've maybe gotten a head start on this maybe relative to the broader industry based on the rolling blackouts years ago and then an active ingredient plant in China being adjacent to that explosion maybe a couple a few years ago now. So just wondering on just your thinking on strategy for supply chain going forward, would, should we expect you'll continue to diversify further? Just what is the thinking in that regard with respect to juxtapose against your strategic growth imperatives?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Listen, we've been on a strategy for the last at least five years, almost six years since we bought the Cheminova assets back in 2015 of really diversifying our supply chain and manufacturing footprint, that continues. For the new molecules that we're adding capacity right now, we're adding capacity in Denmark and in India. And we will continue to expand that active ingredient footwork through our own footprint, through our own operations. We have active ingredient manufacturing in the U.S., in Puerto Rico, in Denmark, in India. Six years ago, we never had pretty much any of that. So we really have changed our strategy to be more diverse, to have more points of manufacture. We make sure that from a registration basis, which frankly is, it is the long pole in the tent here is getting your registrations. We do when we register, when we manufacture new products, we make sure we have two or sometimes three different sources of manufacturing point so that we have that ability to move our manufacturing around the world based upon our registrations. I'm not so sure we're any different to some of the other people out there. There are some people who are more dependent on China, some people who are less. I feel good about where we are today. I don't think you're ever going to get out of China. It's impossible. Just the size of the Chinese chemical industry and the specialty chemicals that come out of there, you will always be dependent on an intermediate or a fine chemical. The real issue for you strategically and especially for us is how do you derisk that to a point where you're more comfortable with it. And we're getting close to that. We're not quite there yet. The next couple of years, we'll move it even further. But I think we're on the right track and certainly it's been paying dividends for us.

Operator

The next question will come from Arun Viswanathan from RBC Capital Markets.

Arun Viswanathan
Analyst at RBC Capital Markets

Congrats on a nice quarter there. I guess first question is just on COVID. Last year, you had some impact in North American logistics in Q4. I would imagine that potentially there had been some impact as well in Asia more recently. Could you verify if that's the case? And then also maybe in Latin America, what you're experiencing as it relates to COVID down there?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Thanks, Arun. I mean, listen, there are two real impacts. One is your ability to supply. And then two is what's happening on the demand side. On the supply side, look, I think we've got used to working in an emergency mode over the last three or four years, we've had, as somebody just said earlier, we had explosions in China that we've had to deal with, environmental policy changes in China then we've got COVID and all the freight issues and manufacturing issues related to that. I don't think there's been anything in the last six month period since we had our last call where anything is fundamentally changed from a supply perspective. It's not that there are not issues out there, there are. The energy power issue in China is certainly causing disruption, and we'll see how that plays out once we get into the winter time. From a demand perspective, we don't often talk about this, but I would say, certainly, in the third quarter, maybe late in the second quarter, I would say the only part of the world where we saw demand issues was Southeast Asia. There was more lockdowns in Vietnam, parts of Indonesia, the Philippines, Malaysia, Thailand than any other part of the world. So we did see, we did struggle getting into the marketplaces, and we saw some demand destruction, not significant. Brazil, not an issue. Many of the growers are well preferred for this growing season. They have a lot of personnel on site. Vaccination rates are actually pretty high in Brazil and growing constantly. So we feel better about Brazil from a COVID perspective going into the '22 season than we did going into the '21 season. So yes, disruption is there. It's not significant at this point. I would say it's at the level where we've been dealing with it, and we'll continue to deal with it.

Arun Viswanathan
Analyst at RBC Capital Markets

Okay. And as a follow-up, maybe I can just ask about cash flow. So as you move into '22, what are some of the buckets that you would envision that could push that 525 or so midpoint for free cash flow a little bit higher? Is working capital a potential leverage just given the cost inflation that you've experienced this year?

Andrew D. Sandifer
Executive Vice President and Chief Financial Officer at FMC

Thanks, Arun. It's Andrew. Look, I think you're hitting on some of the conversations we're having right now as we're going through the budgeting process. But some big stopes for you. Certainly, for free cash flow growth, '22 versus '21 million first and foremost, it's driven by growing the profitability of the business. So EBITDA growth will be a big contributor. Working capital, yes, our long-term vision is to drive better working capital efficiency. For 2022, we're going to have to balance that a bit with having a bit more safety stock in the system because of the level of volatility that we have in the supply chain right now. And you certainly see that on our balance sheet where we ended up at September 30 of this quarter with a big increase year on year on inventory, which is both, as you noted, cost inflation, but also some conscious choices to hold a little extra inventory in certain product lines where we've had some volatility in the supply chain. So I would say at this point, we haven't worked through all the implications for 2022 of working capital yet. But I think our long term trajectory is, yes, to continue driving improvements in working capital to contribute to free cash flow growth. And if you look at the other two lines, the other two big buckets below that, on capital additions, I think we continue to have an expectation of somewhere in that $150 million to $200 million a year being the right kind of pace, particularly with a significant portion of that going to capacity expansion to support new products. And as Mark described, with our strategy to disperse our production base and have active ingredient manufacturer, in particular the new ingredients outside of China. And then finally, on the legacy transformation, the transformation piece, we're basically done. We finished our SAP implementation at the beginning, at the end of last year, a final cleanup the beginning of this year. There's no big transformation spending on the horizon, and there's no fundamental driver of growth in legacy spending. They certainly year to year volatility and just timing and lumpiness about some of that spend, but not fundamental growth. Those are the key elements. I think it's premature to give any more extensive color on where free cash flow could be other than absolutely looking to continue to push growth of free cash flow and free cash conversion as we move forward with the business.

Operator

And the final question today will come from Michael Piken from Cleveland Research.

Michael Piken
Analyst at Cleveland Research

Just a question in terms of the buying behavior of your customers, are you seeing a change in their attitudes towards wanting to procure more inventory and being a little bit less price sensitive in this type of environment? And then secondarily, if you do have customers that are looking to make purchases, are you willing to extend more credit for them to get inventory in place? Or how are you sort of handling if there are any sort of timing shifts?

Mark A. Douglas
President, Chief Executive Officer and Director at FMC

Yes. Listen, I don't think we're seeing a fundamental shift of how distribution retail or direct growers buy. I think there is an acknowledgment out there in the marketplace that, in some cases, for products that are absolutely needed, it's not just the price. It's availability. So there's certainly a desire for people to make sure that as they enter their season, that they have material available doesn't mean to say that we, FMC, we're not seeing a tremendous amount of what I would say, forward buying in Q3. All the growth was related to products that went on the ground in that quarter. So think about full herbicide applications in Europe on cereals, same thing in North America, insect pressure in North America early in the quarter was strong. So those types of things are what are driving the growth. It will be interesting to see how the market evolves for the U.S. as we go into the buying season, which is effectively now getting ready for the season. I do think that recognition is strong that some materials are not going to be available in the quantities that are needed and some people are going to miss out on that. So price in certain areas is always important. But in others, where it's high value and you absolutely need to protect those crops, then yes, I do see people buying to make sure that they've got product in their channel, in their warehouse when they need it. And we'll see how that develops through the fourth quarter into the first quarter. We now see similar behavior as we go into the European season, which really kicks off in Q1.

Abizar Zaki
Investor Relations Director at FMC

All right. Thank you. Thank you for that, Mark. That is all the time that we have for the call today. Thank you, and have a good day.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Abizar Zaki
    Investor Relations Director
  • Mark A. Douglas
    President, Chief Executive Officer and Director
  • Andrew D. Sandifer
    Executive Vice President and Chief Financial Officer
Analysts

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