Materials Conference. We got a great two-day program here today across a wide range of sectors in the space. My name is Adam Samuelson. I'm the agribusiness and packaging equity research analyst here at Goldman. I'm happy to kick things off with FMC and Andrew Sandifer, who is their Chief Financial Officer. Just a quick compliance note before we get going, because this is the first session of the day, that we are required to make certain disclosures in public appearances about Goldman Sachs' relationships with companies that we discuss. The disclosures relate to investment banking relationships, compensation received, or 1% or more ownership. We're prepared to read aloud disclosures for any issuer upon request. These disclosures are available in our most recent reports available to you as clients on our firm portal.
You should also note that the views stated by non-Goldman Sachs personnel do not necessarily reflect those of Goldman Sachs. With all that fun stuff out of the way, let's talk crop chemicals. Andrew, thank you, thank you for joining us today.
My pleasure.
Maybe to kick off, just to level set for the audience, you guys reported your first quarter earnings last week. You actually raised, you must have raised your outlook for the year. Can you maybe talk about just what you're seeing in the marketplace on the demand side, on price cost, and kinda how your view of the market and your own performance has, actually your confidence on the year has increased, relative to where you were three months ago.
Sure. Thanks, Adam. Morning, everybody. Thanks for joining us bright and early for getting started with a two-day conference. Look, we reported last week earnings that were, you know, EBITDA was about $7 million above the midpoint of our guidance range, with EPS as well above midpoint of guidance range. Revenue was a bit lighter than what we had guided, but overall a strong quarter. I think, you know, we think about what's going on in our space, you know, another demonstration of our ability to deliver earnings as guided and predicted despite market conditions. That's been very much a hallmark of FMC, particularly the last five years, in our current iteration as a focused agricultural sciences company.
In the quarter itself, you know, a bit of revenue softness. Two key spots, drought in South and Southern Brazil and Argentina, was a driver certainly in the lower volumes in the quarter, as was some lower volumes in the cereal herbicides markets in Europe. I'd say, you know, low growth in Asia was expected, and a very, very strong growth in North America also expected. I think generally the quarter largely as expected. I'd say the real surprise was a bit of softness in some of the core European markets, which I would attribute to both falling crop prices for cereals, and also a little bit of hesitancy in the channel there around the channel inventory levels and stocking. In general, I'd say, you know, overall a solid quarter.
You know, we outperformed our guidance. We carried a little bit more than that through in a raise of guidance for the full- year, in part because, you know, we do feel confident in our ability to deliver, you know, at the midpoint of our guidance range, $1.53 billion in EBITDA for 2023, with about $6.15 billion in revenue. What's changed? You know, I think our guidance and our outlook for the year had always been predicated on growth more balanced between price and volume than in previous years, with price being a strong contributor. Mid-single digit pricing for the year, a bit stronger than that in the first half, a little less than that in the second half.
Complemented by continued volume growth, basically independent of what market conditions are. You know, we've been a steady compounding, you know, growing 5%-7%, actually a little bit above 7% compounded for five years now, irrespective of what the growth of the market has been in each year. 'Cause it's really been driven by technology penetration, by new products, and to a lesser degree and more recent degree, by some investments we've made in expanding our market access, by putting more people on the ground, agronomists, marketing salespeople, to help people understand how, help growers in particular understand how best to utilize our products. That's starting to really pull through some demand.
The confidence that we have looking forward for the rest of the year has nothing to do with the market and has everything to do with the product portfolio that we have, the organizations that we've built to go and support that product portfolio. I'd say certainly on the profitability basis, it's also the visibility that we have to cost, and that may be something we wanna put down a bit more on.
Sure. No, I wanna come back to that. Maybe just staying on the overall market first.
On that demand side, as we think about, maybe first just the channel inventories is always a common kinda topic of discussion for you, given the working capital and lead times that are involved in your sector. How do we where do you see channel inventories today, both coming out of the season in South America and going into the season in the Northern Hemisphere, and the key kind of things you're watching to assess the demand later in the year?
Sure. Look, I'd say there's a couple hotspots around the world, but generally we're pretty comfortable with channel inventory overall around the world. Places where we have some backup of channel inventory. Southern Brazil and Argentina, where there was a drought and it was, it was a pretty, the consumption of crop chemicals was down a bit this year for the, for the season that's wrapping up. Certainly there's a little bit of channel inventory there. We've seen a little bit of channel inventory again in cereal herbicides in Europe and the core European countries. And one we've talked about extensively, you know, after three poor monsoon seasons in a row in India, you know, we do have some channel inventory of insecticides in India.
All of that was known coming into the year, and a part of our thinking about the way the year would evolve. Now, that's balanced by, you know, very, very strong market conditions in North America, and quite honestly, on almost all markets, favorable grower economics. You know, while crop prices may have eased a bit, fertilizer prices, which are a much bigger input cost for most growers than crop chemistry, have eased even more. The farmer P&L is actually pretty solid right now. We see in-demand for crop protection products being very, very healthy, just, you know, despite where there might be a little bit of channel inventory in different spots.
Got it. As you think about the balance of the year and some of the kind of puts and takes between volume kinda outperformance and maybe volumes market-wise being a little softer, you would be watching Europe cereals, the success of the Indian monsoon. What are the other ones that are maybe more top of mind from a demand perspective that would impact kind of your thinking later in the year?
Sure. I think certainly, you know, as we look ahead in Latin America, for example, we're finishing up the second season now in Latin America. Next real growing season doesn't start till October, right? Implicit and built into our guidance is an assumption of more normal weather in Latin America in the second half. Certainly, you know, watching how the weather evolves through their winter and into the beginning of the next growing season would be a key factor. India monsoon, certainly a more successful monsoon will help with consumption and help clear the channel there. And we'll see how the weather in Europe works out.
Again, you know, I think a lot of the driver of success this year for FMC will really be, you know, the continued uptake of new products or products introduced in the last five years.
Yeah. Maybe let's touch on that because while you actually kind of tempered your overall look at the market f or this year, you actually increased your view on revenue from new products and kind of the product vitality does seem to actually getting better at the company. Talk about where that's already exceeded expectations this year and kind of the confidence that can continue to build and maybe the margin implications of that?
Sure. Look, I think we've had very good traction over the past several years. Growing the sales from products introduced and, you know, the metric we'll typically look at is over the last five years. We have a long product introduction cycle, as you know, with the registration process and the rollout around the world country by country. Looking at that five-year horizon gives us a good view of the vitality of the portfolio. In 2021, we had about $400 million in sales from products launched in the last five years. It jumped up to $600 million in 2022. This year we're expecting it to be well above $800 million. It's a significant growth. That's important for a couple of reasons.
Obviously it's growth of new products, which are typically on average higher margins than our median or average margin for the total company. It helps, you know, bring new conversations with the grower and bring new products. Again, the independent of what overall market conditions might be, if you have a better performing product, farmers will gravitate to it. That's certainly been a part of how we've been able to, again, sustain growth over the past several years.
Yeah. Just definitionally, when you talk about new products in the last five years, that's really not new active ingredients. That's purely new or in large part, new formulations of different active ingredients together that you already have in the portfolio.
Yeah.
New registrations in different countries on different crops. It's an important distinction.
It's all of the above. You know, FMC has always been very strong in developing value-added formulations that bring additional functionality to the grower. Certainly a big chunk of that new product introduction we're talking about are new formulations. Altacor eVo, Coragen MaX, which are high concentration formulations of Rynaxypyr and improve ease of use and efficacy for growers. Elevest, which is a combination of Rynaxypyr and bifenthrin, which has a very good balance of very quick knockdown of insects with bifenthrin and very long sustained control for Rynaxypyr. We also embedded in those numbers is fluindapyr, which is a new fungicide that we just started introducing in crop markets this year under the brand name Onsuva in Brazil.
We've got bixlozone, which was a herbicide for cereals that we introduced in Australia two years ago. Will start being introduced in Latin America this year and in Europe in the next two years. It is truly a combination of new formulations of existing active ingredients. You know, some of those, to be clear, many of those are patented, and, you know, bring different technology and allow you to bring significant value to the grower. As well as new active ingredients, which are fundamentally new chemistry to bring to the marketplace. I think we have a really good balance between those two right now.
Got it. No, that's helpful. Maybe the last one on the, on the top line, and this is gonna be a pivot onto the cost and the margin side but maybe thinking about price and the contribution that is giving to your full-year outlook. Can you just maybe detail the pricing assumptions over the balance of the year? In the guidance as you've laid it out, is there an assumption of incremental pricing actions in any geography that you actually need to achieve later in the year to hit that total target?
Sure. We're anticipating mid-single-digit price increase for the full-year. We had 7% price increase in the first quarter, and the second quarter will be a little less than that but still stronger than the full-year, such that we get about two-thirds of the pricing increase that we've, you know, built into the guidance in the first half. You know, low single digits in the second half, mid-high single digits in the first half pricing. If you think seasonally about how that works in terms of what are the markets that are in active selling season and that timing, right? In the third, fourth quarter, we'll be going into the new growing season in Brazil, in Latin America, as well as into the stocking season in Q4 in North America.
There is some assumption of some smaller, more modest price increases in both of those geographies as we go into the second half. Now, to be clear, we had very, very strong price increases in both last year and Q4, so it's a big comp. But the reality is, you know, Look, we sell highly specialized products. You know, I've been in a number of different specialty businesses over my career, not just in agriculture. When you have rapid inflation as a specialty producer, you're almost always end up acting as a bit of a shock absorber for your customers on, and helping them smooth out some of that inflation.
We have not fully offset the cumulative gap between price and cost. We will continue raising prices in the second half of this year, well into next year, until we recoup that and rebuild margins. We will always do it in a more strategic way. You know, we've never done across the board price increases, we've never done formulaic price increases, we've never done surcharges.
What we've done is taken more value through pricing on products that create very strong value for growers, where we have differentiation, such that, you know, given the nature of our supply chain and the complex, very fragmented buy of inputs that we have, there's really no way for our customers or channel partners to understand our costs other than trying to build it up item by item, which is what we do, or waiting till we report our earnings and describe it for them. I, you know, look, I think as with any specialty business, we will catch back up on that price cost gap over time. I do think those prices are gonna be pretty sticky. You know, we're encouraged.
You know, I think you've seen across our peers some very strong price increases in the first quarter and over the past several quarters. I think people recognize you have to earn a fair return for your technology, even when you do serve as a bit of a shock absorber in the short term on inflationary shocks.
Maybe that's a good pivot onto the cost side because You know, one of the important things you said on the first quarter call was, "Hey, we've got a lot more visibility and confidence on the cost layout into the back half," certainly the third quarter, which year-on-year should flip to be a meaningful tailwind. Help us just think about the key buckets there that are more significant tailwinds and how reinvestment on the SG&A, on the R&D side, maybe you'd be getting funded with some of that cost savings.
Absolutely. When we publish bridges in our earnings and we talk about costs, we're talking about total costs. It's input costs as well as operating expenses, right? On the input cost line, the thing to hear are COGS. We still have in Q1 and Q2 cost headwinds. In Q3, we will see that reverse, where input costs will start becoming a tailwind. Now most significantly in Q3, you know, we had the all-time high cost headwind and quarterly cost headwind in Q3 of 2022. We had $169 million of cost headwind in that quarter. Just reversing that is a massive swing year-on-year in Q3.
Certainly expectation, you know, we might characterize our guidance and our earnings growth this year as being back half loaded, accurate, since we're essentially guiding to slightly above flat first half. But of that second half, it's strongly Q3 loaded, because of that strong reversal in input costs. Input costs for us. Biggest element of input costs are raw materials and intermediates used to make the active ingredients in our products. It's a really fragmented buy. Many of the materials are either bespoke or made for very few other uses. And the costs are driven a lot by supply-demand forces. During the peak of COVID disruption, a lot of our cost inflation really came down to availability at any cost of the key materials we needed to make our products.
I think as across many supply chains, you've seen the world improve. I'm cautious about using the word normalize, because bluntly, after three years of pandemic, I'm not sure what normal is anymore. Certainly the level of disruption has reduced substantially across many supply chains, and particularly for suppliers into our materials, there's much, much less disruption, which means not only do the base input costs to go into production go down, but the premium we were paying for availability from suppliers or having to fragment the buy over more suppliers rather than concentrating with a strategic supplier, has provided some pretty significant input cost relief.
Got it.
That I think is a factor as we go from first half to second half will be very significant as a swing to input cost being a tailwind. The counter to that is operating costs. We are continuing to invest in growing SG&A and R&D. Operating costs will continue to be a headwind throughout the year. What are we investing in? Well, in SG&A, it's in additional resources to go help growers understand how to better utilize our products. It's agronomic resources, it's marketing, field marketing people, technical support, people who work in concert with the distribution channel, and depending on the nature of the distribution in a specific country, to help growers really understand how to get the best impact from our products and to drive adoption of our products.
On the R&D side, it's continuing to fund the growth of our new product pipeline, whether it's new active ingredients or formulations. In 2023, there is a bit of a lumpy step-up. We acquired a company called BioPhero last year, which is a biological producer of pheromones for use in insect control applications. Basically all of its cost is essentially R&D. There's a step-up this year where we're digesting a bit, you know, moving to a different steady state level of R&D with the addition of BioPhero activity.
This year we're anticipating, you know, built into our guidance, is SG&A growing at or above the rate of sales, and R&D growing at 200 basis points faster than sales, which is very different from what that relationship has been over the past several years. Now in the first quarter, it didn't work out that way. Particularly as we got past midpoint of the quarter and we started seeing a little bit of weakness in two markets, we chose to defer some spending and control spending in SG&A, particularly a little more aggressively in the quarter. As you look at our financials, SG&A was actually down quarter-on-quarter in Q1.
You know, we still plan on continuing to ramp up those investments, but should there be any, you know, any further disturbance in the market or any weakness that we're not anticipating, you know, we have that as a lever to modulate. I think if you look at our performance through the past five years, and particularly going through the pandemic, you know, one thing we've demonstrated is our ability to move quickly to control costs if needed, to offset other forces. I, you know, I think that whole cost balance through the year, you know, net-net, you end up with a modest headwind for the full-year, but a tailwind in the second half.
Yeah. Okay. Maybe that's a good segue on to the more medium-term outlook.
You guys are going to have an Analyst Day later this year. You previously had five-year targets through 2023, mid-single-digit, kind of 5%-7% revenue growth, 7%-9% EBITDA. I'm not saying give those new long-term targets today. As we think about the next several years, is there anything that's meaningfully different in FMC's growth algorithm that we should be cognizant of given kind of the product pipeline that you have, the market outlets that you have today, and the business understanding today?
Well, certainly just, you know, gratuitous plug, we do have an Investor Day in mid-November in Philadelphia at our headquarters, a two block walk from 30th Street Station, a quick trot from the Acela if you'd like to come and join us. We will be giving both midterm and longer horizon targets. Unlike our last Investor Day where we gave a fixed five-year horizon, our intention is to give you a three-year horizon that we will update on a more frequent basis, as well as some decade-plus goals for the overall portfolio. I think the general themes, not to steal too much thunder because we are still in the process of defining all of these elements, been going through a pretty lengthy strategic planning process internally.
I think the general themes are gonna be a continuation of what you've heard from us in the last several years. You know, first and foremost, it's organic growth at a premium to the market regardless of what the market does, and that's because it's driven by technology. New product introduction, whether that's synthetic chemistry with new active ingredients, new formulations, or that's importantly with biologicals, including the pheromone acquisition I mentioned earlier, where, you know, there's a significant amount of growth in the next decade to come from those products. I think you'll continue to see very strong technology-driven growth. I think it's an organic growth story principally with some ability to complement that with technology driven smaller acquisitions.
I think you will continue to see us invest in expanding our market access in different geographies, allowing us to get closer to customer and help customers, help growers, and work with our distribution partners to help growers better understand how to take full advantage of our products. Now, I don't want to steal too much thunder, I think you should think that, you know, it's more evolution than revolution in terms of thinking about what the company can do. Fundamentally, we believe we're a long-term, strong organic growth compounding company, and we, you know, expect to maintain the highest EBITDA margins in the industry, which is what we've done for five years now.
Yeah. Just on that last point on the market access and expanding geographically, you're pretty balanced already globally.
Is there any, other than. Off the top of my head, I would say China, but there's probably unique competitive dynamics there.
Yeah.
Other than that, and maybe Russia with the geopolitical environment, other major agricultural regions where you think you are significantly under-indexed given the portfolio of the suite of products that you have today?
Well, I think it is a combination of geography and crop, right? 'Cause we are pretty distinctive factors about FMC, we are much more balanced both geographically and across crop mix than most of our major peers. There are pockets of opportunities for us to continue growing. For example, we've made significant inroads in soy and corn in Brazil. Now, we're still a relatively modest player, and it's not an outsized position, but we've had good growth and market share gain over the past three years in those markets. It is both country and crop where there's opportunities for us to improve market access. I would say geographically, though, you know, the one place that I think is underdeveloped is Africa.
Lots of challenges with accessing that market, but there, you know, we are looking at different ways that we can expand our participation. You know, we do participate today, not broadly, but in a select number of countries in Africa, that, you know, as you look for the next several decades, you know, I think the hope is and the opportunity there, that there's a substantial opportunity to expand agricultural productivity. You know, at its core, that's what our business is. We help farmers drive yield.
Okay. There, and there will be. If there are questions from the audience, there is a microphone that we can circulate. Happy to take them. I can keep going, if you wanna keep listening to me, but happy to open it up to the floor if anybody has questions. I will keep going. Maybe as we think about that long-term plan, your biggest business is a diamide insecticide franchise.
It's over 1/3 of your revenues. Has carried above average margins. It does have kind of a patent estate that is gradually rolling off over the next several years. How do we think about that patent estate rolling off and kind of competition and pricing kind of factoring into that medium-term growth and the confidence that you have?
Your company can not just grow sales, but EBITDA in that transition?
Absolutely. Absolutely. Look, diamides, we acquired the diamides from the former DuPont in November of 2017. In the time that we've owned them, we've more than doubled the sales of those products, grown it now to about a $2.1 billion franchise. We think that franchise continues growing and compounding in the mid-single digits through the rest of the decade. Some of the earliest patents, which are around the composition of matter of the fundamental active ingredient molecules, started rolling off last year. Despite that, there's not a single legal competitor in Rynaxypyr in the world today, that, you know, said differently, that isn't buying it from us. Now, there are illegal competitors and have been since before we bought the business.
There's been illegal material, particularly in China and India, always. There are no current legal entrants in either of those markets where the initial composition of matter patents have expired. That's in part because that's just the beginning of the story around the patent protections. We have patents on manufacturing processes. You know, the diamides are 15 and 16-step processes to produce a molecule. We have patents on many of those individual steps. We have patents on the composition of matter of many of the intermediates that are produced in those steps. Many of those intermediates have no other commercial use other than be made and further be refined into being Rynaxypyr or Cyazypyr. We have patents on formulations of products.
While we had a couple patents roll off last year, we also had a number of new patents granted, including for some value-added formulations of Rynaxypyr, some of the new product growth we were talking about earlier. The patent estate is not a static asset. It is something that we're continuing to invest in and we're continuing to renew. We have always presumed that over time there would be generic entry into this marketplace. That's one of the reasons why we so aggressively pursued partnerships. You know, we have partnerships with five major global players, along with 35+ local players, something north of 50 independent contracts, that where we supply Rynaxypyr to others, and then they go to market. We've had competition in the Rynaxypyr market the entire time we've been in the business.
The idea that, you know, new entrants from generic production are gonna change that dynamics, you know, certainly that will add different pressures, but it's not to say that there hasn't been price competition or feature competition among Rynaxypyr-based products. There has been for a long, long time. I think we've managed very aggressively that patent estate, the branding, the partnerships, continued innovation around those molecules. And while certainly, yes, we expect, you know, you're not gonna grow doubling every five years forever. Law of large numbers comes into play. We do see that the diamide family continuing to compound in that mid-single digit range through the rest of the decade, and continuing to grow profit dollars, not just growing revenue.
That's helpful. We got a couple minutes left. I'd be remiss hosting the CFO for a fireside chat if I didn't ask at least one question on cash flow.
Absolutely.
If I think about the business, you targeted a 70% free cash flow conversion. Yours is a lumpy business seasonally with working capital, so it's always hard to see that in any given period. Maybe why is 70% the right target for this business?
Yeah.
Given the working capital intensity that you have, what could you do over time to maybe push that boulder up the hill a bit more?
Look, free cash flow has actually been a very good news story for FMC over this horizon. You know, in 2018, we had free cash flow conversion from net income about 18%. You know, last year it was 55%, year before, it was 81%, right? We have demonstrated that this business can operate north of 70% free cash flow conversion on earnings. And our goal is on a rolling three-year basis to have cash flow conversion at above a 70% rate. Now we're running at the midpoint of guidance this year, we'll be at about a 67% conversion ratio on a rolling three-year basis.
Think about rolling three years just 'cause cash flow is lumpy, and we measure it at an arbitrary time slice, and you can have things that shift from one year to another. That three-year metric is something we think is important. Why is 70% + the right number? Unlike a lot of other material or chemical companies, we are not fixed asset intensive. We have less than $1 billion in PP&E to support $6.15 billion in sales. We are working capital intensive, and if we grow, we consume cash for working capital. Our goal is to consume less cash as we grow. If we are to grow, we will consume cash for working capital.
That in concert with some legacy liabilities from our former businesses we haven't been in in decades, that aren't growing, but are pretty much stable and a pretty recurring, stable drain on cash every year. They limit how high you can get that conversion. You know, the thought I'd leave with you on cash conversion, Adam, is simply, you know, in our business, the working capital is the reinvestment to grow much more so than fixed assets.
When you look at our return on invested capital, which is in the high teens, it's pretty high value reinvestment in the business, to be able to invest at a high teens return, and grow the business, compounding in the 5%- 7% range or slightly above over the past five years. 70% is the right kind of range. Could be as high as 80 in a given year. But that, again, if we're growing, we're gonna consume some working cash for working capital. But it's very, very high return, high value reinvestment.
Well, I think we're just about out of time, so I think we will leave it there. Andrew, I wanna thank you very much for joining us. Thank you, everyone, for joining.
Thank you.
Hope you enjoy the rest of the session.