Good morning. Welcome to the second quarter 2018 earnings release conference call for FMC Corporation. Phone lines will be placed on listen only mode throughout the conference. After the speaker's presentation, there will be a question and answer period. I now turn the conference over to our host, Mr. Michael Worley, Director of Investor Relations for FMC Corporation. Mr. Worley, you may begin.
Thank you. Good morning, everyone. Welcome to FMC Corporation's second quarter earnings call. Joining me today are Pierre Brondeau, Chief Executive Officer and Chairman, and Andrew Sandifer, Executive Vice President, Chief Financial Officer, and Treasurer. Pierre will review FMC's second quarter performance and provide the outlook for 2018 and the third quarter. Andrew will provide an overview of select financial results. The slide presentation that accompanies our results, along with our earnings release and the 2018 outlook statement, are available on our website. The prepared remarks from today's discussion will be made available after the call. Mark Douglas, President and Chief Operating Officer, and Paul Graves, CEO of FMC Lithium, will join to address questions.
Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties. Today's discussion will focus on adjusted earnings for all income statement and EPS references. A reconciliation and definition of these terms, as well as any other non-GAAP financial terms to which we may refer during today's conference call, are provided on our website. With that, I will now turn the call over to Pierre.
Thank you, Michael. Good morning, everyone. Q2 was another strong quarter for both businesses at the revenue and earnings level. For Ag Solutions, the demand for our products, revenue synergies, and cost were very much in line with expectations we laid out a quarter ago. The business integration is on schedule. The commercial teams continue to perform very well. The strong global performance through the first half of 2018, combined with a high percentage of orders in hand for the rest of the year in Latin America, gives us great confidence for our second half. Beyond the immediate future, we continue to see very strong growth potential for our acquired portfolio, especially Rynaxypyr and Cyazypyr insect control. On the technology front, the integration of our R&D organizations is progressing very well and is confirming the strength of our expanded pipeline.
We remain on track to launch our first new active ingredient from the legacy FMC R&D pipeline, the fungicide Bixafen in North America later this year. The lithium business, which we recently announced will be named Livent Corporation, continues to perform strongly, with demand for our differentiated performance products continuing to grow. Realized prices and delivered volume are in line with our previous expectations. We remain on track to list Livent in an October 2018 IPO, which will be followed by a direct spin to FMC shareholders within six months. Turning to slide three. FMC reported second quarter revenue of just over $1.25 billion, which was nearly double the revenue from Q2 2017. Adjusted EPS was $1.78 in the quarter, which was $0.08 above the midpoint of our guidance and up 270% versus the same period a year ago.
The guidance beat was mainly due to stronger operational performance driven by revenue growth in Ag Solutions and a combination of higher pricing and favorable customer mix in lithium. Moving to slide four and Ag Solutions. Revenue of about $1.15 billion in the quarter nearly doubled year-over-year on a reported basis and increased 8% on a pro forma basis, with zero net impact from foreign currencies. We continue to capitalize on cross-selling opportunities, and our global sales force delivered another impressive performance in its second full quarter with a combined portfolio. You can see in the bridge on the right side of this page that we saw top-line growth on a pro forma basis in every region for the second consecutive quarter. Stepping back and taking a look at the first half revenue, we delivered a very strong performance with 11% pro forma growth.
This was led by the acquired insecticides, Rynaxypyr and Cyazypyr insect control, which grew 24% and continued to gain market share on demand across every region. Second quarter segment EBITDA of $344 million was triple the earnings from the year-ago quarter, and was $14 million above the midpoint of our guidance. Segment EBITDA margin was 30% on strong mix and a continued focus on cost control. This performance was achieved despite the broader challenges faced by the chemical industry. The Chinese government has been shutting down facilities and industrial parks as part of their environmental strategy. These shutdowns have limited the supply of certain active ingredients and intermediates, causing shortages of material and, in certain cases, raising raw material costs. FMC has been able to mitigate and manage the impact on our ability to supply our customers, thanks to our global diversified supply network.
We are very pleased with the margin performance in today's environment and believe this will grow in future years as the portfolio continues to shift to higher margin product. Turning now to slide five. Q2 revenue growth was strong on a pro forma basis in every region. North America revenue increased 8%, Europe revenue grew 3%, Latin America revenue grew 21%, and Asia revenue increased 6%. In North America, we performed well compared to the broader crop protection market, which we estimate was down low to mid single digits. We saw very strong volume growth for insecticide, mostly driven by Rynaxypyr and Cyazypyr insect control. We are also seeing strong demand for our latest Authority-branded herbicide, Authority Supreme, as the market for pre-emergent herbicides continues to grow due to increasing weed resistance.
In Europe, despite difficult growing conditions, our business grew 3%, which was ahead of the crop protection market that we believe was down low single digits on a U.S. dollar basis. The market conditions were aligned with the strength of our portfolio. The insecticide and herbicide market performed better than the fungicide market, which was weak. Consequently, we have seen strong growth of Rynaxypyr and Cyazypyr insect control. In Latin America, our business grew 21% on a pro forma basis, which is a very positive indicator of underlying demand for our product, even in a seasonally lighter quarter. This strong performance is primarily due to our low channel inventories in Brazil and our crop exposure across the region. The Brazilian crop protection market is healthy. FMC sales in Brazil grew an impressive 35% in Q2, driven by strong demand for our legacy FMC herbicides and insecticides.
Mexico also delivered a strong performance driven by expansion of niche crop applications. In Asia, we saw strong pro forma growth in nearly all countries. In India, we have made significant change in our market access model, as we highlighted on the last call. This change to the super distributor model is going extremely well and delivered mid-teens revenue growth on a pro forma basis, led by strong demand for Rynaxypyr and Cyazypyr insect control. In China, our legacy rice herbicides drove a double-digit sales increase on a pro forma basis as we continue to gain traction in a market that is trending toward higher value crop protection product. Growth in these two major markets, along with a host of smaller ones in the region, was more than enough to offset the impact we felt from significantly weaker demand in Australia due to the severe drought.
Moving now to Lithium on slide six. Lithium delivered another strong quarter, with revenue up 46% compared to Q2 last year and segment EBITDA of $51 million, 85% higher than a year ago. We continue to see very strong customer demand for FMC's performance product. Higher realized prices remain the primary driver on a year-over-year growth with hydroxide, carbonate, and lithium metal prices each up at least 20%. Volumes were also higher in all major products as increased production in Argentina, increased hydroxide productions, and higher demand in BuLi all contributed to the year-over-year growth. Our Q2 EBITDA margin of 48% was higher than our full-year margin forecast of 45% at the midpoint, due mainly to favorable customer mix in the first half of the year. Turning to slide seven, which summarizes our outlook for the full year and for the third and fourth quarters.
We still expect adjusted earnings per share for full year 2018 to be between $5.90 and $6.20 per share. At the midpoint of the range, this represents an increase of 123% versus 2017 EPS. Third quarter 2018 adjusted EPS is expected to be between $0.87 and $0.97, and fourth quarter 2018 adjusted EPS is expected to be between $1.41 and $1.61. We expect 2018 Ag Solutions revenue will be in the range of $4.1 billion-$4.3 billion. On a pro forma basis, this equates to a 9% year-over-year increase at the midpoint. We also expect Ag Solutions EBITDA will be in the range of $1.17 billion-$1.23 billion. Our expectations for the overall crop protection market remain unchanged from what we said in May.
We continue to expect the global crop protection chemical market on a US dollar basis to be flat to up low single digits in 2018. We expect North America to be down mid-single digits, Europe to be up low to mid-single digits, Latin America to be up mid to high single digits, and Asia to be flat to up low single digits. For FMC, third quarter Ag Solutions revenue is expected to be in the range of $870 million-$930 million, and fourth quarter segment revenue is expected to be in the range of $980 million-$1.1 billion. These revenue forecasts represent pro forma growth rate of low single digits in Q3 and low double digits in Q4. The third quarter is a low season for the majority of our market, and it will be the lowest sales quarter for FMC from now on.
In 2018, this is magnified by internal events, which are moving sales into Q4. In any major integration process, there often are delayed closings of countries and sites due to legal entity registration and permit transfers under local laws. Since the close of the transaction with DuPont, we have known and planned for delayed closings. DuPont is operating certain countries and sites on our behalf under our direction, and we are receiving the economic benefit. The majority of these delayed countries and sites, along with the related permits, licenses, and registration, are being transferred to FMC in Q3, thus creating a temporary sales blackout period in Q3. These sales will occur in Q4. FMC's outperformance versus the crop protection market in the first half of 2018 will continue as we expect second half Ag Solutions revenues to grow 7% on a pro forma basis.
We have very high confidence in our forecast as our visibility into Latin America, which represents roughly 40% of expected revenue for the period, has increased versus previous seasons. In particular, in Brazil, we have over 70% of our orders in hand to reach our full-year target, which is meaningfully above what we have seen in past years. Segment EBITDA is forecasted to be in the range of $195 million-$215 million in Q3, and in the range of $275 million and $315 million in Q4. Our guidance implies nearly 60% of 2018 Ag Solutions EBITDA occurred in the first half of the year. This is a reversal of the ratio in previous years, when 40% of segment earnings were generated in the first half. The shift is driven by the acquired business, which is much more heavily weighted on the first half. Moving over to Lithium.
We expect full-year segment revenue to be in a range of $430 million-$460 million, a year-over-year increase of 28% at the midpoint. We are increasing our full-year EBITDA forecast by $2 million to a range of $195 million-$205 million, which represents a year-over-year increase of 41% at the midpoint. Our Q3 guidance for the segment is for revenue to be in the range of $105 million-$115 million, and EBITDA to be between $45 million and $49 million, each representing a year-over-year increase of 17% at the midpoint. I will now turn the call over to Andrew.
Thanks, Pierre. Let me start this morning with the income statement, specifically taxes and the impacts of foreign exchange. We've lowered our guidance for adjusted effective tax rate for the full year to a range of 16%-18%, a reduction of 50 basis points at the midpoint of the range, driven by our updated forecast of the mix of earnings across various jurisdictions. The 16.5% adjusted effective tax rate for the second quarter brings our year-to-date provision for taxes in line with this updated guidance. Foreign exchange impacts on revenue were a net zero in the second quarter for our Ag Solutions segment, with euro strength offsetting weakness in key Latin American currencies, aided by ongoing price increases. For the lithium business, FX was a modest tailwind in the quarter. Looking to the remainder of the year, we will, as always, be watching the BRL closely.
We manage our currency exposures throughout the year, and this year is no different. With the combination of price increases in our hedging activities, we expect to completely offset any FX headwinds in the Ag Solutions business in the second half and the full year. Moving on to the balance sheet and cash flow. Net debt at June 30th was $2.75 billion, down more than $150 million from the beginning of this year, reflecting solid cash generation and the paydown of $100 million of outstanding term loan debt in the quarter. Turning to slide eight, FMC generated adjusted cash from operations of $287 million in the first half of 2018, up 34% compared to the prior year period, driven by higher EBITDA. We also benefited from lower working capital build for the DuPont acquisition than was previously expected.
Looking to the full year, we're increasing our guidance for adjusted cash from operations by $100 million to a range of $650 million-$750 million. This increase is driven by our updated forecast for the working capital build for the acquired DuPont business, supported by our continued expectation for strong EBITDA. With that, I'll turn the call back to Pierre.
Thank you, Andrew. First, a comment on the lithium separation. We remain on track to IPO Livent this October. We made a confidential filing with the SEC in June, and we will file a public version of the S1 in late August. Securities laws require us to reduce the commentary we provide on the lithium business now that we are within 30 days of its public filing. Therefore, we will not be able to undertake substantial Q&A on the lithium business today. We feel very good about the direction FMC is headed as we move to becoming a standalone agricultural sciences company. The business delivered another strong quarter, and we have high confidence on our second half estimates.
Our full-year pro forma revenue growth will be significantly above the market growth rate in 2018, and our disciplined approach to cost will help drive an EBITDA margin approaching 30% for the full year. The integration of the acquired business is progressing very well, and our SAP implementation is on track for the end of 2019, which will drive significant margin improvement from 2020 and beyond. Growth synergies are being realized faster than we would have expected nine months ago, as our new portfolio is gaining wider adoption with our strategy customers. We expect to outperform the crop protection market for the foreseeable future. Before moving to Q&A, I would like to remind you, we are hosting an investor day in New York on December 3rd, and we hope to see many of you there. I will now turn the call back to Michael Worley.
Thank you, Pierre. As we are in a quiet period for the lithium business, we're happy to answer questions on the first half performance of that business, but we're very limited in what we can say about the future, so we may choose not to answer some forward-looking questions at this time. Please frame your questions in that light. Operator, you can now begin the Q&A.
Thank you. If you would like to ask a question at this time, please press star then the number one on your telephone keypad. Please limit yourself to one question and one follow-up. If you have additional questions, you can jump back into the queue. To withdraw your question, press the pound key. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Steve Byrne from Bank of America.
Thank you, and good morning. This is Ian Bennett on for Steve. In the agricultural outlook for three Q, could you help describe the moving pieces in the lower margin of legacy business or currency and maybe some of the trucking issues in Brazil? Perhaps compare the margin structure in three Q to what it would've been pro forma for three Q of 2017.
That's a lot of questions at the same time. Q3. As we explained, first of all, Q3 has to be, and will be in the future, the lowest season. If you think about it, the EBITDA margin for the business is very much the result that your SG&A and your R&D costs go against a gross margin, which is lower because the revenue is lower. The math just makes you end up with an EBITDA margin, which is lower. It's purely the fact that your below-the-line cost doesn't move, as the spending is about the same every quarter, while your revenues are lower. Historically, Q3 has always been a low quarter because Europe is non-existing and Asia and North America are fairly low, while Brazil mostly starts in September.
It is magnified with the new portfolio, which is much more of an Asia, North America, Europe portfolio, making the first half even stronger and Q3 even weaker. For the future, I think we have to expect Q3 to be the month with the lowest revenue, consequently with the lowest EBITDA, and consequently with the lowest EBITDA margin. From a currency standpoint, if you look at each half and the full year, we are going to offset any headwind we will be seeing from currencies, and mostly the Real, by a combination of our hedging strategy and our price increase.
If you look at the two quarters, I would say we might be slightly lagging in Q3, you might have a slight negative impact of effects in Q3, and you will have more of a positive impact when we are really in the full season in Brazil in Q4. Last point of your question was around the truck and trucking strike. Maybe I'll let Mark add a couple of sentence. There is no direct impact of the trucking strike on the crop chemical industry. There could be some side effects to the agricultural industry. Maybe, Mark, you want to comment on that?
Yeah. I think the way we're structured in terms of our logistics contracts for Brazil, we are not seeing and not expecting any issues when it comes to supply of trucks to move our materials. Let's be honest, a lot of our materials are extremely concentrated, we tend to ship a lot less volumes, unlike some of the other ag inputs such as fertilizers, which are extremely bulky. I think the other impact you might see if this doesn't get resolved, it's not necessarily for this year, but certainly into Q1 when the harvest starts, is how the grains get moved to the ports. I think you've heard a number of the grain traders talking about that already. Those may be the two impacts right at the front end of the season in terms of fertilizers and right at the back end in terms of grains.
As far as FMC is concerned, we don't see any issues in terms of delivery.
Let me finish to answer your broad question around Q3. Something I want to make very clear. Q3 is always a difficult quarter to predict. We do have today, you could see, and I'm not forecasting, it's hypothetical, you could easily see $40 million or $50 million in Latin America or specifically in Brazil, shifting from Q4 to Q3. We have a very strong cotton season ahead of us. Customers might decide to secure supply earlier, and that could create a shift in the buying pattern. If that happened, we would rebalance the growth rate of Q3 and Q4 to levels which are much more in the same range. Finally, I hope I was clear in my explanation around what we are facing.
Pure integration process, we knew about it, there is a few countries like Indonesia, Philippines, Vietnam or a site in Brazil where there is a delayed transfer to the company. We knew about it that creates a blackout in sales. Those sales are not lost. The orders are taken, but the sales we delivered and accounted for in Q4. That comes and creates more noise and creates a lower Q3 than we should have.
Thanks. That's very helpful. Just as a follow-up, on the lithium business, how has spot prices declining in China affected contract negotiations in the first half of the year?
Most of the contract negotiation for us, for any business we have under contract, is done in the back end of the year. We have very little contract negotiation in the first half of the year. Today, as we said, for hydroxide, carbonate, and even metal, our price are up over 20% year-on-year. We participate very little in the lithium carbonate spot market, I can tell you for our sales between Q1 and Q2 sequentially, pricing are also up for hydroxide and carbonate. We are seeing sequential up pricing, as well as very strong year-on-year pricing.
Your next question comes from the line of Dan Jester with Citi.
Yeah. Good morning, everyone. I wanted to ask you about the comment you made in your prepared remarks about your order book for Brazil and how it's much stronger today than maybe it's been in the past. Is this something specific that you're doing to build an order book differently this year, or is this something that's more market-driven, driving early orders?
I think it's truly market driven. It is the fact that we have been very careful in supplying the market. There is a very low inventory in the channel of the FMC products. Consequently, our customers who have a pretty good visibility on their demand are placing orders and firm orders at an early stage. I would say we are in a much more normalized situation in Brazil. Because we keep on being very careful, even today, in a high demand period, in not supplying product when they are not absolutely required to keep a low level of inventory in the channel, we are getting very strong demand. I say 70%, and I'm not saying that jokingly. I said 70% because we wrote a remark a few days ago, the number is already above 70%.
I think it's been a long time since we had such a high amount of orders in hand before this season. Mark, maybe you want to give more color?
No, I do believe that the last few years of working down those channel inventories have served us very well, and we're in a very advantageous position. I also do believe that our crop focus in Brazil is going to serve us very well as we go through the rest of this year. Cotton increased significantly over the last season in terms of acreage and prices were good. The cotton growers are once again looking at a pretty significant increase in acreage going forward. We're eyeing that market not only with the acquired portfolio but with our legacy portfolio. We expect significant growth there. Overall, with what is happening around the world on soy, obviously the growers in Brazil are feeling very bullish about their acreage. We expect to see acres increase in Brazil as well for soy.
For us, it's a combination of a lot of hard work over the last two to three years to get ourselves in good shape and an advantageous market position right now.
Actually that touches exactly what I asked on my follow-up question, Mark, is, with what's going on with soy, I think the conventional wisdom is that Brazil is going to sell a bit more to China, and the U.S. will need to find new suppliers to sell their soybeans. Is FMC agnostic between a planted soybean acre in Brazil versus a planted soybean acre in the U.S.? I just wonder if long term the U.S. plants less soybeans, what kind of impact that could have on FMC's business, given how important soybeans are for you. Thanks.
Good follow-up question. Just over 20% of our portfolio is exposed to soy around the world. There's one country you're forgetting in that mix, which is Argentina, which is a big country for us. We have a significant pre-emergent herbicide business down in Argentina, and obviously the acquired insecticide portfolio is important to us down there as well. We're pretty agnostic. We're growing in all three regions. Soybeans will be provided around the world from one of those three or all three. For us, we really don't mind. We want to grow in all three, and we'll grow with our technologies.
Your next question is from Bob Koort with Goldman Sachs.
Good morning, everyone. This is Chris Evans on for Bob. We're clearly seeing the benefits of the combined portfolio, given the pro forma growth rates you showed in the first half. You're guiding to a strong 2H top line expectation as well, but maybe at a decelerated rate versus the first half. Could you give some context here? Maybe secondly, can you opine on the growth drivers for Ag as you move beyond 2018? What contribution do you think is possible from new formulations and the acquired DowDuPont product pipeline that you received?
I'll take the first part, and Mark will take the second part on the new technology. I think, yes, we had a very strong first half, and that was driven by the demand on our insecticide. We believe Rynaxypyr sales are still the benchmark molecules in the insecticide market, and they grew 24%. We believe that the quality of the portfolio plus the customer synergies are creating a very significant market share gain. Actually, the overall portfolio of FMC in the first half grew also a healthy 17%. We believe we're in a very strong position. When you move in H2, I think the right way to look at this business will be in H1, H2. We foresee a deceleration versus H1.
It is mostly because, as we said before, the DuPont acquired business is much more of an H1 business, and that business is growing faster than the legacy FMC business. If you look at Latin America and Brazil, the growth will be driven a lot by the herbicide, insecticide from the FMC portfolio and to some extent the acquired business, but less. That is why we do have an 11% growth rate in the first half, and we would expect to be more in the 7% range in the second half of the year.
Yeah. With regards to the portfolio, we've talked numerous times about the strength of the two combined portfolios coming together. We launch our first product, as Pierre said in the script, Bixafen, a fungicide targeted at North America later this year, so for the 2019 season. We pretty much have launches coming every year after that, certainly through the mid part of the decade, and actually, we expect some more products to come that will be hitting later in the decade. We've had a metric for some time that we think of in terms of products introduced over the last five years. That's kind of a metric that we had in the legacy FMC in terms of how efficient we are in turning over the portfolio. We're going to be revamping that metric, and we'll talk more of that at the Investor Day in early December.
You can expect a healthy increase in formulations that are coming to market, not just new active ingredients. I talked on the prior calls about the number of registrations we have coming for the acquired portfolio. We have similar numbers for the legacy FMC portfolio in terms of both herbicides and new fungicide mixtures. It's a very robust portfolio going forward, starting in 2019.
Thanks. Maybe I was hoping you could comment on the impact of the Argentine peso on FMC Lithium in the quarter. I was surprised the large devaluation didn't result in a bigger impact, and it doesn't seem to be, let's say, factored into your guidance.
Yeah. The Argentine peso was a tailwind in the second quarter. I think, Paul, that you know.
Yeah. You have to understand that our exposure to the peso is not as large as people seem to believe. It was less than a $1 million tailwind to the EBITDA in the quarter. It is factored in for the rest of the year. Clearly, you have to bear in mind that one of the drivers of the depreciation of the peso is cost inflation, we do have an offsetting cost in peso terms. By the time you've walked through all those, we're not seeing a huge tailwind or headwind for peso devaluation year to date.
Thank you. Your next question will come from Joel Jackson from BMO Capital. Please go ahead.
I just want to reconcile something you're talking about, expecting a bit of the sales blackout on some of the DuPont sales moving from Q3 to Q4. Looks like you have a $900 million revenue guide for Q3 for ag and a $1 billion for Q4, give or take. How much revenue is roughly swinging from Q3 to Q4? Because if Q3 is the lowest quarter of the year for ag, it seems like Q4 and normalized base would be very similar to Q3.
Yes. If you look right now at the numbers for revenue in Q3, we have about $200 million differential in the two quarters from the sales. Let me get my numbers right. Yeah, $140 million differential between the two quarters in Q3 and Q4. That is a bigger differential than we've seen in the past. If you remove the impact of the blackout sales, we are not talking about $100 million of blackout sales. We are talking about tens of millions of dollars. I think every $10 million is about a percent. If you have a few tens millions, you can bring another 2% or 3% more in a quarter. That's the kind of shift we are talking about.
Thank you very much.
Thank you. Our next question will come from Aleksey Yefremov from Nomura Instinet. Please go ahead.
Yes, good morning. Thank you. Just to confirm, the sales blackout is purely an accounting issue, and the sales are actually being made and booked by DuPont at this time?
No, it's more of a sale recognition. It's just when we have the orders, and we do have the product. The only question is we have the firm order, we have the product. It's only a matter of being entitled to register the sale, ship the product, and do have revenue recognition. It's already as soon as we get the registration or the legal entity transferred, or the permit, then we do ship and do the revenue recognition. It's purely a revenue recognition legal issue for us to be able to account for the sale.
You're waiting for government approval to ship the product. Is there any risk that this slips further into next year and you don't get that approval in Q4?
No, absolutely not. When you do delayed sites, you do transfer the site only when everything is secured and ready to go. It is not a full quarter for us. I think it's going to depend on the place, but sometime it's a couple of weeks, sometime it's a month. It's mostly impacting the part of July or a part of August. There is no questions around those delayed transfers.
Okay, thank you. Your next question comes to the line of Chris Kapsch from Loop Capital. Please go ahead.
Good morning. My question is about this sort of more pronounced or acute seasonality that you're referring to with the new portfolio. Just wondering if what emerged, new information emerged last quarter is about the enthusiasm around both the cross-selling opportunities with the DuPont business as well as a strong pipeline of the new registrations. I'm just wondering if there's anything about this, as we now have two and a half quarters of the DuPont business having closed, anything about this more pronounced seasonality that's inconsistent with those views about cross-selling opportunities and the new registration pipeline associated with the new chemistries.
No. We feel actually the same, if not stronger. Just to look at the number. If you look at the total forecast in sales at the end of Q1, we were expecting for the full year to see a growth rate for the company for the full year in the 7%-8% range. We are forecasting today for the full year, 9% range. Our level of confidence around growth synergies has enormously increased, versus where we were at the end of last year and increased to some extent, versus where we were at the end of the first quarter. There is no change. It's only a situation where Q3 is a quarter where the acquired business is a very low percentage of the overall portfolio and there is less demand for this business. It's an historical low quarter for DuPont and it was for us.
That's all there is. If anything, we are increasing the forecast in term of growth and speed at which we are creating synergies, versus what we said at the end of the first quarter.
Okay. Thanks for that. If I had a follow-up on the lithium business and just about the market and the industry more generally, this disconnect between spot prices in China and obviously you and other sort of incumbent players are seeing obviously strong both year-over-year and sequential pricing trends tied to the contract that you guys have both inked and are rolling over. The question is about the spot price. One possible explanation or plausible explanation is just that in China you have a surplus of either low grade spodumene or DSO that's generally low quality that the conversion industry over there is constrained and therefore there's kind of a surplus of that sort of material in inventory over there, which is sort of creating the short-term phenomenon of destocking. Do you view it that way? Do you feel that's a plausible explanation?
The other thing that might be contributing, of course, is this longer term shift towards high nickel cathode chemistries that's favoring hydroxide, therefore maybe spurring some destock on the carbonate side in China. Any thoughts on if those are plausible explanations in the disconnect? Thanks.
Yeah, this is Paul. I think your second explanation there really goes to the heart of it. What we've seen in Q2 particularly, bear in mind that the new Chinese rebates and incentive structures really kicked in June. What we saw early in the year, in the first half of the year, one of the underlying trends that we've seen is a more rapid move towards hydroxide-based cathode technologies than we had expected. What we're seeing is as the new rebates and incentives kick in, a retooling going on amongst the cathode manufacturers to be able to meet those energy density and other requirements of the new incentive programs. To do that, we've seen plants closing down while they retool. We've seen certainly a drawdown of their own inventory of carbonate as they finish production of cathodes that are using carbonate.
We've seen an increased focus on their part as where they will secure the hydroxide from. There is a significant disconnect between the availability of carbonate and the availability of qualified, usable hydroxide in China and elsewhere in the world. I'll keep making the point until I maybe go blue in the face that the Chinese spot market for carbonate is not a really very useful market, even if it is a market to look at. It carries very little informational content for the overall state of the market or what customers are looking for with their own contracting strategies. While I recognize that people pick up on that data, it's leading everybody down the wrong path as to what the true fundamentals of the market are, I'm afraid.
Thank you. Your next question comes from the line of Mark Connelly from Stephens Inc. Please go ahead.
Thank you. Pierre, do you think that your raw materials and sourcing are going to have to shift towards India if China keeps up the pressure on producers? Where else would you be increasing your sourcing? Second question, before the DuPont deal, you'd been expanding some of your basic R&D through collaboration. Is that still strategically important, and how does it fit together with your big R&D efforts now?
Yes, thank you. Yeah, when we look at our manufacturing strategy, we've been looking and starting to diversify our manufacturing from different locations. India is a location, but I can tell you also that we have moved some of the manufacturing for some intermediates, for example, toward Europe with some partners and towards some of our plants in Europe and other locations. Yes, over time, there is a strategy to keep on investing in China, where we do have a strong partnership and players. Certainly, diversification will take place. We'll produce more in India. You have also to look at Europe and North America as potential place where we will be generating some of our product which are critical.
I think also one critical aspect of what we do, and that's why we got out of the tough situation the first half of the year, what the organization in Ag has done for years is always make sure that your key molecule or intermediate, you have multiplied suppliers who are qualified and registered. I think it's very important. You cannot be depending, even in China, solely on one. You always have to have two or three or four capable suppliers to be able to manage potential shutdown.
On the question of the R&D.
Yes
Your point is a good one, Mark, that we did have strong collaborations in the past as legacy FMC, and obviously now we're very heavily into basic research. That basic research actually helps when it comes to collaborations, because what it means is you have technology that you can actually, in the broadest sense, trade for new technologies. I'll give you an example. FMC were very interested in expanding our fungicide portfolio. That may mean that in the future, we're willing to trade technologies that we're developing in terms of herbicides or insecticides to get access to new fungicides. Our ability to do that is vastly enhanced with the capabilities that we acquired last year. For us, it's very much a game that we know very well.
We've played it very successfully over the last five years, we will continue to keep that tool in our toolbox as we look to continue to broaden that portfolio of technologies.
Thank you. Your next question comes from the line of Mike Harrison from Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning.
Was wondering if you could comment a little bit on the Brazilian real and your exposure in Latin America. The last time we saw the real under pressure like this, you ended up seeing a lot of challenges in your business. Can you just talk a little bit, Pierre, about how the business has changed since the last time FX was an issue in Brazil, and comment in a little more detail on what steps you're taking to mitigate this impact in the second half? I think you mentioned price increases and hedging activities. Thanks.
Absolutely. I think we learned a lot from 2015, we'll do all we can not to get back to a situation equivalent. I think we are very close to what is going on in Brazil, I'll ask Andrew to talk about the hedging. I think first, on the pricing, we do have a very tight connection between the currency and the price list. As long as there is not very abrupt change over a few weeks of significant amount, I think now we are structured from the way we negotiate price and establish the price list to be very much in line with the currencies. Also remember that only half of our business in Brazil is dollar denominated. We moved from a less vulnerable business with a tighter control of the pricing.
I have to say, since the beginning of the year, we've been doing very well in connecting our pricing. Plus, Andrew, could you talk about the change of approach we had to hedging and how do we do that to limit potential issues on downside?
Sure, thanks. Speak to two things. Since 2015, we've become much more systematic and routine in the way we approach hedging the BRL. It's been our practice since 2016 to hedge a significant portion of the anticipated BRL-denominated sales once we have a confirmed order from the customer. It can be some time between confirming the order with the customer and actually invoicing the sale. That protects us from BRL movements between that time of confirming the order, fixing the order with the customer, and actually invoicing the sale. This year, as we saw higher volatility and anticipated some continued volatility in the currency in Brazil, we also chose to do some additional hedging. Hedging a portion of our anticipated sales in advance of confirming orders.
Where we felt confident on the demand, to take some of the risk in terms of their ability to move price sheets fast enough against rapid movements in the currency off the table. It's really that combination of regular, systematic, as we confirm orders, taking that risk off the table, and then some additional work we did this year to prepare for potential volatility in the currency through the year.
All right. Wanted to ask also about the Asia ag business. You mentioned the strength in the rice market in India and China. Is that related to market dynamics or just some new application wins since the combination with DuPont? Can you just talk a little bit about how you're positioned for growth in the rice market in Asia going forward?
Yeah, sure. Three very big markets, India, China, and Southeast Asia. Taking India first, we made a significant step this year in changing the legacy FMC go-to-market model by adopting the acquired super distributor model. That is affording us opportunities where we were selling some very key products from the legacy FMC portfolio into that new channel. I would say, having a broader access channel in rice with the acquired portfolio, i.e., continuing to take market share with insecticides in India. In China, slightly different story. We introduced a very good rice herbicide in 2017 that is continuing to gain traction in China. That combination with sales synergies with the acquired portfolio is helping drive both pieces of the portfolio, hence a very strong first half in China for us.
latterly in Southeast Asia, obviously the acquired portfolio complements very well the legacy FMC rice portfolio, and we have a very good market access in places like Indonesia, Thailand, and the Philippines. Now, with the acquired assets, we get more access to key countries such as Vietnam. Overall for us, it's a lot of sales synergies and a very good, strong portfolio in terms of herbicides as well as insecticides.
Thank you. Your last question comes from the line of Kevin McCarthy from Vertical Research Partners. Please go ahead.
Yes, good morning. Mark, it sounds like channel inventory levels of crop protection chemicals are quite low in Brazil. I was wondering if you could comment on the levels that you're seeing in your other key markets, at least in terms of outliers, including both your perception of industry inventories and FMC's own inventory levels.
Thanks, Kevin. I think in general, I would say from an FMC perspective, we're feeling very good about our channel inventories around the world. Obviously, we've focused for the last few years on Brazil. Absolutely no issues for FMC in Brazil. I think North America, we've talked about where we've had legacy insecticide inventories in terms of corn rootworm applications. That certainly still holds true, although we are seeing more pressure on corn rootworm than we have in the last few years. We'll see how this season develops. Market in general is probably going to be spotty depending on different companies' portfolios. I would say the biggest area that I see going forward is Europe. Given the extremely dry conditions in Europe, I would expect to end this season with higher than normal channel inventories of fungicides, just given the market conditions. India and China.
China has elevated inventory levels mainly because of both weather and market conditions there. The rest of the world, pretty much okay. Oh, sorry, one more. Australia. I would think Australia will end up with very high channel inventories given the severe drought that we've seen this season.
That's helpful. Perhaps for Paul, I was wondering if you could comment on the sequential pattern of earnings in lithium as per your EBITDA guide. Is the decrement that you expect there a function of volume, price, or other factors if I compare your stated guide for three Q versus two Q? Not sure if you can answer that or what you can tell us that might be helpful to discern that.
Yeah, I think there's one factor you have to bear in mind in this business, and we mentioned it in Q1, we'll mention it again today, and it'll be a feature of this business really for a while, which is the timing of which you ship to different customers in different regions in the high hydroxide business can meaningfully move the margin, revenue in any given quarter. Most of the contracts are annual contracts, but we don't necessarily ship everything to every customer on an equal basis through the year. We certainly, and I think we've talked about this, saw a richer mix of customers in the first half than we expect in the second half. You look at our full year guidance, strip out what you saw in the first half, you'll see the impact of essentially equalizing throughout the full year.
I just encourage people not to assume that the first half margin is replicable across the entire year, and instead look at our full year guidance. Just bear in mind that almost all of our contracting is done on an annual basis, and both volumes and price are pretty much predetermined by the time we start the year. It is simply a question of timing as to when we ship to which customer that drives some of these movements.
That is all the time that we have for the call today. As always, I'm available following the call to address any questions you may have. Thank you and have a good day.
Thank you. That's all the time we have for today. This concludes the FMC Corporation second quarter 2018 earnings release conference call. Thank you.