FMC Corporation

Good morning and welcome to the fourth quarter 2022 Earnings Call for FMC Corporation. This event is being recorded and all participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's prepared remarks, there will be an opportunity to ask questions. To be placed in the Q&A queue, please press the star key, then one at any time. If you are using a speakerphone, please pick up your handset before pressing the keys. I'd now like to turn the conference over to Mr. Zach Zecchi, Director of Investor Relations for FMC Corporation. Please go ahead.

Thank you, Emily, and good morning, everyone. Welcome to FMC Corporation's fourth quarter earnings call. Joining me today are Mark Douglas, President and Chief Executive Officer, and Andrew Sandifer, Executive Vice President and Chief Financial Officer. Mark will review our fourth quarter and full year performance, as well as provide an outlook for full year 2023 and the first quarter. Andrew will provide an overview of select financial results. Following the prepared remarks, we will take questions. Our earnings release and today's slide presentation are available on our website, and the prepared remarks from today's discussion will be made available after the call. Let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our earnings release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based upon these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, free cash flow, net debt, and organic revenue growth, all of which are non-GAAP financial measures. Please note that as used in today's discussion, earnings means adjusted earnings and EBITDA means adjusted EBITDA. A reconciliation and definition of these terms, as well as other non-GAAP financial terms to which we may refer during today's conference call, are provided on our website. With that, I will now turn the call over to Mark.

Thank you, Zach, and good morning, everyone. FMC delivered record performance in the quarter, driven by a combination of robust volume growth and strong pricing actions. Sales of new products continued to accelerate. nearly doubling year over year and representing 11% of the total sales in the quarter. We continue to make investments in expanding our market access in key geographies, including the US and Brazil. Pricing actions in the quarter more than offset headwinds from both cost and FX, resulting in EBITDA margin expansion in excess of 40 basis points. This positive gap between price gains and headwinds from cost and FX is expected to continue as we move forward through 2023. Agricultural markets remain robust, with high commodity prices, increasing acreage for crops, and positive grower sentiment, providing a solid backdrop for FMC. Our Q4 results are detailed on slides 3, 4, and 5. Revenue was up 17% organically, EBITDA up 17%, and EPS up 12%. The US and Brazil were major contributors to the quarter's results, with volume and price driving the US business, while price and FX drove Brazil's results. Adjusted earnings were $2.37 per diluted share in the quarter, 7 cents above the midpoint of our guidance range, with this outperformance driven by higher EBITDA and lower than anticipated taxes. In North America, sales increased 35% year over year, driven by strong sentiment among growers and our distribution partners in the US for the upcoming season. Selected herbicides for soybeans and other crops, as well as fungicides for corn, grew rapidly in the quarter. We have made great progress in revitalizing our North American product portfolio, with almost 20% of the quarter's branded sales coming from products launched in the last five years. We've also invested in more sales and tech service resources, enabling us to reach more retailers to promote our newest technologies and expand our market access. In Latin America, sales increased 13% year-over-year and 9% organically, led by Brazil. Pricing actions, demand for our fungicides and selective herbicides, as well as our investments in market access drove results for the region. Our market access investments contributed to about 50% of the region's growth in the quarter. FX was also benefiting the quarter, driven by the strong VRL. However, dry weather negatively impacted corn and soy in southern Brazil and Argentina. Asia was flat versus the fourth quarter last year, and up 12% organically. Insecticides and selective herbicides led the growth in the region. Overwatch herbicide, which is based on Isoflex, the first active from our pipeline, continues to gain share on cereals in Australia. Almost 20% of branded sales in Asia came from products launched in the last five years. FX was a significant headwind in the quarter, offsetting the double-digit organic growth. EMEA was up 7% versus prior year and up 20% organically. In addition to strong pricing, results were driven by broad-based demand, especially for cereal herbicides. 13% of branded sales in the quarter came from products launched in the last five years, and sales of Siazabeer-based formulations almost doubled in the quarter. In our plant health business, biologicals grew double digits in the quarter, reflecting the strength of our portfolio. Overall, adjusted EBITDA for the fourth quarter was $432 million, an increase of 17% compared to the prior year period. resulting in EBITDA margin expansion in excess of 40 basis points. Average price increases of 8% contributed $109 million in the quarter and more than offset the cost and FX headwinds. Moving to slide 6 and FMC's full year 2022 results. We reported record $5.8 billion in revenue, which reflects a 15% increase on a reported basis and 18% organic growth. This is despite exiting our Russian business earlier in the year. More than $600 million in sales came from products launched in the last five years, growth of 50% over the previous year. And about $100 million came from products launched in 2022, continuing the multi-year trend of strong growth from new technologies. Diamides grew in the mid to high single digit range for the year. Adjusted EBITDA was $1.407 billion, an increase of 7% compared to 2021, despite $463 million in cost headwinds and $74 million in FX headwinds. Exiting Russia negatively impacted our EBITDA by approximately $25 million. The benefit from pricing actions in the year was $372 million. This was necessary to overcome the most significant input cost headwinds we have ever experienced. We believe input cost headwinds peaked in the third quarter and expect them to ease going forward. 2022 adjusted earnings were $7.41 per diluted share, an increase of 8% versus 2021. This increase was driven primarily by the EBITDA increase and lower share count, offset partially by higher interest expenses and taxes. In addition to these financial results, we also had other significant achievements in the year, as detailed on slides seven and eight. FMC continues to make substantial progress on our sustainability and net zero goals. For example, we reduced scope one and two greenhouse gas emissions at our operating sites by at least 2% in the last year, while at the same time delivering record growth. The consistent progress we have made on various ESG metrics was recognized by several raters that moved us up on their rankings in 2022. FMC now stands at or above industry average across these raters. In our plant health business, we launched 17 new biological products spread across all four regions, as well as two new micronutrient products. We also acquired Bioferro in 2022. As we've said before, Bioferro is a pioneer in biologically produced pheromone technology with a patented fermentation platform that enables significantly lower cost production compared to current standards. In Precision Ag, we continue to advance our ARC farm intelligence platform, FMC's proprietary mobile solution that helps farmers manage pest pressure through predictive modeling. ARC is now deployed across 20 million acres spanning over 20 countries, and we have found that growers who use ARC are tending to buy a broader range of products from FMC. Finally, our venture capital arm, FMC Ventures, continued to build its portfolio in 2022 with new collaborations and strategic investments in startups and early-stage companies working on new or disruptive technologies. These engagements, which support or augment our internal capabilities, span several technology segments, including robotics, drone technology, ag fintech, pathology detection, soil health, peptides and pheromones. As an example, in 2022, FMC Ventures increased its investment in MicroPep, a startup developing short natural peptide molecules that target and regulate plant genes and proteins. In addition to our equity investment, we entered into a strategic collaboration with MicroPep late last year to develop solutions to control herbicide-resistant weeds. FMC Ventures also invested in Trave, an ag fintech startup addressing working capital needs of growers in Brazil. Turning to slide 9, which provides the key market and cost dynamics underpinning our 2023 outlook. We expect crop commodity prices to remain robust and that growers around the world will continue to rely on our advanced technologies to deliver high yields while they combat erratic weather patterns. We expect the North American market to grow in the low single-digit range with an assumption of normal weather conditions. The Latin American market is believed to have grown significantly in 2022, primarily due to rapidly price increases in non-selective herbicides, a product segment in which FMC does not participate. In 2023, we expect the Latin American market to contract by mid-single digits, as some of those gains in non-selective herbicides reverse. Asian markets are expected to be flat to last year, And EMEA is expected to be up high single digits with improvements driven by increasing acres for cereals. Taking into account these regional market projections and in light of the very strong market growth in 2022, we expect the overall crop protection market will grow this year in the low single digit range on a US dollar basis. FMC's continued pricing actions, strong demand for our product portfolio, particularly our newest technologies, as well as farther market access gains are expected to provide solid support for FMC's top line to grow above the market rate. Costs are anticipated to remain a year-over-year headwind throughout the year. However, we are seeing deceleration of input cost inflation, and these costs are expected to become a year-over-year tailwind in the second half. We will continue to invest in R&D and SG&A to expand market access, grow our plant health business, deploy new technologies through precision ag, and develop new synthetic and biological products. Overall, we expect price increases to more than offset cost and FX headwinds, resulting in margin expansion in the second half of the year. Turning to slide 10 for our full year 2023 outlook, we expect the full year revenue in the range of $6.08 billion to $6.22 billion, representing a 6% growth at the midpoint compared to 2022. New launches and market access initiatives will drive volume growth with mid-single digit pricing expected for the full year. FX is expected to be a moderate headwind to top line results. Adjusted EBITDA is forecasted to be in the range of $1.48 billion to $1.56 billion, reflecting 8% year-over-year growth at the midpoint. Price is anticipated to be the primary driver of EBITDA growth in the year. with cost headwinds expected to be significantly lower than those experienced last year. Increases in the input cost portion of cost headwinds are anticipated to decelerate as the year progresses and become a year-over-year tailwind in the second half. We expect adjusted earnings of $7.20 to $8 per diluted share, representing a 3% increase at the midpoint, with EPS growth limited by higher interest and tax rates. This assumes a share count of approximately 126.5 million and does not factor in the benefit of any potential share repurchases in the year. Looking at the first quarter outlook on slide 10, we forecast revenue to be in the range of $1.41 billion to $1.45 billion, representing 6% growth at the midpoint compared to the first quarter of 2022. We are targeting mid to high single digit price increases of which much has already been implemented. Price is expected to be the primary driver of revenue growth in the quarter. FX is anticipated to be a headwind in the quarter. Adjusted EBITDA is forecasted to be in the range of $345 million to $365 million, flat versus the prior year period at the midpoint, mainly due to pricing gains being offset by expected cost headwinds. Volume gains are expected to be offset by FX-related headwinds. We expect adjusted earnings per diluted share to be in the range of $1.63 to $1.83, representing a decrease of 8% at the midpoint due to higher interest rates and taxes. This assumes a share count of approximately 126.5 million. Moving now to slide 12, I want to highlight some of the potential factors that could drive our results to either end of the guidance range. For the midpoint of our adjusted EBITDA guidance, we are assuming market growth in the low single-digit range and FMC achieving mid-single-digit price increases. Input costs headwinds are expected to continue decelerating and become a tailwind as the year progresses, while FX is expected to be a headwind throughout the year. With the resilience we've built into our supply chain, our base case assumes any minor disruptions are mitigated. Alternatively, if cost headwinds ease more rapidly If the market grows at a higher rate than forecasted and if we are able to realize high single-digit prices or FX has a lower impact, we could deliver results at the high end of our guidance range. Major supply disruptions of critical inputs or services are examples of factors that would drive results below the midpoint of the guidance range. With that, I'll now turn the call over to Andrew.

Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a 2% headwind to revenue in the fourth quarter, with weakness in Asian and European currencies, partially offset by strength of the Brazilian REI. For full year 2022, FX was a 3% headwind overall, with the most significant headwinds coming from the Euro, Turkish Lira, and Indian Rupee, offset in part by a strong Brazilian REI. Looking ahead to 2023, we see continued modest FX headwinds on the horizon. consistent with the initial outlook for 2023 we provided on the November call. For the first quarter of 2023, these headwinds are across a range of Asian and European currencies. Interest expense for the fourth quarter was $44.8 million, up $11.8 million versus the prior year period. Interest expense for full year 2022 was $151.8 million, up $20.7 million versus the prior year. rising U.S. interest rates for the primary driver of higher interest expense for both the quarter and the full year. Looking ahead to 2023, we expect full-year interest expense to be in the range of $200 to $210 million, an increase of more than $50 million at the midpoint versus 2022, driven primarily by higher U.S. interest rates. Our effective tax rate on adjusted earnings for full-year 2022 came in slightly better than anticipated at 13.7%, driven by a modest shift in mix of earnings across principal operating companies. The fourth quarter effective tax rate of 13.1% reflects the true up to the full year rate relative to the 14% rate that accrued through the third quarter. For 2023, we estimate that our tax rates should be in the range of 14 to 16%, with the increase driven by anticipated higher foreign earnings subject to U.S. GILTI tax versus 2022. Moving next to the balance sheet and liquidity. Gross debt at year end was slightly below $3.3 billion, down $285 million from the prior quarter. Gross debt to trailing 12-month EBITDA was 2.3 times at year end, while net debt to EBITDA was 2.0 times. On a full year average basis, gross debt to EBITDA was 2.6 times, while net debt to EBITDA was 2.3 times. Moving on to cash flow generation and deployment on slide 13. FMC generated free cash flow of $514 million in 2022, down 28% versus the prior year. Adjusted cash from operations was down nearly $250 million compared to the prior year. Growth in EBITDA and cash provided by non-working capital items were more than offset by cash used by working capital. Receivables net of rebates, vendor financing, and advanced payments were a major use of cash, driven by the inflationary impact on receivables of price increases to offset cost headlifts. Advanced payments from customers in North America were up somewhat, but grew at a rate much slower than revenue growth. Inventory was a use of cash with year-end inventory levels higher, as expected, given our anticipation of a strong northern hemisphere season in the first half of 2023 and the impact of inflation on inventory values. Accounts payable was a source of cash driven by cost inflation. Capital additions and other investing activities of $119 million were up $5 million compared with the prior year, with nearly half of the spending directed towards capacity expansion. Legacy and transformation was down substantially, with the decrease due entirely to proceeds from the disposition of an inactive site. Legacy and transformation would have been essentially flat year on year in the absence of these proceeds. Overall free cash flow conversion from adjusted earnings for 2022 was 55%, with rolling three-year average free cash flow conversion at 67%, slightly below our long-term goal for three-year average cash conversion of 70% or more, due to the inflationary impacts on working capital. With this free cash flow and a modest increase in net debt year-on-year, we deployed $566 million in 2022, with nearly $370 million returned to shareholders through $267 million in dividends and $100 million of share repurchases. The remainder of cash deployed in 2022 was used to acquire a biofarer and to make equity investments through F&C Ventures. With leverage levels through the year slightly above our targeted ranges, we chose not to repurchase additional shares following our third quarter earnings call. Looking ahead now to free cash flow generation and deployment for 2023 on slide 14. We are forecasting free cash flow of $530 to $720 million in 2023. of more than 20% year-on-year at the midpoint. Underlying this forecast is our expectation of adjusted cash from operations of $800 to $920 million, up $200 million at the midpoint, with the increase driven by growth in EBITDA and slower growth in working capital, resulting from lower sales growth and easing input cost inflation. This is partially offset by higher cash interest in taxes. We further expect to continue to modestly ramp up cash flow additions as we expand capacity to meet growing demand and to support new product introductions. Legacy and transformation cash flow is expected to be essentially flat at the midpoint after adjusting for the benefit from the disposal of the inactive site in 2022. With this guidance, we anticipate free cash flow conversion of 65% at the midpoint for 2023, a significant improvement from the 55% conversion last year. The rolling three-year average free cash flow conversion is expected to be 67%, just under our targeted conversion range of 70% or more. With interest rates substantially higher, we do not intend to utilize incremental borrowing capacity for cash deployment this year, so as to mitigate the impacts of higher interest expense on earnings and cash flow. Free cash flow will be used first to fund the dividend and approximately $290 million use of cash at the newly raised dividend per share authorized by our Board of Directors in December. Free cash flow will then be used to fund inorganic growth if attractive opportunities become available. Free cash flow remaining after any such investments will then be directed to share repurchases. Given the seasonal nature of our cash flow, any share repurchases will be weighted more heavily to the latter part of the year. That said, we do intend to repurchase in the first quarter, at a minimum, enough FMC shares to offset any dilution from share-based compensation. I must emphasize that this is not a permanent change in capital policy for FMC. Rather, this is temporary, as we adjust to structurally higher interest rates in the United States. Our intent here is to actively manage the impact of higher rates in 2023. Should interest rates ease, we would consider using incremental debt capacity to expand our pool of deployable cash. Finally, moving on to slide 15, let me put our free cash flow generation and deployment into perspective. Since launching F&C as a focused agricultural sciences company in 2018, we've made substantial improvements in free cash flow generation and free cash flow conversion from earnings. As you can see on the left-hand side of this page, we've improved three-year rolling average free cash flow conversion from adjusted earnings from 42% in 2020 to 67% at the midpoint of 2023 guidance. We've shown we can convert more than 70% of earnings to cash in a single year, as we did in 2021, and we are well on our way to our targeted 70% or more rolling three-year average cash conversions. Equally as important, we've been very balanced in how we've utilized this improved cash flow generation. Strongly rewarding shareholders with nearly $2 billion in cash returned over 2019 to 2022, split equally between share purchases and dividends, while fully funding our organic growth, as well as directing $268 million to inorganic growth investments, like our recent acquisition of BioFair. Overall, we feel this approach to cash deployment balances shareholder rewards over both the near and long-term horizon. With that, I'll hand the call back to Mark.

Thank you, Andrew. FMC delivered a record performance in 2022, despite facing the largest input cost inflation headwinds in the company's history. Robust volumes driven by our market access initiatives and the continued accelerated growth of new products, as well as strong pricing gains, helped overcome significant cost supply and FX challenges in the year. We expect the broader economy to be volatile in 2023. However, agricultural market fundamentals are expected to remain solid. FMC's pricing momentum continues, and we should benefit from the potential deflation in the broader industrial supply chains. We continue to invest in our technology portfolio of synthetics, biologicals, precision ag, and FMC ventures. Our expanding market access initiatives are resulting in increased profitable growth, and we intend to continue the pace of these investments across more countries. Overall, there are fewer disruptive factors that we see today compared to the same time period last year, and this strengthens our confidence in the narrow guidance range we have provided. We expect to deliver another year of strong and profitable growth in 2023. Finally, As we are now in the final year of our current strategic plan, we are planning to host an Investor Day at our global headquarters in Philadelphia this November. At that time, we will share details of our new strategic plan, and we look forward to seeing you here in person. We will, of course, announce the date for this Investor Day event soon.

Thank you, Emily. We will now take questions.

Thank you. We will now begin the question and answer session. To be placed in the queue, please press the star key, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question and one follow-up. If you have additional questions, you can jump back in the queue. To withdraw from the queue, please press star, then two. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Christopher Parkinson with Mizuho.

Please go ahead, Christopher.

Great. Thank you so much. It does look like you have some cost benefit built into just the midpoint of your EBITDA growth versus your projected revenues. I know you've been taking a prudent approach on the price cost in terms of the cost side and forecasting, but can you just talk a little bit more on how you see that progressing throughout the year, specifically in the second half? and even potentially how you think it progresses throughout the year, which would even have implications on the first half of 24. Thank you so much.

Yeah, thanks, Chris. So let me take a step back on that one and just talk a little bit about, you know, I mentioned in the script where we were last year versus where we are this year. You know, last year at this time, we had a wave coming at us of inflationary costs, and Truly, we did not understand the order of magnitude. We ended up with, what, $463 million of costs. At the beginning of the year, our forecast had nothing like that number. I would say this year, we're in exactly the reverse position. We see costs receding. We just don't know exactly how much that will be. We know it'll impact us in the second half of the year. And we have built what I would call a modest amount of cost reduction into the midpoint of our guidance. But what I really see is a timeline here that gets us through the end of this year and into early 2024 where costs do become a meaningful tailwind for us. We do expect to see margin expansion as we go through the second half of the year. We did talk about the fact that we will continue to invest in SG&A and R&D, and I'll have Andrew add a couple of comments here at the end on some details here. We are investing in those areas because Frankly, we are seeing profitable growth from those investments. Whether I think about the growth in Brazil or I think about the growth in the US or other parts of Asia, those investments are paying off very quickly in terms of how we gather new sales from new customers and new parts of the value chain. R&D is growing very simply because we're investing not only in our synthetic pipeline, and this year we moved another molecule from discovery into development, and we'll talk more about that in Invest Today. but we're also got a full year run rate of our bioferro investment in R&D, and we continue to invest in plant health and precision ag. So if you think about a growth rate of roughly 6% for the top line, you should expect SG&A to be growing pretty close to the 6%, and then R&D a little bit above that. That's how it will flow through the year. The input costs are higher in the first half, and you can see what we said about Q1. We still have high input costs. They're the legacy of what we bought in the the second half of last year. Those will abate as we go through the half. And then in the second half, we'll get that margin expansion. So I've seen some of the flash reports last night. Are we being conservative? I think we've been prudent. The world is still somewhat volatile. We all know that. But we are confident enough to say that we're already seeing the trend lines, same as we saw last year. The trend lines are there. We just don't quite know where we'll be. So when I talked about on the script, could we see areas where we'll have improvement? Yes, absolutely. So we'll see as we go forward. The May call will be an important call for us because we'll have a much better view on where we are with raw materials. Our pricing actions, we probably have about 50% of our price target for this year is simply a rollover from last year, just pure timing of when pricing was implemented. So we feel good about the pricing side. We're less sure about the cost side, but the trend line is there for it to get better as we go through the year. Andrew, do you want to add anything there?

Yeah, let me just reiterate and expand on a couple of your thoughts there, Mark. I think certainly input costs, you know, the cost of our hogs line, they are a significantly smaller headwind in 2023 than they were in 2022. As Mark described, they remain a headwind in the first half, but we anticipate them becoming a tailwind in the second half. We will have growth in SG&A and R&D spending on a dollar basis. You know, the SG&A should grow, as Mark described, generally in line with sales. R&D might grow a bit faster. All of this to support growth, you know, the addition of BioFarrow, the investments in our plant health platform. We have moved another active ingredient from discovery into development in our active ingredient pipeline. So that SG&A and R&D dollar spending will continue to be a cost headwind as we go through the year. That said, on a percentage of sales basis, SG&A will stay relatively flat, R&D expands slightly. But this is against the contrast where over the past four years, we've taken 300 basis points out of SG&A as a percentage of sales and over 100 basis points out of R&D as a percentage of sales. So while we might not get the same kind of leverage this year, more flat on SG&A and R&D as a percentage of sales, still a very, very competitive cost structure. The SG&A is more than 500 basis points lower than our nearest competitor. I think what you'll see through the year is that on a dollar EBITDA basis, SG&A and R&D continue to be a cost headwind. We will manage that carefully, as we always have, and we'll adjust if we need to as we progress through the year.

Very good. Thanks, Andrew.

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

Thank you, and good morning, everyone. Just want to touch on the pricing environment a little bit. I think I heard you say, Mark, that you've already got 50% in place just sort of from a rollover of last year. Of the other 50%, how much have you already gone out with for the first half versus I assume there's a fair amount that you need to go out with for the back half of the year? And just want to understand, you know, sort of what you're hearing from your channel partners in terms of continued receptivity for pricing at this point. Just thinking atmospherically, you know, a lot of headlines about we're all entering into a deflationary environment. We're seeing fertilizer prices come down and glyphosate prices come down. I know those are very different products versus what you sell, but just, you know, we are sort of pivoting out of, you know, the inflationary or price increase environment. So what, if any, change in feedback are you getting from your channel partners?

Yeah, thanks, Vincent. Well, listen, for pricing in the first half of the year, I mean, pretty much most of it, as I said, is already underway. The U.S. and Canada markets are active now. Europe is getting active right now. So those price increases are through. I think what you're referring to is probably in the fourth quarter as we roll into the Latin American market, where we will be. It's a valid question to ask. We don't know. We are planning price increases. At the end of the day, as Andrew just alluded to, input costs are still higher than they were last year. They are still increasing. They're just increasing at a much lower amount. Plus the fact that we're seeing significant labor cost inflation around the world, not only for SG&A, but within our manufacturing plants, etc. So for me, there is a cost environment that is still conducive to price increases. In Europe, you have high energy costs. Yes, they've come down off their peaks, but they're still meaningfully different to the average over the last few years. So we will continue to move price where we see fit. And of course, it's not a standard number around the world. We've talked about this before. It's different in different markets with different products. We continue to use that differentiation to move price. I think most of the value chains that we operate in really do see that inflationary environment. It's like any negotiation. They're always difficult. They're never easy. But overall, we are getting the price that we need to get to move us back to the EBITDA margins we want. You're right on the non-selective herbicides. You know, you can look at all the metrics. You see them coming down. They went up very quickly. They come down very quickly. They truly are commoditized. We're not seeing that sort of curve for the more specialty products where you're really selling value, not just on a cost basis through a contract. And that's a key differentiator for us. We don't have those non-selective herbicides. We don't operate in that type of environment.

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

Yeah, I think overall, when I look at the market, we do have a lower view over the overall market, but frankly, it's driven by Latin America. I mean, we still expect North America to have a reasonable growth despite how strong it was in the past year. There is very good sentiment in the North American market right now for the coming year. Europe, we expect to be up. We do see increase in cereal acres, which will be positive. So we see Europe up. Asia will be slightly flat. There has been some weather issues in India, Indonesia, and other parts of Southeast Asia, offset by a good market in Australia. I would say the reason we're going lower in the world today is because of Latin America. You know, there are independent numbers that suggest the Latin American market may have grown $6 billion today. in 2022. Now the vast majority of that is with non-selective herbicides, mainly price and then pricing for other active ingredients. So I do think that people need to watch that non-selective herbicide market in Brazil and Argentina. That's the reason we're calling for a lower overall market, but it really is focused in that particular segment, which is so large it does impact the rest. The rest of it is probably close to where we said it would be in November.

Okay, makes a lot of sense. Thanks so much.

Thank you.

The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead, Adam.

Adam, your line is open. Please proceed with your question. Adam Samuelson with Goldman Sachs, your line is open if you'd like to please proceed with your question.

Unfortunately, we're not receiving any audio from Adam's line, so we'll move on to our next question, which comes from Alexey Yefremov with KeyBank Capital Markets. Alexey, please go ahead.

uh thank you uh good morning everyone i just wanted to get back to your first quarter guidance uh you know you're you had margin expansion in in just reported fourth quarter 22 and and you're you're guiding to um some somewhat lower margins in in flat even die in the first quarter um in what way are are these quarters different could you just maybe provide some some of the bridge items for for q1

Yeah, Alexi, I'll just give you a quick high-level view, and then, Andrew, please give some color commentary here. Very different markets in the sense of where you're selling into. Latin America, Brazil, Argentina, huge markets in Q4. Still important in Q1, but to a lesser degree. And then obviously in Q1, the European business is starting to kick in, which is very different. So you have a very different geographic mix across the world for how we see and it's why we never ever talk about sequential quarters it's almost impossible to look at the business on that light but andrew if you want to make some comments on the revenue side and the uh the cost side yeah certainly i i think yes just echo mark's comment very very challenging to look our business on a sequential basis uh given the different regional country mix for for each quarter i think what we're looking at is you know solid

revenue growth and flat EBITDA entirely due to cost headwinds in the first quarter. We'll be close to offsetting them with price increases in the first quarter, but we don't really get to that positive price-cost comparison in any strong way until we get into the following quarter. So we do see some EBITDA margin dilution from Q1 2022 to Q1 2023, which I would suggest is a better comparison period to be looking at and trying to understand the Q1 performance. Again, it's really driven by getting past this last part of the wave of cost inflation. Now, as we move into the second half of the year, as input costs recede, as we're anticipating, that's when you start to really see margin improvement.

Thank you. As a follow-up, you mentioned diomides, mid-single-digit to high single-digit growth. Sir, if diomides dip to mid-to-high single-digit territory going forward over the next two, three years, is this the level of growth that you see as fairly normal, or could it be a little higher or lower?

I think we've said in the past, you know, sort of that mid-to-high single digits is where we think it'll pan out over time. I wouldn't change that view right now. We do continue to launch new diomide formulations around the world. And Syazapur is growing very nicely as we get the new registration. So I think the mid to high single digit is a perfectly good range, Alexei.

Thanks a lot.

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

Yeah, thanks for taking my question. I guess just to follow up on some of the Roz questions earlier, I mean, you've been pretty clear in the past. You have about six months of visibility to what you're buying. So, I mean, is this something where next quarter you'll have a stronger view on second half and would adjust your view kind of aligned with what you're seeing there? And just curious on some of the near-term dynamics as well, is China disruption impacting your view of what pricing can be? Does that have an impact there? And if you look at your buy now, Is there any way to frame what your raws would be doing year over year in the second half today?

Yeah, listen, it's exactly what I talked about. I think as we go through the second quarter, we're going to have a much better view of, A, what have we bought and what are we buying in the second quarter, which will inform our raw material view in the second half. So I think at the May call, we'll be giving a lot more detail in that area. China has not impacted us at all through this latest round of COVID. We did have closures of some supply, but over the last three to four years, we've built up a really robust process and network of how to manage disruptions. So we didn't see any significant disruptions through the Chinese New Year and through the COVID wave that they had to deal with. China opening up is It's positive for us in the sense that obviously we get raw materials from China. It's not a huge market for us from a sales perspective. It's a nice market, but it's not one of our leading growth markets. So for us, it's a bit of a neutral event, China opening up. We've managed raw material as well out of China. We've been distributing our manufacturing network over the last five years to other countries. That continues at a pace. So overall, I think we feel pretty good from a supply position standpoint right now.

Okay, thanks. And if I could just poke on your guide range on the high end specifically, I guess if I just take one of those variables and look at price and say you do high single digit versus mid single digit, you know, it's 150 million plus EBITDA upside. Your scenario is 40 million higher. And I guess you list a whole bunch of positives that could play out. So what are the negatives that we should be thinking about? Or is that higher upside potentially possible if you get more visibility there?

Well, I think on the negative side, you know, I highlighted supply disruptions, which is the obvious one. Weather disruptions would be the next one, I would say. Outside of that, it would be a lack of pricing or something in the world that creates an inflationary environment for raw materials. We don't see that today. As I said, you know, you look at the script, we mentioned three or four items that could move us from the midpoint to the upper end of the range. We mentioned basically one that would come the other way. So you can read into that what you will.

Got it.

Thank you.

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

Yes, thank you. The EPA recently came out with a draft risk assessment on siazapyr, and they concluded, they used the terminology, you know, likely to adversely affect. Is this meaningful in your view? Could there be impacts from this on you know, how Siazepir is used. And how would you compare this to other insecticides? Is this fairly normal or is this a concern?

Yeah, thanks, Steve. Top line, no, it's not a concern. And we've been following this for some time, as you can imagine. We're well clued into where the EPA is going. Siazepir is one of the, what we call the softer chemistries, much more targeted. We don't see the EPA guidance as any impact on our business. We continue to see Siazepra grow at quite a fast rate around the world. It has numerous attributes that are very targeted. There are lots of older pesticides and insecticides that are more broad in nature that Siazepra would take share from and is taking share from. So we don't see any impact to our business from this ruling.

Okay, thank you.

And I wanted to just drill into your outlook on the biologicals. It's clearly an area that you're devoting a lot of focus on. Do you find that it has the potential to be say synergistic with your synthetics is used in combination. I think that was a view that Kathy Sheldon had in prior years. Is that still the view that there's a synergy between the biologicals and synthetic chemistries?

Yeah, very much so. When you look at the growth rate of our biologicals, we talk about our plant health business this year will be pretty close to $300 million in size. Biologicals is now roughly half of that. It's getting close to be a $150 million business. It's growing in excess of 20% top line per year. And that growth is coming from not only the new products, but the synergistic effect that you talk about, which is twofold. First of all, we are developing products where biologicals and synthetics are in the same formulation. So you're getting different modes of action and different attributes from a biological and lowering the amount of synthetic material in the formulation. The second one is in spray programs, where you will replace a synthetic spray with a biological spray. So you are using a pure biological, but using it in a way that augments what the synthetics are doing, and once again, reduces the amount of synthetic material. So we see that growth coming from both aspects. We're launching, as I said, we launched 17 new products last year in the whole biological space. I continue to see that space growing rapidly. We are investing more in R&D. We are investing through ventures as well. So I think it's one of the bright spots in the portfolio in terms of overall growth and investment for the company.

Thank you.

Thank you.

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

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

Yeah, I think so. From a North American perspective, U.S. in particular, I think channel inventories are a little bit elevated right now, but that's normal. I would say as you enter the season that Most of retail and distribution is stocked up for a very good year. When I think of inventory levels for FMC compared to our sales on a percent basis, we're about the same place we were the year before. So I think it's pretty normal. Brazil and Argentina, different story. Forget the non-selectives that we just talked about. I think because of the conditions that we saw in the south of Brazil and in Argentina, it was very dry in the fourth quarter. I have no doubt that there is elevated channel inventories in that area. Would not be a surprise at all. If I run around the rest of the world, Europe, south of Europe is high again because of hangover from the last season. Northern Europe, pretty much okay, I think. In Asia, we've talked about India in the past. The weather didn't help again in 2022. So we see high channel inventories in India, which we'll be working through. Parts of Indonesia are similar, somewhat high. The rest of Asia is good. So overall, it's pretty much what you would expect. And don't forget, you know, people are focused on what happened in Brazil in terms of growth. The vast majority of the growth in Brazil was price. It wasn't volume. And that's important to recognize. So I think out of the weather patterns that we saw in the south and in Argentina, I think other parts of the country are fine.

That's helpful. And as a second question, if I may, you've owned BioFuro for roughly six months now. And so I was wondering if you could provide an update on what you've seen so far. I think when you bought it, you talked about potentially launching five new pheromones over the next three to five years with an eye toward a billion of sales by 2030. Maybe you could just provide an update as to how that aspect of the biologicals pipeline is going here.

Yeah, thank you. Great question. We're very happy with the acquisition we've made. In fact, I would say when I think of the key metrics that we're looking at, when we acquired the product, we had five new pheromones in the R&D pipeline. Today, that number is nine. So the accelerated rate of discovery and application of new pheromones is growing. We have made our first batches of products and moved them into the marketplace. So that was a major milestone. The company that we acquired Bioferro was just at the very beginning of making commercial scale quantities. We've now got past that. We are looking to invest in our own manufacturing. We do use some tall manufacturers today, but we're looking at balancing that out across the world. And I would say the trial work, we have substantial trial work around the world on the pheromones that we already have in place. And those trial works are going very well. So from my perspective, the integration has gone very well. But more importantly, I see an accelerated rate of discovery and development coming out of that pipeline, which is very encouraging.

Thanks, Mark.

Thank you.

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

Thanks. Good morning, everybody. First question on CapEx looks like for 23 bit of a step up 140 to 180 million versus 2022. Can you talk about where you're going to be adding capacity? What new products plant increase and where your operating rates are currently?

Andrew, why don't you talk about the overall CapEx?

Yeah, so we spent about just under 120 million in CapEx in 2022. We're stepping up at the midpoint to about 160, so about a good-sized increment in CapEx. A lot of that additional CapEx is to support manufacturing capacity for our new active ingredients. So we're expanding production of Isoflex, which is our cereal heiferside we introduced in Australia a couple years ago and are rolling out now more broadly around the world. We're expanding capacity for Fluendipir, the fungicide that we've introduced in a couple of key countries and starts becoming much more material as we get into the next several years. That CAPEX, I think, building on comments earlier, that CAPEX is largely directed in places outside of China. We're expanding capacity in Europe. We're expanding capacity in other parts of Asia. to complement the sourcing that we have today and the strong sourcing position that we have in China, helping to sort of balance that mix of sources that we have. And Mark, if you want to add anything to that.

Yeah, I would say a couple of things on top of what Andrew just added. Formulation capacity is also important. Having the active ingredient is one thing, but expanding your formulation capacity is also a key attribute of where we spend capital. It's nowhere near the same scale of capital, but it is important. And we have over the last year expanded capacity here in the U.S., in Europe, and as we go into 23, we're expanding our formulating capacity in Brazil as well. So you won't see it. It doesn't become so apparent in terms of overall dollars of capacity expansion, but that is an important attribute that we're focused on as well.

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

maybe if you could touch on those thanks yeah sure so I'll take the last one first listen I think once you apply something from a precision methodology you are going to de facto use less volume I think what gets mixed and what gets missed in this area is the discussion around volume of value where are you bringing value and how do you capture that value obviously there are some very large products used around the world especially non-selective herbicides to go back to that topic Sea and spray technology, which has been developed, is an area that is obviously of interest in that space. For us, when I look at how do we capture value from ARC, what are we doing? We're allowing the grower to very precisely time when they need to put the best products in the field to remove insects. That's great from a sustainability perspective. It is also something where you capture value from not only the products you're selling today, but the broader portfolio that you sell to those growers. I don't see anywhere in the world where we charge for ARK. We provide it free of charge. It is an SG&A expense, but it does have tremendous uplift in terms of the portfolio mix that you sell. And also, don't forget, it has another attribute. It defends business for us. We're defending on 20 million acres quite a few hundred million dollars of high-profit products that is very difficult to remove once somebody is using a process like that. That's a differentiator that we believe adds more value to the company than anything else. So we don't necessarily see it as a separate profit center, but we do see it as an important element of how we continue to grow the portfolio and defend the business we have today.

Great, thank you. Thank you.

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

Thanks for taking my question. When you think about maybe 24 and 25, you know, 23 and 22 have been impacted by FX as well as cost inflation. But when you look at 24 and 25, do you expect to get back onto a 7% to 9% EBITDA growth rate? And maybe if you could give us a little bit of what you're thinking strategy-wise longer term, Are you planning to have an investor day and maybe unveil the next three to five years of strategy and the biologicals be a bigger part of that? Or maybe you can just explain maybe some of the longer term strategy. Thanks.

Yeah, thanks for the question. As I just said in the script, we are going to have an investor day at the end of this year. We'll give the dates coming. I don't want to preempt that because there's a lot of work to do between now and then. but we will be giving a view of the future, both, I would say, within the near-term few years and then a longer-term aspirational goal for the company. It is important that we feel that we have that longer-term view as we drive the company forward. We've been very good in managing the company through the last five-year cycle. As Andrew has talked about before, we're pretty much right now above our metric for revenue, but right on the bottom line, of EBITDA despite well in excess of a billion dollars so far of costs. So I would say you just have to hold that question until we get to the end of the year. Thanks.

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

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