Well, good afternoon, everyone. Our next discussion is with FMC, which is one of the largest ag chemical company. They make herbicides, pesticides, insecticides. And from FMC, we have FMC's CFO, Andrew Sandifer. Andrew has been CFO since 2018 and has been with the company since 2010. Prior to his current role, he was VP of Strategic Development and VP of Corporate Transformation, before being named treasurer in 2016. With that, let's welcome FMC and Andrew.
Thanks, PJ.
Andrew, let's start with your outlook for 2023, which you talked about in your fourth quarter for ag chemicals. You talked about low single-digit growth for 2023, particularly strong in Europe or EMEA, but somewhat sort of weak guidance in LatAm. Can you talk about what are the regional drivers? What do you see? Just go around the geographies and give us a state of the union.
Be glad to. Thanks, PJ. I think when we look at the ag market and particularly the market for crop protection chemistry in 2023, I think that the first context point we have to have is just how strong a year it really was for the industry in 2022. All right? The estimates we follow see growth around in the low teens, up to about $76 billion in sales globally for the crop protection industry last year. Pretty strong growth around the world in 2022. While we're anticipating some deceleration from that in 2023, we're still anticipating at that low single digit basis, as you talked about, which is not out of line when you look at 20- and 30-year horizon growth of this industry overall.
Regionally, certainly the strongest growth we're expecting is in EMEA, in Europe. We've had a couple of seasons in a row of really rough summers in Europe, particularly in the core EU countries, with very dry, hot weather. You know, the early, you know, pre-spring weather here that we had, they've had a milder winter. There's been good precipitation. I think we're optimistic there, with more favorable weather. We expect to see some higher planted area for cereal crops, which are a big driver of the business for us in Europe as well for the overall market. You know, the other markets, you know, we want to, we'll keep going through them in descending order.
Okay.
Out of that, I think, if we look at North America, we're still expecting solid growth, low single digits. Again, you know, very strong year in 2022 in North America. A bit of dynamics that we're gonna see in a couple of regions with non-selective herbicides, glyphosate, dicamba, 2,4-D, glufosinate. To be very clear, product lines that FMC does not participate in, that had outsized growth in 2022, due to commodity price inflation. We've seen some normalization of prices in those product lines, and that's really a downdraft on overall market growth. You think about how significant those products are in the overall market size. Again, for FMC, not really an issue, but for the overall market, it's a bit of a downdraft. Asia, we're seeing more flat for the market.
Mm-hmm.
Again, we have some element of these downdraft from non-selective herbicides. There's also some pretty meaningful FX headwinds in different parts of Asia. Again, just for clarity, when we talk about market growth, we're expressing it on a US dollar basis.
Okay.
So that's the outlook. Outlook in local currency is for low to mid-single digit growth in Asia. Finally get us to Latin America. Latin America really had an extraordinary year last year. Very, very strong growth. A lot of it price-driven, and a lot of that price-driven, again, by non-selective herbicides, by the glyphosates and similar products, to where as those prices are coming back down to more normal levels, it's a significant downdraft on the overall market. Again, you know, low single digit overall market environment. You know, for FMC, though, you know, we still expect to see very strong growth. We're, you know, guiding 6% revenue growth for the year and continuing that trend of growing at a multiple of the overall market growth.
Can you talk a little bit about pricing? You got significant pricing last year.
Yeah.
Oil was going up, raw materials were going up. You know, oil has come down, but not a whole lot. What's your expectation of pricing, and how do you offset the FX headwinds?
For FMC, you know, we had 7% total price increase last year. You know, 11% volume growth, 7% pricing growth, so 18% organic growth for full year 2022. You know, for this year, we're looking at 6% top line growth. Some modest FX headwinds, again, you know, in the low single digits. The organic growth being more evenly split between price and volume. So pricing, again, a key lever of growth for us. We have been pricing to recoup raw material cost inflation. We have not fully by any means recouped or offset that raw material inflation. That raw material inflation and input cost inflation for us has not stopped.
We still have year-over-year cost headwinds at the COGS line, what we would refer to as input costs in the first half. We are starting to see some changes as we look ahead into the second half. You know, it ties into why we need pricing throughout the year. You know, we're going to need pricing in the first half to help offset the continued increase year-over-year in the input costs that we're facing. In the second half, where we're starting to see signals of a swing to where we're anticipating a modest tailwind from input costs, we still need additional pricing because we've not recouped the cost that we, you know, the magnitude of the full cost increases that we've seen over the past several years.
Great. Let me talk about Diamides, which is a big franchise for you that you bought from DuPont.
Mm-hmm.
You know, I think the sales are close to maybe north of $2 billion from where you bought it was maybe less than $1 billion or $1 billion. How fast can that grow? What are the key drivers there? Then I have a question about patent expirations that I'll come to.
Sure, sure. When we talk about the diamides, we're talking about two core active ingredients, Rynaxypyr or chlorantraniliprole, or Cyazypyr, which is chemically known as cyantraniliprole. We acquired those molecules from DuPont back in 2017. As P.J. mentioned, we've essentially doubled, like more than doubled that business in the five years we've owned it, with sales in 2022 of just shy of $2.1 billion, and growth in the year in the mid-to-high single digits. Still a very, very strong growing platform. And fundamentally what you have is a product that works better than the alternatives. It's safer, it has less off-target impacts, it's very effective, has very long sustained control of insects.
It's displacing older chemistries that are harsher, less safe, less helpful to the environment. As a number of those old chemistries get removed from the market or as it just simply becomes untenable to continue using them, the penetration, the share of the Diamides just keeps increasing. That said, Diamides the largest class of insecticides. They still are less than 1/3 of the total insecticide markets. There's still a lot of room for them to continue taking share and continue growing. You know, we have been managing a strategy of utilizing partnership relationships, where we supply five major global partners as well as over 50 regional partners with our Diamides today, 'cause they sell in their own formulations under their own product names, to get broaden the access that these products have in the marketplace.
That's been a big part of continuing to sustain that growth. Now as we look to the rest of the decade, you know, mid to high single-digit growth of our branded businesses in 2023 is our expectation. As we look to the end of the decade, sustaining mid-single digit kind of growth. You do run into law of large numbers here, right?
Yeah. Yeah.
As you know, when you have a $2.1 billion franchise, 5% growth is over $100 million. That's a new active ingredient, essentially. That's a new product for the world for many companies every year. You know, some tapering of that growth rate from the mid to high-
Sure.
-to the mid range is probably to be expected over the next several years.
You know, can you talk about patent expirations on Diamides?
Mm-hmm.
You've done some interesting deals like one you did in India with UPL.
Absolutely.
Can you just talk about how do you see the cadence of these expirations and what can you do to extend the life?
Absolutely. For anyone who really wants to get a deep dive on this, we published about 10 pages of slides in our Q2 of 2021 earnings call. It goes through in a lot of depth. I'm not gonna go through every detail.
Sure.
Just to give you the big picture, the Diamides, Rynaxypyr, Cyazypyr, we have 30 patent families, include about 1,000 patents, both granted and applied for, that cover broad array of issues that protect the Diamides. The one that gets the most initial focus is the composition of matter patents, is literally the patent on the molecule itself. Some of those patents have already started to expire for Rynaxypyr. In fact, in several countries, China, India, and certain Eastern European countries, the patent for Rynaxypyr expired in 2022. That's just one of a small part of the total layer of protections we have around these molecules. We also have patents on the manufacturing process to make Rynaxypyr or Cyazypyr. We have patents on the intermediates, the composition of matter patents on the intermediate materials that are used in that process.
For example, for Rynaxypyr, it's a 16-stage synthesis process. Many of the intermediate steps and the chemicals that are produced there really have no other use than for making Rynaxypyr. We have patents on their composition matter. We have patents on the process to make several of those as well. We also have patents on formulations on how the product is finally formulated to take to market. We've had this broad set of patent protections. We're also provided some protection to the use of our regulatory data and the way registrations are managed in different countries. They give us protection that continues well until the end of this decade, and in some cases a bit longer. Certainly with... speaking directly to Rynaxypyr, which has earlier expiration dates, Cyazypyr goes a little bit further.
As you pointed to, PJ, it's not just relying on the patents themselves. Obviously, we've been very aggressive in enforcing the patents. We've won cases for infringement in both China and India and continue to aggressively defend our patents. We've also engaged partners and brought other people in the business ahead of any kind of patent expiration. We don't believe that in our industry, in crop protection, that there really is a patent cliff. It's more of a long plateau as you transition from being a fully patented to a post-patent life. I'll tell you, we have post-patent molecules in our portfolio that are about as profitable as Rynaxypyr that are well, you know, more than a decade off patent. It's not only about the patent in terms of maintaining the profitability.
These partnerships, and in particular, the most recent one that you mentioned, excuse me, with UPL, are a big part of that. Right? Getting other innovation-led players into the game where they're taking out and doing, using their own formulations and going to their customers and parts of the market we can't reach as effectively on our own, has been a big part of the doubling of the franchise since we've owned it. It's a big part of protecting the franchise as it becomes off patent. In the case of UPL, you know, UPL is a very strong manufacturing company. It's world's largest generic, ag chemical producer. If there's any company in the world that is capable of reverse engineering our manufacturing process or finding alternative processes, I'd suggest UPL is probably one of them.
Right.
UPL chose to do a deal with us instead of doing that. To me, that signals the strength of the process patents that we have, the difficulty it really takes to actually make these products, and the advantages to being affiliated with the brand Granaxanor as well, not just with the chemistry. I think it's all of those balancing factors, the patent enforcement, the partnerships, the way we've managed registrations, the way we're developing value-added formulations that combine now and are just coming to market now since it takes so long to get new products to market in the ag industry. That'll bring new ways, new products, higher value to farmers where you're not just selling a straight chlorantraniliprole generics and Cyazypyr or excuse me, generic Granaxanor. You're selling a differentiated product and can continue to compete that way.
Great. Now let's turn to Biologicals, which has been a big topic of discussion. You launched 17 new Biological products in 2022. Can you take a second to explain what they are?
Sure.
Also talk about are these region-specific products? What kind of growth rate do you expect from biologicals?
Biologicals are a place that gets a lot of interest because they typically are less harsh chemistries. They typically have less unintended consequence, less side effect, if you will, if put in a pharmaceutical kind of speak. They're either chemicals secreted by or extracted from a living molecule or synthesized from that molecule or from that organism. In some cases, it can be the organism itself. It's a very fragmented space, where, you know, it's, you know, right now we have a plant health business that's reported revenue in 2022 of about $235 million. About half of that is Biologicals. We're one of the top three, four players in Biologicals in the world, right?
It is a very fragmented space, and it's growing rapidly, but it's still a small part of the overall crop protection environment. One of the couple of factors that people tend to think about with biologicals, one, is they have been typically smaller in terms of product size. You don't see the billion-dollar product. We have not yet in biologicals. What you see typically are smaller, more focused products. They often have a little less duration and control than a synthetic chemistry might have, one of the trade-offs we use. And in some cases, they have been more regionally limited, particularly if it's the use of a living organism, where there have been some regulations preventing a use across borders.
When you look at products that are actually using something that's either expressed or extracted and concentrated from a living organism, that's where you're starting to see more global opportunities. You know, and of the 17 new products that we introduced last year, a vast majority of them were, in fact, global or multi-regional, if you will, where we were able to take them to market not just in a single country or a single region in the world. A couple of examples. You know, we have a Provilar called Provilar. It's just been introduced in Brazil for use on soybeans and cotton, and has a very strong data that's supporting its improvement in yields for growers. We're right now pushing for registrations in an additional 20 countries around the globe.
It'll take a couple of years to get all those countries up and running, this will be a truly global product. Accudo, which is a biostimulant used in specialty crops, has, you know, we've got field data that shows 15% yield improvement. It's another one where we're registering in multiple countries. Finally, final example I'll use is Zyronar, which is a nematicide and fungicide used in corn, that we've introduced in the U.S. Has another, you know, significant productivity yield improvement and is one that we expect to be able to introduce across multiple geographies.
Does that contribute to double-digit growth?
I think, you know, we've been growing biologicals in the double digits for several years. We would expect to continue doing that for quite some time.
Great. Then, you know, you made the acquisition of BioPhero, talked about new pheromones with BioPhero, you wanna get to $1 billion by 2030. Can you just tell us about that acquisition? How is that going so far?
Look, we were super excited to buy BioPhero. We'd been an investor in BioPhero for a year and a half through our FMC Ventures arm. We were an early-stage investor in the company. We got very familiar with the technology and with the team, and at the right time said, "You know, this is a product we really wanna not just invest in, we wanna own." Fundamentally what BioPhero has is a biological process to produce pheromones. Pheromones are naturally occurring chemicals that insects and other organisms use to signal and communicate with each other. For insects, it's a part of identifying where each other are for mating.
Pheromones are used today in agriculture, typically in very high-value crops, tree fruits, for example, where you will use a synthetically produced pheromone sprayed out in the field, and it confuses the insects to where they can't find each other. If they can't find each other, they can't mate, and there are fewer bugs in the next generation. It's not as an immediate pest, reduction of insect pressure as you get with a, with an insecticide, but over the life cycle of a crop and the multiple generations of insects that you have in a growing season, it reduces substantially the amount of bugs that are there. BioPhero's biggest innovation is they've got a biological process to produce these pheromones. Uses a genetically modified yeast that is modified so it produces this chemistry. It's a biological production technique.
You concentrate it through a fermentation after you've grown these particular yeasts. Now you have a much lower cost point than traditional chemical synthesis. That's where we think, you know, rather than the addressable market being, you know, just fruits and vegetables, specialty crops, now you're at a cost point where you can take it to broad row crops and where it can be a very good complement to traditional insecticides like Granaxanor. We have very, very high expectations. We would expect to get our first large-scale commercial product in the market either late 2024, early 2025, and then a very steep ramp in the second half of the decade, to where, you know, it's a billion-dollar revenue potential for us by the end of the decade. The integration itself is going great. It's a small company, very technology-driven.
They just happen to be 5 mi down the road from our European innovation center, which is the base of our Biologicals business globally. We've relocated the team and have them together. The R&D team has been incredibly productive. When we acquired the company, there were five pheromones in the pipeline. There are now nine. We're already accelerating the number of pheromones that they identified and where we're being able to do the early-stage preparation for production. At this point, I'd say we're just very, very pleased with progress with BioPhero. Very, very excited about the potential there.
You're saying these bio-pheromones are more environmentally friendly, less environmental footprint, and they're cheaper?
And-
How much cheaper are they?
It's an order of magnitude cheaper than the conventional synthetic market.
Right.
The Pheromones.
How much of the sort of growth in insecticides coming from row crops, your corn, soybean, versus niche crops?
Mm-hmm.
fruits and vegetables and others. Can you sort of-
Sure.
-break that down between the two?
Yeah. Look, big picture for FMC, one of the things that is different about FMC versus many of our peer companies, we have a broader crop participation. Certainly, we do participate in corn and soybean. Soybean is about 20% of our sales. Corn is a little less than 10. But we are substantially lower in our participation in corn and soybean than many of our peer companies, particularly those that have big seed businesses. Historically, we've had big participation in specialty crops, fruits, vegetables, sugarcane, cotton, coffee, rice, other crops beyond soy and corn. That said, you know, we've been growing across all of those crops.
In the past several years, and in several key markets, including the U.S. and Brazil, we have made investments in selling resources to go out and expand our market access in soybean and cotton. In Brazil, in particular, we have people out there working very closely with large distributors and large cooperatives, helping their teams explain the benefits of how to best use our products to growers and pulling through demand. We've actually seen very substantial share gain in soybean and corn in those markets. We are still a small player relative to some of the other guys. Again, we still have the benefit of that broader crop balance, but it has been a very strong growth area for us. Insecticides certainly are a key part of that.
It's also been a very good opportunity for us in herbicides, where we're a little less, we're underrepresented relative to the market, but we are making substantial investments in new product development.
Right. We talk a lot about diamides and biologicals. How is the legacy FMC business doing, which is what you're talking about...
Yeah.
....herbicides and all that. How fast can that grow?
That business is actually doing quite well. Just to connect a few dots, you know, we grew top line last year for the total company 15%. Diamides grew in the mid-to-high single digits. Therefore, the rest of the portfolio, which, you know, legacy is probably a misnomer at this point. It's including the long-time FMC active ingredients, as well as some new active ingredients that we've introduced, new formulations that we've been developing using those active ingredients. They are growing strongly. Herbicides are a part of this, including bixlozone, the new active ingredient, new herbicide for wheat and other cereals that we introduced two years ago in Australia and are rolling out in Argentina this year. We'll continue rolling around the world as we move through the rest of the decade.
Certainly that's a part of the growth, the new products as well. Even in insecticides, some long-time FMC powerhouse ingredients like bifenthrin, we have some very good value-added formulations that compete very well and that have grown very, very well, and not just in the last year, but over the past several. I'd say the, you know, while with good cause, there's a lot of focus on the diamide portfolio at FMC, and there should be. You know, it's a little more than 1/3 of our total sales. It's more than that of our profit. It's been a big driver of our success. It's not everything. The core remaining portfolio, particularly the new products, whether it's new active ingredients and new formulations, are really driving strong growth and helping maintain industry-leading profitability.
You guys are very good at these formulations, and I think that seems to be a driving force behind the sort of the old generic products to keep creating new formulations. Can you talk about your strength in formulations?
That's certainly been, from a historical FMC, a core competence. I think the synergy of putting together the legacy DuPont R&D organization, which is now really the guts of our R&D platform, with FMC's formulating capability, has just been very, very powerful. Unfortunately, our industry, it's slow to get new products to market.
Right.
It's just in the last two years, we've gotten the first real value-added formulations of diamides to market. Utilizing some of FMC's real expertise in developing value-added formulations, we're seeing great interest and great growth of Coragen MaX, which is a high concentration form of Rynaxypyr. It provides some real efficiency benefits to farmers. For Elevest, which is a dual formulation of Rynaxypyr with bifenthrin, gives you a nice balance of properties. Bifenthrin is very good at quickly killing bugs. You get what they call knockdown. You see visibly that you're killing the bugs that you see in the field, whereas Rynaxypyr is a bit slower, but it has a much longer sustained control. You get that both immediacy and sustained control.
That's the formulation.
That, and getting those two molecules to live together, not the easiest thing to do chemically. That's the secret sauce for FMC, is being able to figure out how to do that in a formulation. Seeds my two semesters of chemistry a really long time ago in terms of knowledge. You know, we have some really deep strength in those areas in the company.
Andrew, can you talk about your inventory levels around the world? I know there is a drought going on in Argentina and Southern Brazil, inventories may be high there as farmers are not spreading chemicals as much. Can you just talk about-
Yeah.
-where inventories are at your level, at the dealer level?
Yeah. I mean, certainly when we talk about inventories, you know, a lot of what the focus is on the inventory that's in the channel. You know, downstream from us and our direct customers, whether that be distributors or retailers or growers, depending on the market that we're in. You know, going around the world, let's say, you know, we'll start with Latin America because I think you highlighted, you know, one of the hot points. There was a drought and very dry conditions in Southern Brazil and Argentina at the beginning of the growing season in October, November. Some acreage was pulled out of production. There is some lost volume there. Because of that, there's a bit of channel inventory and something we're very conscious of and managing closely.
I would say there has been improvement in precipitation over the past months. Some of that business is just lost. You're not gonna pick it back up. Some of it may recover. Rest of Brazil is actually in pretty good shape, so it's really the southern part of Brazil and Argentina that are the hotspot. If I look at the rest of the Americas, the U.S. market and then Canada, you know, Canada is still a little early. In the U.S. market, there's a lot of product in the channel because there should be a lot of product in the channel. Planting season starts here in another four weeks or so. You need that product in place. You know, so for example, pre-emergent herbicides, which are, you know, an important product line for us. You put those down at or before planting.
That's now is the time to have that product in the channel. I think, you know, from our own estimation analysis, the levels of channel inventory are in line with the level of sales we've been having. Going around the rest of the world in Asia, you know, we, you know, Mark on the call in our most recent earnings call highlighted India. India's another place we have a little bit of a backup of channel inventory. Had three years in a row of sort of uneven or weak monsoons. I'm not a weather forecaster. I just, you know, I do know that at some point you revert to mean, so whether that's this year or next year. We went through a similar issue with Australia several years ago. We had a number of years of really pronounced drought.
Now they've sort of reversed the thread and it's a bit of flooding. I, you know, I think this year, you know, India, which is our third largest country, is not likely to be a big contributor to growth as we try to, you know, manage through that channel inventory. Europe, generally speaking, pretty good shape. There's a few spots in Southern Europe where there's some pretty hot and dry weather last year. There's a little bit of inventory in the channel, but it's not significant.
What I'm hearing is there is some, in some pockets there is inventory.
Yeah.
You're not concerned overall for the company.
No, no. I think we're managing. I think we're, we know where the issues are, and we're gonna manage it proactively.
Also, when you bought DuPont's business, you also got their lab scientists, R&D machine.
Absolutely.
You had plans of getting one active ingredient out every year out of your R&D pipeline. Your Isoflex come out. Can you just talk about what do you see in the next few years?
Look, I think we're trying to get to a pace where there's two stages in the R&D process. You know, in the earlier stage, which we call discovery, where you're really trying to identify molecules that have an interesting activity, that have an impact on a particular pest you're trying to control. Once you really get comfortable that there is some activity there and there's no obvious red flags around its safety, then you move into development, which is a much more resource-intensive time period, where you're doing all the toxicology work, you're doing field trials to prove efficacy, you do the development of formulations. That's where you spend the real money.
One of our goals has been to get one new molecule out of discovery into development every year, with the idea being, as you get into that rhythm, then you start spitting out a new molecule out of development into commercialization every year. We're currently still running at a 0.7- 0.8 kind of pace. We did have one molecule advance from discovery to development last year. Missed a year before, had one the year before that. We're getting to that rhythm, but we're not quite at the pace we wanna be at yet. But it is accelerating, and it is substantially faster than the historical pace. But we are seeing good things coming out of the pipeline. You know, we've introduced bixlozone, which is a cereal herbicide, and we, I mentioned earlier, introduced in Australia initially, now in Argentina.
We'll be taking it to other countries here over the next several years. We've introduced fluindapyr, a new fungicide. Fungicides are an area where we're significantly underrepresented in the market. That's been introduced in Paraguay and Argentina, and will next year be introduced in Brazil. Big expectations for that to continue to grow. It could be a $300 million-$400 million molecule for us over a several year period. Next in queue is a rice herbicide, tetraflupyrolimet, which is not quite yet ready. We're still working registration processes. Among, one of the many things COVID disrupted was getting things through registration processes in countries, so it's taking a bit longer than we would like. But that should be coming to market hopefully in 2025. That one's gonna be a very interesting one.
It's the first new herbicide for use in rice applications in decades. It is a truly selective herbicide, meaning that it does not impact the target, the crop itself. In particular can take out rice itself as a grass, and you're trying to control grassy weeds within a grass crop. Then Isoflex-- not, excuse me, tetraflupyrolimet, excuse me, has the ability to do that. Very, very exciting chemistry. Just gotta get it through regulatory processes.
Okay. My, my next question, Andrew, is on Precision Ag. You have a Precision Ag app that you give to farmers for free.
Yes.
That's a cost to you, but a benefit to the grower. Can you talk about that? Does Precision Ag mean that maybe farmers use less of your chemistry because they know precisely where to apply, when to apply?
Let's... All right, we'll talk first about Arc. Arc is our own proprietary platform that helps our growers manage insect pressure. Uses traps, sensors in the field to monitor and not only number and quantity of pests, but identify what kind of pests are in your field. Through some predictive algorithms, many of which are patented, help you identify the best time to apply and how to best apply throughout the field to get the maximum control. That product, that app has been incredibly popular. Now, it's now on over 20 million acres, and we have $200 million of sales that are related to it. As you pointed out, we don't charge for it. It's a part of building engagement with the grower.
What we can observe, and we have very good data on, growers that use Arc spend more with us, buy additional products, not just insecticides, and stay with us more, stay with us longer. Multiple seasons that we've had out, Arc out in the marketplace. We're gonna continue investing in Arc. We'll continue to expand it across other countries and crops. We think that's a good part of using technology and data to help growers have better impact from the inputs they're using. Now, it speaks to the second part of your question, which is the, you know, the dreaded volume question. I say it somewhat facetiously 'cause I'm not worried about volume. I'm worried about value.
We have had multiple experiences with taking, through formulation technology, taking a chemistry and reducing significantly the volume that's required to get the desired output. Yet you're extracting the same if not more value from the product. That really illustrates for me and highlights for me the idea that, look, there are certain opportunities for using precision application that would reduce the amount of particularly non-selective herbicides that are used. The whole idea with a glyphosate is that the crop that's genetically modified is the only thing that survives being sprayed with glyphosate. You spray everything with it. If you're able to more selectively spray it, yeah, you're gonna reduce substantially volumes. We don't play in that field. The herbicides we sell are selective herbicides that only target the weed, don't target the actual crop that's being grown.
You already apply that only in the areas where you have weeds that are showing up that are resistant to other herbicides, 'cause selective herbicides are more expensive than non-selective herbicides. It's not to say that there can't be impacts from precision application. There probably will be. I think we have already significant experience that suggests you focus on delivering value for the farmer, you can get paid for it, and the volume is really not the driving variable. We don't have a big manufacturing infrastructure backward integrated, you know, into other things that we need to feed and absorb fixed costs from that needs to drive volume. We're worried about driving value. The way we drive value, same way when we think about value-added formulation, how we create a product that has better impact for the farmer.
Great. Now, my next two questions are about CapEx and R&D.
Yep.
CapEx is going up. Can you talk to us about where that is going? Also same thing about R&D and where do you think R&D expenses are going?
Sure. CapEx was about $119 million last year. We're guiding in the midpoint about $160 million this year. It's a meaningful tick up in CapEx. I do wanna put that into context. We're guiding revenue of $6.15 billion this year with $160 million in CapEx. This is not a fixed asset intensive business. It is a step-up. Where is that going? It's going into capacity for active ingredient manufacturing, for formulations capacity to support our growth. It's going to further diversify our supply base, where we're investing in active ingredient manufacturing capacity in India, in the U.S., and in Europe, particularly in Denmark, to complement the historical sourcing that we have in China. It's a part of balance. It's a part of continuing to support the growth.
I think that's probably the right kind of range for the next several years. We've got a, you know, new active ingredients we're bringing to the market, that as we bring them to market, we need to bring new capacity to manufacture them.
Sure.
I don't see a huge acceleration from that level.
How big was China before?
So, uh-
... the COVID thing you are active?
Yeah.
What is it now as a percentage?
If you trace China back in our supply chain, not just from direct purchases, but also two or three layers back into you know, where some, our suppliers are buying from suppliers..
Right. Right.
... are buying from China. you know, China in 2012 was probably 90%. as of today, it's about 40%. If you look at the chemical industry broadly, especially in fine chemicals, you know this better than I, the portion of the installed capacity of the world, and especially in fine chemicals, you're not gonna get much below 40%.
Mm-hmm.
You might give yourself the illusion of that you're not. If you really trace back...
Sure
... you're gonna be dependent on China to a degree. It's not about not being dependent on China. It's about making sure you have multiple sources, particularly in a highly regulated industry like ours, where your registration is tied to the source point that the active ingredient is produced in. If you don't have that active ingredient registered at multiple production sites and you have a disruption anywhere, you can be short out of supply for a while. We've, over a 10-year period, really worked to build resilience in our supply chain, both by updating registrations to have multiple source points, by developing multiple suppliers. You give up a little bit in purchasing economics, but you get a tremendous upside in resilience.
It's something that really paid off well for us through the pandemic and all the disruptions that we've had there. It's not cost neutral, but it does allow you, particularly in very high margin products like ours, to have continuity of supply and availability of material.
How big is China as a market for you?
China is in our top 20 but at the bottom end. It's probably $100 million-ish in revenue. As an end market for sales, it's not a big market for us. The Chinese domestic market is largely generic. It is not a place where our differentiated products get as much value in the marketplace. As a sourcing point, more important.
Right. About R&D? Let's go back to R&D.
R&D, you know, we spend a pretty significant amount of money on R&D, a little over $300 million last year. You know, this year, we expect R&D spending to grow a little bit faster than sales and trend back up to about a 6% of sales level. Percentage of sales probably not the best. It's not the only way of thinking about R&D spending. The way we really are building up that spending is looking at the projects in the pipeline and what it's gonna take to keep advancing them. As I said, like, we have 1 molecule this year when we moved out of the early stage discovery into the development process. That's where you start really spending money.
You're doing field studies, you're doing toxicology studies, you're doing large-scale trials that start to burn up a lot of money, right? There's a little step up as that next molecule moves into the development process. It's still at a level that's comparable, if not below, what our peers spend. crop chemistry is a little less R&D intensive than seeds. We don't have the same heavier load that most of our seed-based competitors seem to have. you know, I think just for people, you know, looking at structure of our P&L, 6-ish% R&D is probably the right place for the next couple of years.
My last question to you, and then we'll take questions from the audience, is on M&A pipeline.
Mm-hmm.
You've relied on M&A consistently. What are you looking for? Is it biologicals? Is it, you know, geographies that you're targeting? How is your M&A funnel looking like?
Look, I think for us right now, you know, our company and its configuration exists because of antitrust divestitures from the last wave of consolidation in the top tier of crop chemistry. Don't an immediate net wave of large scale consolidation. The real M&A is really driven around technology. You could describe it as augmenting our internal R&D efforts. Where we've spent money on M&A, we bought out our development partner in fluindapyr a few years ago. This year we bought BioPhero, which we were speaking about earlier. Earlier stage technology, potentially game-breaking, game-changing technology. We're looking at a lot of things in the biological space, which tend to be smaller companies. You know, it's 10s and 20s and 50s of million-dollar kind of deals, not $100s of millions of dollars of deals.
I think you should expect we will continue to be active looking at technology and even further early stage through our FMC Ventures group. As I mentioned, BioPhero was initially an equity investment that we eventually ended up buying the rest of the stake out of. You know, we've made investments in peptides, in robotics and drone technology, most recently in an agri-fintech in Brazil, looking at bringing different sources of working capital financing into growers in Brazil. Those kinds of places, smaller amounts. It should not consume all of our free cash flow, not transformative. Part of the challenge of Biologicals, it is a very fragmented space. There aren't a lot of big things to go out there and buy.
Great. With that, let me stop here and take any questions from the audience.
Quickly, you mentioned the expansion and capacity that you guys were doing, and I think you answered this.
Yeah.
In terms of the inputs there, are any as you guys expand, are any exclusive to you guys? It sounds like you have multiple sources there, but just in terms of potential bottlenecks going forward.
Yeah. Looking back to the intermediates and raw materials that we need to feed those manufacturing, new manufacturing capacity, some of it is, you know, we'll do long-term partner or supply agreements. Some of it is, it's a mix of spot and long term. I think to your broader point, we're very, very careful to make sure we're not sole sourced on any critical material.
Mm-hmm. Any other questions? Well, if not, I have one more question for you, which is a question we're asking all the companies at this conference.
Oh, no.
What are the top two or three innovations, mega trends or structural changes affecting your company in the next five years? May not be within the company from outside, but what are the two or three mega trends?
Mm-hmm.
That you see?
Look, I think trying, the biggest one is one that's been around for a while but is getting, you know, different viewpoints on it and different highlight now. We're in a world that has a growing population and a growing need for output from agriculture. How do you increase that yield with having as minimal adverse impact as you can, right? That's where bringing more sustainable chemistries, whether they're synthetics like the Rynaxypyr and Cyazypyr, or Biologicals like pheromones, and other biofungicides and bioinsecticides, bringing products that help drive yield, increase productivity of agriculture with less adverse impact. That's the key theme impacting our industry.
Great. Well, if there are no questions, I wanna thank you, Andrew.
One shameless plug, November, mid-November of this year, we'll be holding an investor day at our headquarters in Philadelphia. We're in the fifth year of our first five-year plan as a focused ag company. First time in my career in the chemical industry we've ever made it to the fifth year of a five-year plan. We're very excited to share with you what is currently a work in process of our next long-range plan. Look for a save the date shortly, but mid-November in Philadelphia. We'd love to see you there.
Great.
Thanks, PJ.
Andrew, thank you. Excellent.