It's a pleasure for me to host FMC for this next session. I have CEO and CFO of the team up here. Mark Douglas, he's been with FMC since 2010. As far as I know, he's always run the ag business for FMC. It's what FMC is now. Prior to that, he had a two-decade career at Rohm and Haas. Also up here is Andrew Sandifer, also joined FMC in 2010. He joined to lead M&A for the company. Also prior to 2010, he was with Rohm and Haas. Quality company. I worked at one of their manufacturing plants 30 years ago, so I have very high regard for Rohm and Haas, and these two guys certainly came out of that, so.
Thank you.
Good to have you here.
Right.
Lot going on in ag these days, but maybe, Mark, why don't you give us some high-level view on your outlook for 2023, you know, positives, concerns, anything that you would like to highlight just up front, and we'll drill in from there.
Sure. Look, I think basically we're bullish on the ag market as we look at 2023, and probably as we stretch out into 2024 as well. You know, the fundamentals are all good for agriculture, whether it's food security, whether it's the use of alternate fuels, everything is moving in a direction of greater demand for agriculture. Greater demand means greater yield, greater productivity, and that's where a company like FMC brings the technology to improve that yield. For us, we see that backdrop as being positive.
Weather plays an important part in agriculture. We always say that. The weather is never good in agriculture. It's always bad somewhere in the world. The reality is, it's becoming more frequent, and those dislocations of weather are having an impact on soft commodity prices, on yields. We have to now factor that into our thinking as we think about the markets going forward. Overall, fundamentally bullish for the markets in agriculture.
Since you brought up bad weather, certainly, Argentina and Southern Brazil are in the grips of yet another drought, and this one's really bad. What's your level of concern about your own business in that area? Does it meaningfully affect demand for your products?
Yeah. I mean, we talked about this in the February earnings call. We saw it in Q4. We said we would probably see it going forward into Q1, and we are. I mean, Argentina is very dry. Southern Brazil is dry. That's gonna have an impact on yields. Obviously, it's gonna have an impact on commodity prices. It's something we're watching. Now, you contrast that to other parts of the world.
Here we are getting ready in the northern hemisphere for the U.S. and European seasons. Everything is looking very good in those markets. From a U.S. perspective, we're expecting a good run into the spring, weather-wise, especially in the Midwest. California has water for the first time in a few years, that bodes well for the niche and specialty crops. Almonds being a good example of that.
Europe is gearing up for a good season. We expect cereals to be strong. It's a little warm still in the south, so southern Spain, Italy, Greece, but the rest of Europe's looking good. You know, you always have these contrasts between areas that have an issue, such as the south of Latin America, but the U.S. and Europe gearing up for a good start to the season, I think.
In the area that, like Argentina, where there could be weak demand, is it so much of a risk that you might have to, you know, reverse some sales in that channel or to lower that? I remember that happening a few years back.
What normally happens in those situations, and we're facing that in India right now, where we and the rest of the industry have channel inventory in India because of bad weather, rice crops being lower. What you do is you reduce your sales into the channel going forward, and you consume the inventory as fast as possible. That is what is probably likely to happen in Argentina.
Okay. While we're talking about demand, I'd sure like to get your views on the cost structure and perhaps, you know, price-cost balance, and thus margins. How would you view the outlook for 2023 with respect of potential moderating or even deflation in costs?
Certainly. I think we've touched on this a little bit in the earnings call as well. Look, I think we're beginning to see the turn, right? In Q2, at the end of Q2 of 2021, we saw a real wave of cost inflation coming at us. We didn't know how big it was, but we could see it coming across the horizon. We've really lived through that over the past six quarters with pretty massive cost inflation. I think over $460 million worth of cost headwinds at EBITDA last year. In a year, we generated $1.4 billion in EBITDA. It was a heck of a headwind. As we look to 2023, we still see input cost inflation in the H1 .
The material that we have in inventory, the materials we buy, you know, we tend to turn inventory a little less than twice a year. The things that we're, you know, buying and then going through our manufacturing process and actually being formulated and packaged out and sold to customers takes about a six-month lag. In that time period, what we have right now, what we're selling right now, there is year-on-year cost inflation. The costs in the products we're selling right now are higher than the year before.
What we are seeing, though, purchase orders we're placing now as we're negotiating with suppliers for material that will flow through and through production and inventory and be sold in Q3 and Q4, we are starting to see lower prices. We are starting to see a shift and a swing in that input cost line, such that, you know, we are anticipating input costs to be a tailwind in the H2 of 2023. Now, for the full year, it's net-net still a small headwind, but with continued price increases, that price cost relationship is favorable throughout the year, and we see importantly, a return to margin expansion in the H2 of the year.
We can model that reversal of that 400 in COGS in 2024?
Maybe.
Oh.
I mean, we didn't get here overnight, and we're not gonna get out of it overnight. I think 2023 in the H2 we'll make good progress, as Andrew said. I think we'll make even more progress in 2024. Time out on that, whether it's by the end of 2024 that we recover it all or whether it's into 2025, we've got to go through a couple of seasons to work that through. The intent is to get absolutely back what we had. Our peak EBITDA margins were 27% in Q2, 2020.
Yeah, trailing twelve Mark basis.
Yeah. We intend to get that back. Right now, we're at the 24.5 range, give or take. The intent is to get FMC back to 27% EBITDA margin as we come out the back end of this cycle.
if you recover that cost and that cost deflates, wouldn't your margin be higher than that?
That cost head, as we talk about, is total cost. Right. $460 million included growth in SG&A and R&D.
Okay.
-spending, not just COGS. The headwind in 2022, about 70% of that was at COGS line.
Okay.
Certainly I think to your point, Steve, there is a great opportunity for margin expansion as we continue raising price and holding price and raw material and input costs start to ease. Yeah, again, it won't. That swing doesn't happen till the H2, so we only get a small benefit in this year. In 2024, there should be significant margin expansion. Whether or not you can recoup all of that in one season, I think to Mark's point, you know, it took several seasons to get here. I think it'll take several seasons to get back out.
How about price? Do you see risk that you will have to give back any of the pricing that you're getting? I raise it because of some dialogue we had with ADAMA and Nufarm a month or so ago. Clearly, they have a different platform than you do, but they were expecting lower pricing in the H2 of this year.
Yeah, we're not expecting lower pricing in the H2 of the year. I think there is a big difference in how some companies sell generic products that are very commoditized versus the more specialty, value-add products that a company like FMC develops and sells. Pricing for us is always based upon value to grower.
That value is still there, and we intend to maintain price as we go through the year. It doesn't mean to say there won't be pockets of movement. Obviously, there will be in a market of this size. Generally speaking, we intend to continue to raise price as we go through the year, and then the intent is to hold that price, obviously, to get back to the margins we wanna be at.
Okay. I'd like to drill into diamides a little bit. Where are we at in, you know, the patent expiry outlook over the next two years and, you know, your preparedness for that, given your existing contracts with some of the really big crop chemical peers?
Yeah. Listen, we talked about the diamides a lot, obviously. We get a lot of questions about the patent estate. The patent estate is a matrix of just over 1,000 patents for the 2 molecules. The base composition of matter patents for an Rynaxypyr started to come off August 2022. In some countries, we have runway in others. Same thing for Cyazypyr, which is the smaller molecule.
The initial ones start to come off in August 2023, again, spread out after that. There are also significant patents related to the whole process of manufacturing. These molecules are 15 or 16 synthetic steps, we have many of those steps patented. I think it's worth noting today that the only legal material that's available is from FMC, even though the original patent has come off. Why is that?
Because of the strength of the rest of the patent portfolio. We have great contracts with 5 of the other major players in the industry and about 50 contracts with other smaller players in different regions of the world. They are very successful. About 40% of our total diamide sales go through those contracts.
We already have a strong network out there of people who are selling diamides, so in some cases competing with us in different markets, in many cases expanding the market by having routes to market or formulations that we don't have. That was the intent of the plan. That's what we're seeing today. We expect the diamide growth to continue. Last year, diamides grew about 7%. I think in the mid to long term, you're gonna see them continue to grow in the mid-single digit.
I think that's an important part of the algorithm of growth. They have been around for almost 20 years now. We talk about them as being new molecules, new technology, and they are, but they're coming off the end of their patent. You should expect at some point towards the end of this decade, you will see generic manufacturing.
That is what happens. We're ready for that. We anticipate it, and we'll continue to invest in the diamides. I think the other important asset that we have is our whole formulation strategy around bringing new products to market. We have replaced some of the older ones that were probably more simple in nature with very sophisticated formulations, some of them of extremely high concentration, so you can use smaller amounts.
Those are completely new, patented in some cases. They won't be able to be repeated by generics. There's a whole different mismatch of how patents work, how you go to market, who you partner with. It's pretty sophisticated so far bearing very, very good results.
I recall you have a couple legal battles in India for some generic product. What's the status of those patent infringement cases?
Yeah. They, there's a couple of cases in India that we recently won, a couple of cases in China as well. It's interesting. When we bought the assets in 2018, there was already illegal material being sold in China way back in 2018. That continues today. It's unfortunately a facet of the Chinese industry that many companies will not respect patents, and they go and make illegal materials. It's not as if we're not used to competing with products out there that are of inferior quality, but they are illegal, and we will enforce our patents all over the world.
Having contracts with five big peers, does that effectively preclude them from sourcing generic material from the Chinese in those out years?
Yes. It does. The way the contracts are structured, a number of the contracts run through the end of the decade, at which point we'll either renegotiate contracts or they will go and source from somebody else, assuming that there is legal material available. We anticipated that. I mean, at the end of the day, it is a competitive market, and we all compete. You know, the contracts will run their course, and we'll see where we get to.
Mid-single-digit growth at the end of the decade, does that take into consideration intense regulatory pressure on other insecticides out there, like the neonics and...?
Yeah. It's a.
-organophosphates?
Yeah. It's a good point, Steve. You think of the diamides today, they're just north of $2 billion in size, two molecules. The insecticide market today is about $16 billion. Now, the diamides cannot deal with all the pests that are out there, so you're always going to need a mixture of insecticides, and we have them ourselves. We do believe that in certain cases, neonics being one of them, organophosphates being another one, carbamates, that the diamides can continue to take share. I think one facet of our strategy is to go and get registrations on new crops and geographies where we don't currently sell the diamides.
That's part of that growth algorithm that keeps the molecule moving. I do also think you've just gotta look at the law of sheer scale. There are very few molecules of this size. They really are some of the largest molecules out there. You know, eventually, growth is going to slow down. It's still very healthy. I don't mind having a mid-single digit growth on $2 billion of revenue. It's a healthy business to have.
Let's talk a little about what's coming. Your pipeline, you are moving more and more into biologicals, maybe a couple questions on that.
Sure.
What's coming that you're really particularly excited about as, you know, new active ingredient? Is that best developed in-house, or is that more efficiently developed outside and partnered?
Yeah. The pipeline that we have has about 35 molecules in it today. That's a combination of the classical synthetic molecules as well as the brand-new biologicals. When I look at that pipeline, the next generation of products to come, we've just launched last year or the year before, a new cereal herbicide, that was in Australia, that now moves to Argentina in the coming year, and then by 2024, we're gonna launch in Europe. That's a big move for us in Europe because cereals is the biggest market for a brand new herbicide in that space. It's brand new space for us, so that's real growth in Europe.
No herbicide-tolerant genetics.
Correct.
Yeah.
The next one is a fungicide that we just launched called fluindapyr. That product is going into Argentina, into Paraguay as its first launch, will then move through the Americas and parts of Asia. The next one after that is at the end of 2024, early 2025. It's called Dodhylex, and that is a brand-new grass herbicide for rice. For the non-technical people among you, of which I count myself, rice is a grass. We're gonna kill grass in a crop that is a grass without harming the rice. That is brand new technology. You can imagine in Asia, that is gonna be a big market for us. That comes at the end of 2024, beginning of 2025, assuming registrations go as planned.
Following that, we have 2 more herbicides that come in 2026 and 2027 and a new insecticide that comes at the end of the decade. You take all that into consideration. If you think of last year, we had $600 million of brand new revenue that came from products launched in the last five years. In 2021, that was about $340 million. Jumping to this year, we expect that $600 million to grow to about $720 million, $730 million. What does it mean? It means the pipeline of products that are coming out of discovery and development, as well as new formulations in the regions, are becoming a much more important part of the overall portfolio. That's very healthy for the growth of the company.
I would say the other piece of that that you can't see yet we know is there, we're getting a very interesting mix uplift in terms of margin. It's just been swamped by the sheer scale of the inflation that we've had coming at us. Once that starts to abate, we will have margin uplift because of the way the mix is moving with the new products, which are more profitable than older products in the portfolio.
What about this BioPhero that you acquired? What's the potential for this?
Yeah. Listen, it's a very exciting technology which is producing pheromones from essentially fermentation of modified yeast. What does that mean? It means you have a cost base that is substantially lower than the synthetic route for producing pheromones. Why is that important? Pheromones today are used as mating disruption in a lot of specialty crops because they're expensive. We're gonna produce it at a much lower cost point. We want to introduce those pheromones into the row crop area, so soybeans, corn, cereals around the world. That will allow us to use less synthetic products in combination with pheromones.
Not only do you have a completely new disruptive technology in row crops, but the sustainable benefits are obviously there from reducing the synthetic loading on row crops. We have said that we believe this could be a billion-dollar business by the end of the decade. Those are the numbers that we're sticking with right now. When we bought the business, we had five new pheromones in development. Today, that number is nine. The accelerated pace of R&D in that new business is really something to see. We're very excited about where the pheromones can go.
Does that potentially put some of your existing insecticides at risk, or could they work synergistically?
They do work synergistically. That's the idea. The way to think of this is you would spray an insecticide, then you would spray or use the pheromones to mating disrupt. The next population is lower. You can use another insecticide at a lower amount, spray pheromones again, the population gets reduced. You're going through a curve of reducing populations, therefore reducing amounts of product.
Do these pheromones have to be put like in a box to catch or to attract the males? Is that how it works?
What happens is, in today's world, in specialty crops, they're used as a dispenser. You will get a puff of pheromones. Just to put this in perspective for you, for an acre on a row crop, we probably need 1 gram. It's a tiny amount of chemical that basically means that the males and females can't get together, no mating, lower amount of insects. We intend to use drones on large scale acres. We're not gonna use dispensers, we're gonna use drones in special formulations to put the pheromone out in the field.
Interesting. Okay, how about biologicals? What do you see as the opportunity for that? Is that still early days, or are you thinking that there's some applications where it could really be efficacious by itself?
10 years ago, we invested in biologicals. That was our first start. We created a plant health business. I would have said 10 years ago, I thought it was early days. Today, we have a plant health business that's about $300 million in size, growing north of 20% at above average EBITDA margins. About $150 million of the $300 million is real biologicals. That business is growing much faster than 20%. We have a view of getting to the biological and the plant health business to be $500 million-$600 million by 2025, and then continue the acceleration. Overall for the industry, you could say we're still in the very early days.
As real research gets applied to these segments, much more is known about how biologicals work, the different types of biologicals. We're investing through FMC Ventures into the use of peptides as pesticides, which has never been done before. We invested in a company called Micropep in France, who have some very, very interesting technology. We have a relationship with Novozymes on enzymes for use as pesticides. There's a long way to go in understanding microbiological activity in different areas. I would say early stages of the real research here.
Okay. Andrew, maybe jumping over to you.
Sure.
How does the higher interest rate environment affecting you guys?
Yeah, look, I think it's a pretty substantial step up in interest expense from 2022 to 2023 that we're managing through. Look, we have a working capital-intensive business. We use a lot of short-term financing commercial paper, in particular, to finance working capital, very seasonal financing need. It makes sense to use that kind of financing. It exposes you, unfortunately, though, when you have this kind of structural shift in interest rates, to a pretty big headwind. We have a $50 million+ year-on-year headwind in interest expense this year. It's a bit of a drag on earnings growth. First time in five years that our earnings are growing more slowly than our EBITDA. That is not the long-term expectation.
I think as, you know, without making profound prognostications of what the Fed is or isn't gonna do, at some point, this tightening cycle will top off and will start easing. Certainly, you know, the step from 2023 to 2024, I would expect to be much more modest. I, you know, I think we'll manage that. I think we're being very cautious to manage across a number of different metrics, not just interest expense, but looking at the impact on cash flow, thinking about how we manage the balance sheet through that cycle as well.
How about free cash flow? Was this inflationary challenge you guys dealt with last year that, clearly that was meaningful for you. Do you expect that free cash flow to conversion to improve?
I think we're seeing, we're seeing a nice step up from 2022 to 2023. you know, we certainly were disappointed with our free cash flow results in 2022, but it really was the flow-through of inflation through working capital. Unfortunately, the last, the last thing to see easing is your receivables, 'cause as we continue to raise price and grow revenue, the receivables continue to grow. Certainly in 2023, you know, we are seeing still healthy growth, you know, guiding to a midpoint of 6% revenue growth, but a deceleration from 15% revenue growth in 2022. Growth in working capital, particularly receivables, becomes less of a use of cash in 2023 than it was in 2022.
We'll see cash conversion creep back up to 65% on a rolling basis, which is, I think, the way we prefer to think about it. It's at 67% over a three-year rolling horizon. We'd like to get it into the 70s. We've done it before. We think the right place for this business is in the 70% range. It's not 100% because we do have working capital. If we grow, we grow working capital. Now, we are not a particularly fixed capital-intensive business.
We have less than $1 billion in PPE, and about $2 billion in working capital. That 70%, yeah, 70%-80% free cash flow really is a, is a function of if we grow, we have to use some cash to fund the growth and working capital. We have reasonably modest fixed capital investment. We do pay some ongoing legacy liabilities from our history as a, you know, prior to becoming a focused ag company, being a bit more diversified, having some old liabilities. Relatively stable, but it's about a $75 million drain on cash flow every year.
Anybody wanna jump in here with a question? Up here, please. Excuse me. Excuse me.
Thank you very much. Couple of questions. The first, just because you mentioned these liabilities sitting on $50 million-$75 million a year, For how many more years will you have to take this charge, firstly? And the second, just a little bit on your guidance. You gave a nice range, in line, I guess, with the historical targets you have. But when we think kind of about some of the moving parts of your assumptions, including high single-digit price, it looks to me that, you know, the best case EBITDA should be much higher when we put the numbers in the model.
Why don't I take the easy part, then I'll hand the hard part off to you, Mark. How about that? On the legacy liabilities, I think you should assume that they stay in the $60 million-$90 million range for the foreseeable future. We are doing lots of things to try to fix them in terms of the expense and reduce variability, but they're not fundamentally going away. They become less of a drag on free cash conversion as we grow the earnings of the company. Regarding the guidance, I'll make a quick comment, then hand it to Mark.
You know, our guidance for you for pricing is mid-single digits for the full year, and the Q1 , we expect to be in high single digits. I think certainly, you know, the dynamic of where we guide in that range, you know, reflects, you know, what we, what we can see today, the visibility we have at this time of year. You know, it's still very strong growth at 6% top line, 8% EBITDA. Hand it over to Mark on the rest of the guidance. He just said exactly what I would have said.
Maybe one last one. I've spent a lot of time crossing the Corn Belt area and met with a lot of retailers. When I have asked them about, you know, who they, who they get their crop chemicals from, almost always FMC is mentioned. You compete with some big competitors that also sell seed, and you don't. My question for you, just really conceptually, is how do you stay so relevant in a market that is where you have seed and crop chemical bundling? You know, our dialogue with ADAMA made that very clear. It's very tough to get into the U.S. market.
I would say technology is key because of, because of a simple reason. The people that are selling seeds and chemicals don't necessarily sell the chemicals to the same people they sell seeds to. They compete in an open market. They're very different markets. For us, we're bringing technology that enhances yield and productivity.
We're agnostic to whose seeds somebody buys, whether it's row crops, whether it's specialty crops, no matter where it is in the world. We offer flexibility, and I think that is incredibly important. Not everybody wants to buy a bundled package. They want optionality of technology. If we're bringing something new, whether it's a new herbicide, a new insecticide, or a biofungicide, people want access to that. We've been told by our customers that they do not see the fact that we don't have seeds as a liability.
They see it as something that is positive for them because we are truly independent. We don't care. I think that's something that really adds value, plus the fact that we're a pretty agile company. We can move quickly with technology, and we can move quickly into new spaces. That's what we do. I think that's highly valued by our customers, not just in North America, but you can go around the world. You know, we're north of $6 billion in revenue, truly global. That has to tell you something that there is a model that works.
Very good. We're out of time, guys. Join me in thanking Andrew and Mark for their presentation.
Thank you.
Thank you.