FMC Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2023

There are 12 speakers on the call.

Operator

Good morning, and welcome to the 4th Quarter 2022 Earnings Call for FMC Corporation. This event is being recorded and all participants are in listen only mode. After today's prepared remarks, there will be an opportunity to ask questions. I would now like to turn the conference over to Mr. Zack Zaki, Director of Investor Relations for FMC Corporation.

Operator

Please go ahead.

Speaker 1

Thank you, Emily, and good morning, everyone. Welcome to FMC Corporation's 4th 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 Q4 and full year performance as well as provide an outlook for full year 2023 and the Q1. Andrew will provide an overview of Select Financial Results.

Speaker 1

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 Object 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.

Speaker 1

Today's discussion and the supporting materials will include references to adjusted EPS, Adjusted EBITDA, adjusted cash from operations, free cash flow, net debt 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.

Speaker 2

Thank you, Zach, and good morning, everyone. FMC delivered record performance in the quarter, Driven by a combination of robust volume growth and strong pricing actions. Sales of new products continue to accelerate, Nearly doubling year over year and representing 11% of the total sales in the quarter. We continue to make investments in And our market access in key geographies, including the U. S.

Speaker 2

And Brazil. Pricing actions in the quarter More than offset headwinds from both cost and FX, resulting in EBITDA margin expansion in excess of 40 basis points. This positive gap between price gains and headwinds from cost and FX is expected to continue as we move forward through 2023. Agricultural markets remain robust with high commodity prices, increasing acreage for crops and positive grower sentiment, providing a solid backdrop For FMC, our Q4 results are detailed on Slides 3, 4 and 5. Revenue was up 17% organically, EBITDA up 17% and EPS up 12%.

Speaker 2

The U. S. And Brazil were major contributors to the quarter's results With volume and price driving the U. S. Business, while price and FX drove Brazil's results.

Speaker 2

With this outperformance driven by higher EBITDA and lower than anticipated taxes. In North America, Sales increased 35% year over year, driven by strong sentiment among growers and our distribution partners in the U. S. For the upcoming season. Selected herbicides for soybeans and other crops as well as fungicides for corn grew rapidly in the quarter.

Speaker 2

We have made great progress in revitalizing our North American product portfolio, with almost 20% of the quarter's branded sales coming from products launched in the last 5 years. We've also invested in more sales and tech service resources, Enabling us to reach more retailers to promote our newest technologies and expand our market access. In Latin America, Sales increased 13% year over year and 9% organically, led by Brazil. Pricing actions, Demand for our fungicides and selective herbicides as well as our investments in market access drove results for the region. Our market access investments contributed to about 50% of the region's growth in the quarter.

Speaker 2

FX was also a benefit in the quarter, driven by the strong BRL. However, dry weather negatively impacted corn and soy in Southern Brazil and Argentina. Asia was flat versus the 4th quarter last year and up 12% organically. Insecticides and selective led to growth in the region. Overwatch herbicide, which is based on IsoFlex, the first active from our pipeline, Continues to gain share on cereals in Australia.

Speaker 2

Almost 20% of branded sales in Asia came from products launched in the last 5 years. FX was a significant headwind in the quarter, offsetting the double digit organic growth. EMEA was up 7% versus prior year and up 20% organically. In addition to strong pricing, results were driven by broad based demand, Especially for cereal herbicides, 13% of branded sales in the quarter came from products launched in the last 5 years, And sales of cyazabir based formulations almost doubled in the quarter. In our Plant Health business, Biologicals grew double digits in the quarter, reflecting the strength of our portfolio.

Speaker 2

Overall, adjusted EBITDA for The Q4 was $432,000,000 an increase of 17% compared to the prior year period, Resulting in EBITDA margin expansion in excess of 40 basis points. Average price increases of 8% Contributed $109,000,000 in the quarter and more than offset the cost and FX headwinds. Moving to Slide 6 and FMC's full year 2022 results. We reported record $5,800,000,000 in revenue, Which reflects a 15% increase on a reported basis and 18% organic growth. This is despite exiting our Russian business earlier in the year.

Speaker 2

More than $600,000,000 in sales came from products launched in the last 5 years, growth of 50% over the previous year And about $100,000,000 came from products launched in 2022, continuing the multiyear trend of strong growth from new technologies. Diamides grew in the mid to high single digit range for the year. Adjusted EBITDA was $1,407,000,000 An increase of 7% compared to 2021 despite $463,000,000 in cost headwinds And $74,000,000 in FX headwinds. Exiting Russia negatively impacted our EBITDA by approximately $25,000,000 The benefit from pricing actions in the year was $372,000,000 This was necessary to overcome the most significant input cost headwinds we have ever experienced. We believe input cost headwinds peaked in the 3rd quarter and expect them to ease going forward.

Speaker 2

2022 adjusted earnings were $7.41 per diluted share, an increase of 8% versus 2021. This increase was driven primarily by the EBITDA increase and lower share count, offset partially by higher interest expenses and taxes. In addition to these financial results, we also had other significant achievements in the year as detailed on Slide 7 and 8. FMC continues to make substantial progress on our sustainability and net zero goals. For example, we reduced scope 1 and 2 greenhouse gas emissions And our operating sites by at least 2% in the last year, while at the same time delivering record growth.

Speaker 2

The consistent progress we have made on various ESG metrics was recognized by several raters that moved us up on their rankings in 2022. FMC now stands at or above industry average across these raters. In our plant health business, We launched 17 new biological products spread across all four regions as well as 2 new micronutrient products. We also acquired Biofero in 2022. As we've said before, Biofero is a pioneer in biologically produced pheromone technology With a patented fermentation platform that enables significantly lower cost production compared to current standards.

Speaker 2

In Precision Ag, we continue to advance our ARC farm intelligence platform, FMC's proprietary mobile solution that helps farmers manage pest pressure Through predictive modeling, ARC is now deployed across 20,000,000 acres spanning over 20 countries, and we have found that growers who use ARC are tending to buy a broader range of products from FMC. Finally, our venture capital arm, FMC Ventures, Continue to build its portfolio in 2022 with new collaborations and strategic investments in start ups and early stage companies Working on new or disruptive technologies. These engagements, which support or augment our internal capabilities, spans several technology segments, including robotics, drone technology, agfintech, pathology detection, soil health, Peptides and pheromones. As an example, in 2022, FMC Ventures increased its investment in MicroPep, The start of developing short natural peptide molecules that target and regulate plant genes and proteins. In addition to our equity investment, we entered into a strategic collaboration with MicroPep late last year to develop solutions to control herbicide resistant weeds.

Speaker 2

FMC Ventures also invested in Trave, an ag fintech startup, addressing working capital needs of growers in Brazil. Turning to Slide 9, which provides the key market and cost dynamics underpinning our 2023 outlook. We expect crop commodity prices to remain robust and that growers around the world will continue to rely on our advanced technologies to deliver high yields While they combat erratic weather patterns, we expect the North American market to grow in the low single digit range with an assumption of normal weather conditions. The Latin American market is believed to have grown significantly in 2022, primarily due to rapidly price increases in non selective herbicides, A product segment in which FMC does not participate. In 2023, we expect the Latin American market to contract by mid single digits Some of those gains in non selected herbicides reverse.

Speaker 2

Asian markets are expected to be flat to last year, An EMEA is expected to be up high single digits with improvements driven by increasing acres for cereals. Taking into account these regional market projections and in light of the very strong market growth in 2022, we expect the overall crop protection market will grow this year In the low single digit range on a U. S. Dollar basis. FMC's continued pricing actions, strong demand for our product portfolio, Particularly our newest technologies as well as further market access gains are expected to provide solid support for FMC's top line to grow above the market rates.

Speaker 2

Costs are anticipated to remain a year over year headwind throughout the year. However, we are seeing deceleration of input cost inflation, And these costs are expected to become a year over year tailwind in the second half. We will continue to invest in R and D and SG and A to expand market access, Grow our plant health business, deploy new technologies through precision ag and develop new synthetic and biological products. Overall, we expect price increases to more than offset cost and FX headwinds, resulting in margin expansion in the second half of the year. Turning to Slide 10 for our full year 2023 outlook.

Speaker 2

We expect the full year revenue in the range of $6,080,000,000 to $6,220,000,000 Representing a 6% growth at the midpoint compared to 2022. New launches and market access initiatives will drive volume growth With mid single digit pricing expected for the full year, FX is expected to be a moderate headwind to top line results. Adjusted EBITDA is forecasted to be in the range of $1,480,000,000 to $1,560,000,000 Reflecting 8% year over year growth at the midpoint. Price is anticipated to be the primary driver of EBITDA growth in the year, With cost headwinds expected to be significantly lower than those experienced last year. Increases in the input cost portion of cost headwinds Are anticipated to decelerate as the year progresses and become a year over year tailwind in the second half.

Speaker 2

We expect adjusted earnings of $7.20 to $8 per diluted share, representing a 3% increase at the midpoint, With EPS growth limited by higher interest and tax rates. This assumes a share count of approximately 126,500,000 and does not factor in the benefit of any potential share repurchases in the year. Looking at the Q1 outlook on Slide 10, We forecast revenue to be in the range of $1,410,000,000 to $1,450,000,000 representing 6% growth at the midpoint Compared to the Q1 of 2022, we are targeting mid to high single digit price increases, of which much has already been implemented. Price is expected to be the primary driver of revenue growth in the quarter. FX is anticipated to be a headwind in the quarter.

Speaker 2

Adjusted EBITDA is forecasted to be in the range of $345,000,000 to $365,000,000 Flat versus the prior year period at the midpoint mainly due to pricing gains being offset by expected cost headwinds. Volume gains are expected to be offset by FX related headwinds. We expect adjusted earnings per diluted share to be in the range of $1.63 to $1.83 Representing a decrease of 8% at the midpoint due to higher interest rates and taxes. This assumes a share count of approximately $126,500,000 Moving now to Slide 12. I want to highlight potential factors that could drive our results to either end of the guidance range.

Speaker 2

For the midpoint of our adjusted EBITDA guidance, we are assuming market growth in the low single digit range And FMC achieving mid single digit price increases. Input cost headwinds are expected to continue decelerating and become a tailwind as the year progresses, While FX is expected to be a headwind throughout the year. With the resilience we've built into our supply chain, our base case assumes any minor disruptions are mitigated. Alternatively, if cost headwinds ease more rapidly, if the market grows at a higher rate than forecasted and if we are able to realize high single digit prices or FX has a lower impact, we could deliver results at the high end of our guidance range. Major supply disruptions of critical inputs or services are With that, I'll now turn the call over to Andrew.

Speaker 3

Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a 2% headwind to revenue in the 4th quarter With weakness in Asian and European currencies, partially offset by strength of the Brazilian real. For full year 2022, FX was a 3% headwind overall, with the most significant headwinds coming from the euro, Turkish lira and Indian rupee, Offset in part by a strong Brazilian real. Looking ahead to 2023, we see continued modest FX headwinds on the horizon, Consistent with the initial outlook for 2023 we provided on the November call.

Speaker 3

For the Q1 of 2023, these headwinds are across a range of Asian and European currencies. Interest expense for the Q4 was $44,800,000 up $11,800,000 versus the prior year period. Interest expense for full year 2022 was $151,800,000 up $20,700,000 versus the prior year. Rising U. S.

Speaker 3

Interest rates were the primary driver of higher interest expense for both the quarter and the full year. Looking ahead to 2023, we expect full year interest expense to be in the range of $200,000,000 to $210,000,000 an increase of more than $50,000,000 at the midpoint versus 2022, driven primarily by higher U. S. Interest rates. Our effective tax rate on adjusted earnings for full year 2022 came in slightly better than at 13.7 percent driven by a modest shift in mix of earnings across principal operating companies.

Speaker 3

The Q4 effective tax rate of 13.1 percent reflects the true up to the full year rate relative to the 14% rate that accrued through the Q3. For 2023, we estimate that our tax rate should be in the range of 14% to 16%, with the increase driven by anticipated higher foreign earnings Subject to U. S. GILTI tax versus 2022. Moving next to the balance sheet and liquidity.

Speaker 3

Gross debt at year end was slightly below $3,300,000,000 down $285,000,000 from the prior quarter. Gross debt to trailing 12 month EBITDA was 2.3 times at year end, while net debt to EBITDA was 2.0 times. On a full year average basis, Gross debt to EBITDA was 2.6 times, while net debt to EBITDA was 2.3 times. Moving on to cash flow generation and deployment on Slide 13. FMC generated free cash flow

Speaker 4

of $514,000,000

Speaker 3

And 2022, down 28% versus the prior year. Adjusted cash from operations was down nearly $250,000,000 compared to the prior year. Growth in EBITDA and cash provided by non working capital items were more than offset by cash used by working capital. Receivables net of rebates, vendor financing and advanced payments were a major use of cash, driven by the inflationary impact on receivables of price increases to offset cost headwinds. Advanced payments from customers in North America were up somewhat, but grew at a rate much slower than revenue growth.

Speaker 3

Inventory was a use of cash with year end inventory levels higher as expected given our anticipation of a strong Northern Hemisphere season in the first half of twenty twenty three And the impact of inflation on inventory values. Accounts payable was a source of cash driven by cost inflation. Capital additions and other investing activities of $119,000,000 were up $5,000,000 compared with the prior year, With nearly half of the spending directed towards capacity expansion. Legacy and Transformation was down substantially with the decrease due entirely to proceeds The disposition of an inactive site. Legacy and transformation would have been essentially flat year on year in the absence of these proceeds.

Speaker 3

Overall free cash flow conversion from adjusted earnings for 2022 was 55%, with rolling 3 year average free cash flow conversion at 67%, Slightly below our long term goal for 3 year average cash conversion of 70% or more due to the inflationary impacts on working capital. With this free cash flow and a modest increase in net debt year on year, we deployed $566,000,000 in 2022 With nearly $370,000,000 returned to shareholders through $267,000,000 in dividends and $100,000,000 of share repurchases. The remainder of cash deployed in 2022 was used to acquire BioPhair and to make equity investments through FMC Ventures. With leverage levels through the year slightly above our targeted ranges, we chose not to repurchase additional shares following our Q3 earnings call. Looking ahead now to free cash flow generation and deployment for 2023 on Slide 14.

Speaker 3

We are forecasting free cash flow of 530 $720,000,000 in 2023, up more than 20% year on year at the midpoint. Underlying this forecast Our expectation of adjusted cash from operations of $800,000,000 to $920,000,000 up $200,000,000 at the midpoint, With the increase driven by growth in EBITDA and slower growth in working capital, resulting from lower sales growth and easing input cost inflation. This is partially offset by higher cash interest and taxes. We further expect to continue to modestly ramp up cash flow additions As we expand capacity to meet growing demand and to support new product introduction. Legacy and transformation cash burn is expected to be essentially flat at the midpoint After adjusting for the benefit from the disposal of the inactive site in 2022.

Speaker 3

With this guidance, we anticipate free cash conversion of 65% at the midpoint for 2023, a significant improvement from the 55% conversion last year. The rolling 3 year average free cash flow conversion is expected to be 67%, just under our targeted conversion range of 70% or more. With interest rates substantially higher, we do not intend to utilize incremental borrowing capacity for cash deployment this year, So as to mitigate the impact of higher interest expense on earnings and cash flow. Free cash flow will be used first to fund the dividend And approximately $290,000,000 use of cash at the newly raised dividend per share authorized by our Board of Directors in December. Free cash flow will then be used to fund inorganic growth if attractive opportunities become available.

Speaker 3

Free cash flow remaining after any such investments will then be directed to share repurchases. Given the seasonal nature of our cash flow, Any share repurchases will be weighted more heavily to the latter part of the year. That said, we do intend to repurchase in the Q1 at a minimum Enough FMC shares to offset any dilution from share based compensation. I must emphasize that this is not a permanent change in capital policy for FMC, Rather this is temporary as we adjust to structurally higher interest rates in the United States. Our intent here is to actively manage the impact of higher rates in 2023.

Speaker 3

Should interest rates ease, we would consider using incremental debt capacity to expand our pool of deployable cash. Finally, moving on to Slide 15. Let me put our free cash flow generation and deployment into perspective. Since launching F and C as a focused agricultural sciences company in 2018, we've made substantial improvements in free cash flow generation and free cash flow conversion from earnings. As you can see on the left hand side of this page, we've improved 3 year rolling average free cash flow conversion from adjusted earnings From 42% in 2020 to 67% at the midpoint of 2023 guidance.

Speaker 3

We've shown we can convert more than 70% of earnings to cash in a single year As we did in 2021, and we are well on our way to our targeted 70% or more rolling 3 year average cash conversion. Equally as important, we've been very balanced in how we've utilized this improved cash flow generation. Strongly rewarding shareholders with nearly $2,000,000,000 in cash returned over 2019 to 2022, split equally between share repurchases and dividends. While fully funding our organic growth, As well as directing $268,000,000 to inorganic growth investments like our recent acquisition of BioPharo. Overall, we feel this approach to cash deployment balances shareholder rewards over both the near and long term horizon.

Speaker 3

And with that, I'll hand the call back to Mark.

Speaker 2

Thank you, Andrew. FMC delivered a record performance in 2022 despite facing the largest input cost Inflation headwinds in the company's history. Robust volumes driven by our market access initiatives and the continued accelerated growth of new products As well as strong pricing gains helped to overcome significant cost, supply and FX challenges in the year. We expect the broader economy to be volatile in 2023. However, agricultural market fundamentals are expected to remain solid.

Speaker 2

FMC's pricing momentum continues and we should benefit from the potential deflation in the broader industrial supply chains. We continue to invest in our technology portfolio of synthetics, biologicals, precision ag and FMC Ventures. Our expanding market access initiatives are resulting in increased profitable growth, and we intend to continue the pace of these investments across more countries. Overall, there are fewer disruptive factors that we see today compared to the same time period last year, and this strengthens our confidence in the narrowed guidance range we have provided. We expect to deliver another year of strong and profitable growth in 2023.

Speaker 2

Finally, as we are now in the final year of our current strategic plan, we are planning to host an Investor Day at our global headquarters in Philadelphia this November. At that time, we will share details of our new strategic plan, and we look forward to seeing you here in person. We will, of course, announce the date for this Investor Day event soon.

Speaker 1

Thank you, Emily. We'll now take questions.

Operator

Thank you. We will now begin the question and answer session. If you have additional questions, you can jump back in the queue. Our first question comes from Christopher Parkinson with Mizuho. Please go ahead, Christopher.

Speaker 5

Great. Thank you so much. It does look like you have some cost benefit built into your The midpoint of your EBITDA growth versus your projected revenues, I know you've been taking a prudent approach on the price cost in terms of The cost side and forecasting, but can you just talk a little bit more on how you see that progressing throughout the year, specifically in the second half? And even potentially how you think it progresses throughout the year, which would even have implications on the first half of twenty twenty four? Thank you so much.

Speaker 2

Yes. Thanks, Chris. So let me take a step back on that one and just talk a little bit about I mentioned in the script where we were last year versus where we are this year. Last year at this time, We had a wave coming at us of inflationary costs and truly we did not understand the order of magnitude. We ended up with what $463,000,000 Costs.

Speaker 2

At the beginning of the year, our forecast had nothing like that number. I would say this year, we're in exactly the reverse position. We see costs receding. We just don't know exactly how much that will be. We know it will impact us in the second half of the year, And we have built what I would call a modest amount of cost reduction into the midpoint of our guidance.

Speaker 2

But what I really see is a time line here that gets us through the end of this year and into early 2024, Where costs do become a meaningful tailwind for us, we do expect to see margin expansion as we go through the second half of the year. We did talk about the fact that we will continue to invest in SG and A and R and D, and I'll have Andrew add a couple of comments here at the end on Some details here. We are investing in those areas because frankly, we are seeing profitable growth from those investments. Whether I think about the growth in Brazil or I think about the growth in the U. S.

Speaker 2

Or other parts of Asia, those investments are paying off very quickly in terms of how we gather new sales Pipeline and this year we moved another molecule from discovery into development and we'll talk more about that in Investor Day. But we've also got a full year run rate of our Bioferro investment in R and D, and we continue to invest in plant health and precision ag. So if you think about a growth rate of Roughly 6% for the top line. You should expect SG and A to be growing pretty close to the 6% and then R and D a little bit above that. That's how it will flow through the year.

Speaker 2

The input costs are higher in the first half and you can see what we said about Q1. We still have high input costs. There is a legacy of what we bought in the second half of last year. Those will abate as we go through the half. And then in the second half, we'll get that margin expansion.

Speaker 2

So I've seen some of the flash reports last night of the Are we being conservative? I think we're being prudent. The world is still somewhat volatile. We all know that. But we are confident enough to say that we're already seeing the trend lines.

Speaker 2

Same as we saw last year, the trend lines are there. We just don't quite know where we'll be. So when I talked about on the script, could we see areas where we'll have improvement? Yes, absolutely. So we'll see as we go forward.

Speaker 2

The May call will be an important call for us because we'll have a much better view on where we are with raw materials. Our pricing actions, We probably have about 50% of our price target for this year is simply a rollover from last year, just pure timing of when Pricing was implemented. So we feel good about the pricing side. We're less sure about the cost side, but the trend line is there for it to get better as we go through the year. Andrew, do you want to add anything there?

Speaker 2

Yes.

Speaker 3

Let me just reiterate and expand on a couple of your thoughts there, Mark. I think certainly input costs and the cost of our COGS line, They are a significantly smaller headwind in 2023 than they were in 2022. As Mark described, they remain a headwind in the first But we anticipate them becoming a tailwind in the second half. We will have growth in SG and A and R and D spending on a dollar basis. The SG and A should grow, as Mark described, generally in line with sales.

Speaker 3

R and D might grow a bit faster. All of this to support growth, the addition of Bioferro, the investments in our plant health platform. We have moved another active ingredient from discovery into development in our active ingredient pipeline. So that SG and A and R and D dollar spending will continue to be a cost headwind as we go through the year. That said, on a percentage of sales basis, SG and A will stay relatively flat, R and D will expand slightly.

Speaker 3

But this is against the contrast where over the past 4 years, we've taken 300 basis points out of SG and A as a percentage of sales And over 100 basis points out of R and D as a percentage of sales. So while we might not get the same kind of leverage this year, more flat on SG and A and R and D as a percentage of sales, Still a very, very competitive cost structure. SG and A more than 500 basis points lower than our nearest competitor. So I think what you'll see through the year is that on a dollar EBITDA basis, SG and A and R and D continue to be a cost headwind. We will manage that carefully as we always have, and we'll adjust as we need to as we progress through the

Speaker 2

year. Very good. Thanks,

Speaker 6

Andrew.

Operator

Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead, Vincent.

Speaker 7

Thank you and good morning everyone. Just want to touch on the pricing environment a little bit. I think I heard you say, Mark, that you've already got 50 In place just sort of from a rollover of last year. Of the other 50%, how much have you already gone out with For the first half versus I assume there's a fair amount that you need to go out with for the back half of the year. And just want to understand sort of what you're hearing from your channel partners in terms of continued receptivity for pricing at this point, just thinking atmospherically, Lot of headlines about we're all entering into a deflationary environment.

Speaker 7

We're seeing fertilizer prices come down and glyphosate prices come down. I know those are very different products Versus what you sell, but just we are sort of pivoting out of the inflationary or price increase environment. So what, if any, change in feedback are you getting from the channel partners?

Speaker 2

Yes. Thanks, Vincent. Well, listen, for pricing in the first half of the year, I mean, pretty much most of it, as I said, is already underway. The U. S.

Speaker 2

Canada markets are active now. Europe is getting active right now. So those price increases are through. I think what you're referring to is probably in 4th quarter as we roll into the Latin American market, where will we be? It's a valid question to ask.

Speaker 2

We don't know. We are planning price increases. At the end of the day, as Andrew just alluded to, input costs are still higher than they were last year. They are still increasing. They're just increasing at a much lower amount.

Speaker 2

Plus the fact that we're seeing significant labor cost inflation around the world, not only for SG and A, but within our manufacturing plants, etcetera. So for me, there is a cost environment That is still conducive to price increases. In Europe, you have high energy costs. Yes, they've come down off their peaks, but they're still Meaningfully different to the average over the last few years. So we will continue to move price where we see fit.

Speaker 2

And of course, it's not a standard number around the world. We've talked about Before, it's different in different markets with different products. We continue to use that differentiation to move price. I think most of the Value chains that we operate in really do see that inflationary environment. It's like any negotiation.

Speaker 2

They're always difficult. They're never easy. But overall, we are getting the price that we need to get to move us back to the EBITDA margins we want. You're right on the non selective herbicides. You can look at all the metrics.

Speaker 2

You see them coming down. They went up very quickly. They come down very quickly. They truly are commoditized. We're not seeing that sort of For the most specialty products where you're really selling value not just on a cost basis through a contract.

Speaker 2

And that's a key differentiator for us. We don't have those non selective herbicides. We don't operate in that type of environment.

Speaker 7

Okay. And just as a follow-up, Mark, did I hear you say, I believe last quarter you thought the market overall would grow low to mid single digits. I believe now you're thinking low single digits for this year. Is that just a function of last year for the market coming in better than you thought? So Just a harder compare or is there anything at all different about sort of what you expect for this year globally?

Speaker 2

Yes. I think overall when I look at the market, we are we do have a lower view over the overall market. But frankly, it's driven by Latin America. I mean, we still expect North America to have a reasonable growth despite how strong it was in the past year. There is very good sentiment in the North American market right now for the coming year.

Speaker 2

Europe, we expect to be up. We do see increase in cereal acres, which will be positive. So we see Europe up. Asia will be slightly flat. There has been some weather issues in India, Indonesia and other parts of Southeast Asia, Offset by a good market in Australia.

Speaker 2

I would say the reason we're going lower in the world today is because of Latin America. There are independent numbers that suggest the Latin American market may have grown $6,000,000,000 in 2022. Now the vast majority of that is with non selective herbicides, mainly price and then pricing for other active ingredients. So I do think that people need to watch that non selective herbicide market in Brazil and Argentina. That's the reason we're calling for a lower overall market, But it really is focused in that particular segment, which is so large, it does impact the rest.

Speaker 2

The rest of it is probably close to where we said it would be in November.

Speaker 7

Okay. Makes a lot of sense. Thanks so much.

Speaker 2

Thank you.

Operator

The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead, Adam. Adam, your line is open. Please proceed with your question. Adam Samuelson with Goldman Sachs, your line is open.

Operator

If you'd like to please proceed with your question.

Speaker 8

Thank you and good morning everyone. Just wanted to get back to your Q1 guidance. You had margin expansion in just reported Q4 2022 and you're guiding to some of lower margins And flat EBITDA in the Q1. In what way are these quarters different? Could you just maybe Provide some of the bridge items for Q1.

Speaker 2

Yes, Alexey, I'll just give you a quick high level view and then Andrew please give some Color commentary here. Very different markets in the sense of where you're selling into. Latin America, Brazil, Argentina, huge markets in Q4, still important in Q1, but to a lesser degree. And then obviously in Q1, the European business is starting to kick in, which is very different. So you have a very different geographic mix Across the world for how we see.

Speaker 2

And it's why we never ever talk about sequential quarters. It's almost impossible to look at the business on that light. But Andrew, if you want to make

Speaker 3

some comments on The revenue side and the cost side? Yes, certainly. I think, yes, just to echo Mark's comment, very, very challenging to look our business on a sequential basis, Given the different regional country mix for each quarter, I think what we're looking at is solid revenue growth and flat EBITDA Entirely due to cost headwinds in the Q1. We're off we'll be close to offsetting them with Price increases in the Q1, but we don't really get to that positive price cost comparison for any strong way until we get into The following quarter. So we do see some EBITDA margin dilution from Q1 2022 to Q1 2023, Which I would suggest is that is a better comparison periods to be looking at and trying to understand the Q1 performance.

Speaker 3

Again, it's really driven by Getting past this last part of the wave of cost inflation. Now as we move into the second half of the year, as input costs recede,

Speaker 4

As we're anticipating, that's when

Speaker 3

you start to really see margin improvement.

Speaker 8

Thank you. And as a follow-up, you mentioned diamides mid single digit to high single digit growth. So if they if dynamite dip to mid single digit territory going forward over the next 2, 3 years, is this the level of growth that Did you see us fairly normal? Or could it be a little higher or lower?

Speaker 2

I think we've said in the past, sort of that mid High single digits is where we think it will pan out over time. I wouldn't change that view right now. We do continue to launch new diamide formulations around the world and, cyazipur is growing very nicely as we get the new registration. So I think the Mid to high single digit is a perfectly good range, Alexey.

Speaker 8

Thanks a lot.

Operator

The next question comes from Josh Spector with UBS. Please go ahead, Josh.

Speaker 4

Yes. Thanks for taking my question. I guess just to follow-up on some of the raws questions earlier. I mean you've been pretty clear in the past, you have 6 months of visibility to what you're buying. So I mean is this something where next quarter you'll have a stronger view on second half and would adjust your view Kind of aligned with what you're seeing there.

Speaker 4

And just curious on some of the near term dynamics as well. Is China disruption impacting your view of what Pricing can be, does that have an impact there? And if you look at your buy now, is there any way to frame what your raws will be doing year over year in the second half today?

Speaker 2

Yes. Listen, it's exactly what I talked about. I think as we go through the Q2, we're going to have a much Better view of, a, what have we bought and what are we buying in the second quarter, which will inform our raw material view in the second half. So I think at the May call, we'll be giving a lot more detail in that area. China has not impacted us at all through this latest round of COVID.

Speaker 2

We did have closures of some supply. But over the last 3 to 4 years, we've built up a really robust Process and network of how to manage disruptions. So we didn't see any significant disruptions through The Chinese New Year and through the COVID wave that they had to deal with, China opening up is positive for us in the sense that, Obviously, we get raw materials from China. It's not a huge market for us from a sales perspective. It's a nice market, but it's not one of our leading growth markets.

Speaker 2

So for us, it's a bit of a neutral event, China opening up. We've managed raw materials well out of China. We've been distributing our manufacturing network over the last 5 years to other countries. That continues at a pace. So overall, I think we feel pretty good from a supply position

Speaker 4

Okay, thanks. And if I could poke on your guide range on the high end specifically. I guess if I just take one of those variables and look at price and say you do high single digit versus mid single digit, It's $150,000,000 plus of EBITDA upside. Your scenario is $40,000,000 higher. And I guess you list a whole bunch of positives that could play out.

Speaker 4

So what are the negatives that we should be thinking about? Or is that higher upside potentially possible if you get more visibility there?

Speaker 2

Well, I think on the negative side, I highlighted supply disruptions, which is the obvious one. Weather disruptions would be the next one, I would say. Outside of that, it would be a lack of pricing or something in the world that creates inflationary environment for raw materials. We don't see that today. As I said, you look at the script, we mentioned 3 or 4 items that could Move us from the midpoint to the upper end of the range.

Speaker 2

We mentioned basically one that would come the other way. So you can read into that what you will.

Speaker 4

Got it. Thank you.

Operator

The next question comes from Stephen Byrne with Bank of America Merrill Lynch. Please go ahead, Steven.

Speaker 9

Yes. Thank you. The EPA recently came out with a draft risk assessment If I have a peer and they concluded they use the terminology likely to adversely affect, Is this meaningful in your view? Could there be impacts from this on how Cyazapeer is used? And how would you compare this to other insecticides?

Speaker 9

Is this fairly normal or is this a concern?

Speaker 2

Yes. Thanks, Steve. Top line, no, it's not a concern and we've been following this for some time. As you can imagine, we're Well, clued into where the EPA is going. Cyazepyr is one of the what we call the softer chemistry, it's much more targeted.

Speaker 2

We don't see the EPA guidance as any impact on our business. We continue to see cyazapura grow at Quite a fast rate around the world. It has numerous attributes that are very targeted. There are lots of older pesticides And insecticides that are more broad in nature that, cyazepyr would take share from and is taking share from. So We don't see any impact to our business from this ruling.

Speaker 9

Okay. Thank you. And I wanted to just drill into your outlook on the biologicals. It's clearly an area that you're devoting a lot of focus on. Do you find that it has the potential to be, say, synergistic with your synthetics Is it used in combination?

Speaker 9

I think that was a view that Kathy Sheldon had in prior years. Is that Still the view that there's a synergy between the biologicals and synthetic chemistries?

Speaker 2

Yes, very much so. When you look at the growth rate of our biologicals, we talk about our plant health business. This year, it will be pretty close to $300,000,000 in size. Biologicals is now roughly half of that. It's getting close to be $150,000,000 business.

Speaker 2

It's growing in Excess of 20% top line per year. And that growth is coming from not only the new products, but The synergistic effect that you talk about, which is twofold. First of all, we are developing products where biologicals and synthetics are in the same formulation. So you're getting different modes of action and different attributes from a biological and lowering the amount of synthetic material in the formulation. The second one is in spray programs, where you will replace a synthetic spray with a biological spray.

Speaker 2

So You are using a pure biological, but using it in a way that augments what the synthetics are doing and once again reduces the amount of synthetic material. So we see that growth coming from both aspects. We're launching, as I said, we launched 17 new products last year in the whole Biological space. I continue to see that space growing rapidly. We are investing more in R and D.

Speaker 2

We are investing through ventures as well. So I think it's one of the bright spots in the portfolio in terms of overall Growth and investment for the company.

Speaker 9

Thank you.

Speaker 4

Thank you.

Operator

The next question comes from Kevin McCarthy with Vertical Research Partners. Kevin, your line is open.

Speaker 10

Yes, good morning. Mark, how would you characterize channel inventory levels in the U. S, Brazil and Argentina, Exclusive of the non selective herbicides where you don't compete?

Speaker 2

Yes. I think so. From a North American U. S. In particular, I think channel inventories are a little bit elevated right now, but that's normal.

Speaker 2

I would say, as you enter the season, Most of retail and distribution is stocked up for a very good year. When I think of inventory levels for FMC compared to our sales On a percent basis, we're about the same place we were the year before. So I think it's pretty normal. Brazil and Argentina, different story. Forget the nonselectives that we just talked about.

Speaker 2

I think because of the conditions that we saw in the south of Brazil and in Argentina, It was very dry in the Q4. I have no doubt that there is elevated channel inventories in that area. Would not be a surprise at all. If I run around the rest of the world, Europe, South of Europe is high again because of hangover from the last season. Northern Europe is pretty much okay, I think.

Speaker 2

In Asia, we've talked about India in the past. The weather didn't help again in 2022. So We see high channel inventories in India, which we'll be working through. Parts of Indonesia are similar, somewhat high. The rest of Asia is good.

Speaker 2

So overall, it's pretty much what you would expect. And don't forget, people are focused on what happened in Brazil in terms of growth. The vast majority of the growth in Brazil was price. It wasn't volume. And that's important to recognize.

Speaker 2

So I think out of the weather patterns that we saw in the South and in Argentina, I think other parts of the country are fine.

Speaker 10

That's helpful. And as a second question, if I may, you've owned Biofuro for roughly 6 months now. And so I was wondering if you could provide An update on what you've seen so far. I think when you bought it, you talked about potentially launching 5 new pheromones over the next 3 to 5 years with an eye toward $1,000,000,000 of sales by 2,030. Maybe you could just provide an update as to how that aspect of the biologicals pipeline is going here?

Speaker 2

Yes, thank you. Great question. We're very happy with the acquisition we made. In fact, I would say when I think of the key metrics We're looking at, when we acquired the product, we had 5, new pheromones in the R and D pipeline. Today, that number is 9.

Speaker 2

So the accelerated rate of discovery and application of new pheromones is growing. We have made our first batches of She's a product to move them into the marketplace. So that was a major milestone. The company that we acquired, Bioferro, had not I was just at the very beginning of making commercial scale quantities. We've now got past that.

Speaker 2

We are looking to invest in our own manufacturing. We do use some toll manufacturers today, but we're looking at balancing that out across the world. And I would say the trial work, we have substantial trial work around the world on the pheromones that we already have in place, and those trial works are going very well. So from my perspective, the integration has gone very well. But more importantly, I see an accelerated rate of discovery and development coming out of that pipeline, which is very encouraging.

Speaker 6

Thanks, Mark.

Speaker 2

Thank you.

Operator

The next question comes from Richard Gatchiturina with Wells Fargo. Please go ahead, Richard.

Speaker 6

Thanks. Good morning, everybody. First question on CapEx. Looks like for 2023, bit of a step up $140,000,000 to $180,000,000 versus 2022. Can you talk about Where you're going to be adding capacity, what new products, plan to increase and where your operating rates are Currently.

Speaker 2

Under why don't you talk about the overall CapEx? Yes.

Speaker 3

So we spent about just under $120,000,000 in CapEx in We're stepping up at the midpoint about $160,000,000 so about a good sized increment in CapEx. A lot of that new additional CapEx is to support manufacturing capacity for our new active ingredients. So we're expanding production of ISOFLEX, Which is our cereal heparaside we introduced in Australia several couple of years ago and are rolling out now more broadly around the world. We're expanding capacity for floundapyr, the fungicide that we've introduced in a couple of key countries and starts becoming much more material as we get into the next several years. That CapEx, I think building on comments earlier, that CapEx is largely directed in places outside of China.

Speaker 3

We're expanding capacity in Europe. We're expanding capacity in other parts of Asia to complement the sourcing that we have today and The strong sourcing position that we have in China, helping to sort of balance that mix of sources that we have. And Mark, if you want to add anything to that.

Speaker 2

Yes. I would say a couple of things on top of what Andrew just added. Formulation capacity is also important. Having the active ingredient is one thing, but Expanding your formulation capacity is also a key attribute of where we spend capital. It's nowhere near the same scale of capital, But it is important, and we have over the last year expanded capacity here in the U.

Speaker 2

S, in Europe. And as we go into 2023, we're expanding our formulating capacity in Brazil as well. So you won't see it. It doesn't become so apparent in terms of overall dollars of capacity expansion, But that is an important attribute that we're focused on as well.

Speaker 6

Okay, great. And as a follow-up, In the slides you provided some details on your Precision Ag business, the ARC mobile solution. Maybe can you talk about How are you going to plan on monetizing this potentially in the future? What your expectations are for growth of that Platform. And also, what would you say to folks who there's a thought out there that precision ag Could be a negative to volumes longer term given, it could make farmers more efficient and they may be applying less volume of Product, maybe if you could touch on those.

Speaker 6

Thanks.

Speaker 2

Yes, sure. So I'll take the last one first. Listen, I think once you apply something from a precision methodology, you are going to de facto use less volume. I think what gets mixed in this area Is the discussion around volume and value? Where are you bringing value and how do you capture that value?

Speaker 2

Obviously, there are some very large products used around the world, So non selective herbicides to go back to that topic. See and Spray technology, which is being developed is an area that is obviously of interest in that space. For us, when I look at how do we capture value from ARC, what are we doing? We're allowing the grower to very precisely time when they need Put the best products in the field to remove insects. That's great from a sustainability perspective.

Speaker 2

It is also something where you capture value from not only the product You're selling today, but the broader portfolio that you sell to those growers. I don't see anywhere in the world where we charge for ARC. We provide it free of charge. It is an SG and A expense, but it does have tremendous uplift in terms of the portfolio mix that you sell. And also, don't forget, it has another attribute.

Speaker 2

It defends business for us. We're defending on 20,000,000 acres, Quite a few $100,000,000 of high profit products that is very difficult to remove when somebody is using a process like that. That's a differentiator that we believe adds more value to the company than anything else. So we don't necessarily see it as a separate profit center, but we do see it as an important element

Speaker 6

Great. Thank you.

Speaker 2

Thank you.

Operator

The final question comes from Arun Viswanathan with RBC. Please go ahead, Arun.

Speaker 11

Thanks for taking my question. When you think about maybe 2024 and 2025, 2023 and 2022 have been Impacted by FX as well as cost inflation. But when you look at 2024 and 5, do you expect to get back on to a 7% to 9% EBITDA growth rate? And maybe if you Give us a little bit of what you're thinking strategy wise longer term. Are you planning to have an Investor Day and maybe unveil the next 3 to 5 years of strategy and biologicals be a bigger part of that or maybe you can just explain maybe some of the longer term strategy?

Speaker 11

Thanks.

Speaker 2

Yes. Thanks for the question. As I just said in the script, we are going to have an Investor Day At the end of this year, we'll give the dates coming. I don't want to preempt that because there's a lot of work to do between now and then. But we will be giving a view of the future both, I would say, within the near term few years and then a longer term aspirational goal for the company.

Speaker 2

It is important that we feel that we have that longer term view as we drive the company forward. We've been very good in managing the company through the last 5 year cycle. As Andrew has talked about before, we're pretty much right now above our metric for revenue, but right on the bottom line Of EBITDA despite well in excess of $1,000,000,000 so far of costs. So I would say you just have to hold that question until we get to the end of the year.

Speaker 9

Thanks.

Speaker 1

All right. Thank you, Emily. That's all the time that we have for questions. Thank you very much. Have a good day.

Operator

This concludes the FMC Corporation conference call. Thank you for attending. You may now disconnect.

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Earnings Conference Call
FMC Q4 2022
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