This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Good morning, everyone, and welcome to the fourth quarter 2023 earnings call for FMC Corporation. This event is being recorded and all participants are in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing 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 star key, then one at any time. If you are using a speakerphone, please pick up your headset before pressing the keys. I would now like to turn the conference over to Mr. Zach Zaki, Director of Investor Relations for FMC Corporation. Please go ahead.
spk01: Thank you, Bruno, 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 Sandefur, Executive Vice President and Chief Financial Officer. Mark will review our fourth quarter performance as well as provide an outlook for first quarter and full year 2024. Andrew will then 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, pre-cash flow, 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.
spk07: Thank you, Zach, and good morning, everyone. Details on our fourth quarter and full year 2023 results can be found on slides three through six. Market conditions and buyer behavior were pretty much as we had expected in the fourth quarter, with North America, EMEA, and Asia performing to our plan. The one exception was Latin America. In addition to the ongoing channel correction, our results were negatively impacted by drought conditions in Brazil. This was somewhat offset by stronger sales of our more differentiated products which are showing continued resilience despite market conditions. Branded diamide sales in the quarter were up 5%, with sales essentially flat or higher in all regions. While products launched in the last five years outperformed the overall portfolio and comprised 14% of our total revenue. The channel inventory correction is running its course at varying rates through the regions, and we're expecting this to continue through the first half of 2024. However, The underlying fundamentals of our business and this industry remain solid. Based on input from third party data and our own commercial teams, crop protection products continue to be applied at steady rates. Looking at fourth quarter sales on a regional level, North America revenue was down 37% versus prior year from lower volume as expected after a record Q4 in 2022. In Latin America, sales were down 38%, 41% excluding FX, due to lower volumes and low double-digit pricing decline. Branded diamides were essentially flat to the prior year, aided by the successful launch of Premier Star in Brazil. In addition, we had solid growth in Mexico, supported by higher sales of new products. Fourth-quarter sales in Asia were flat to prior year period, as growth in fungicides and biologicals effectively offset inventory destocking. particularly in India where channel inventory remains elevated. Branded diamide sales in the region were in line with the prior year period. Revenue in EMEA was down 24% or 22% lower excluding FX due to lower volume, mostly in herbicides. Price was a low to mid single digit benefit as the region continued to effectively implement price initiatives. Branded diamide sales experienced strong growth of more than 20% driven by the launches of Verimark in Spain and Prestacor in Turkey. Shifting to EBITDA, fourth quarter results were 41% lower than the prior year period, due primarily to lower sales. Costs were a strong tailwind, with contributions from lower input costs and diligent spending controlled in SG&A and R&D. Our full year 2023 results are listed on slide 6. EBITDA margin of nearly 22% was lower by approximately 240 basis points, but remains at industry-leading levels. This was accomplished through effective spend management and by holding or raising price in many geographies, especially in EMEA, which benefited from a price increase of low double digits for the year. We had substantial cost favorability for the year that was more than offset by the decline in sales volumes. Operating cost actions we took in the second half of 2023, in response to lower demand, delivered spend reductions well in excess of our $60 to $70 million target. Diamide sales for the full year were $1.8 billion, a decline of about 15%. However, sales of our branded diamides outperformed and were only down 7%. Across our portfolio, the new and more innovative products showed much greater resilience, even in a weak demand environment. NPI sales were down only 2% and made up a little over 13% of our total revenue, a new annual record, up from 10% in 2022. New products that drove this performance include a number of products in Brazil, such as Premio Star insecticide for soy, Boral Full and Stone herbicides for sugarcane and soy, and Onsuva fungicide for soy based on our new active ingredient, Fluindapyr. We also benefited from sales of Corrigin Max insecticide for canola, Altacor Evavo insecticide for fruits and vegetables, and Overwatch herbicide for cereals. Before we move the discussion to 2024, I would like to highlight some of the actions we have taken to enhance visibility into channel inventory. In Europe, we have put surveys in place in nine of our most important countries, uncovering hundreds of distributors and growers to gain insight into their inventory and especially of our products. In Asia, the larger countries, including India, are utilizing proprietary digital platforms to track inventory movement in real time across the channel as it passes from distributor to retailer and then to grower. In Mexico, we're in the final stages of integrating our systems with those of our retailers, which will also give us real time visibility of inventory sellouts. We are also piloting the same system and approach in Brazil. In Argentina, we have increased the frequency of data updates to our inventory tracking system. And finally, in the US, we're expanding our forecasting process beyond distributors to now include retailers. This expanded data set will then be incorporated into our demand forecasting processes. Moving to 2024 expectations, our full year guidance and commentary have been provided on slide 7 through 10. Having closed 2023 and established a starting point for 2024, we now expect revenue of $4.5 to $4.7 billion, an increase of 2.5% at the midpoint. We are anticipating the full year global market to be flat to down low single digits, as a softer first half is expected to be followed by the resumption of historical low single digit percent growth in the second half. The exception to this forecast is India, where we expect the market to be down for the full year, primarily due to channel inventory that the entire industry is carrying as a result of multiple seasons of unfavorable monsoons. Revenue growth for FMC in 2024 centers on volume growth led by NPI, which after posting sales of $590 million in 2023, we expect to grow by approximately $200 million in 2024. Almost half of the MPI growth is expected to come from products launched in 2024. Major products driving higher MPI sales include Corrigin Evo insecticide in Argentina and the US, Premio Star insecticide in Brazil, Overwatch herbicide in Australia, as well as Onsuva fungicide in Brazil and Argentina. We expect moderate pricing pressure in the year, with the largest impact in the first half. FX is also expected to be a minor headwind for the year. EBITDA is expected to be between $900 million and $1.05 billion, flat to 2023 at the midpoint. Growth of new products and benefits from our restructuring are expected to be offset by higher cost of inventory carried forward from the prior year, lower fixed cost absorption, and modest pricing pressure. The updated sales range is $150 million lower at the midpoint than our preliminary outlook presented in November. This range now reflects our actual 2023 results. The EBITDA range midpoint is $100 million lower than the preliminary outlook, mainly due to the reduced revenue expectation for 2024 and minor additional headwinds to gross margin. Adjusted earnings per share is expected to be between $3.23 and $4.41 per share. an increase of 1% at the midpoint from lower interest expense and DNA. At our November Investor Day, we acknowledged that although FMC had responded aggressively to market challenges in the second half of 2023, broader actions were needed to better align our business operations with the current realities in the marketplace. We are moving quickly on a global restructuring plan that will fundamentally transform our operating model, including how we're organized, where we operate, and the way we work. This is a multi-pronged approach that focuses on shorter-term expenses and longer-term structural costs as we restructure the operating model. These structural changes will position us for success as we move beyond 2024 and towards our 2026 goals. Slide 9 provides some additional detail on the actions we're taking. The global restructuring program is currently underway and will largely be completed in Brazil by the end of Q1. We have also made strong progress through a voluntary separation program in the US with preparations for additional workforce reductions company-wide. Combined, approximately 8% of our workforce will be impacted as we begin to consolidate roles and adjust team structures. Reducing indirect spend is another place where we've accelerated our actions on many critical areas, including non-essential spend and implementing a new strategic sourcing strategy. We already announced plans to sell our non-cropped global specialty solutions business. We have been preparing for this over the last two months and we are now ready to begin marketing. And lastly, we are examining the company's global and regional footprint. Our location strategy is a critical pillar in FMC's overall transformation and we've made good progress in our analysis so far. This includes examining office locations, manufacturing sites and research centers. Although this is a longer term work stream, there will be milestones that we will announce throughout this year. As a reminder, we expect this restructuring plan to result in $50 to $75 million of cost savings in 2024. It's important to note that these savings are net of inflationary and other cost headwinds that we're forecasting for the year. We expect $150 million of run rate savings by the end of 2025. We plan to complete this restructuring and deliver lower costs while continuing to prioritize investments in critical growth areas, such as our plant health business, further engagement with growers, and R&D, including new product innovation. Slide 10 lists some of the factors that would lead to varying EBITDA outcomes in our guidance range. The pace of recovery in the market is still the largest determinant factor. Our base assumption is that by mid-year, every region will have had one full growing season to manage inventory to desired levels, aided by steady application rates by growers. Recovery may vary by region, but we expect to see overall market growth in the second half of the year. Slide 11 provides our outlook for the first quarter. Expected revenue of $925 million to $1.075 billion is lower than the prior year by 26% at the midpoint. which is consistent with the revenue declines of the last three quarters. Volume is expected to be the primary driver of lower sales, with pricing pressure in Latin America and Asia a smaller secondary headwind. EBITDA guidance for the quarter is between $135 million and $165 million, with the decline versus prior year primarily driven by lower sales, as well as higher cost inventory carried forward from 2023. Taking into account the first quarter guidance that is lower than the prior year period, slide 12 provides a bridge for how we plan to achieve our full year guidance over the remaining quarters. The largest component of EBITDA growth over the second to fourth quarter period is higher sales volume of new products. Not only do these products have a strong track record of delivering sales in difficult market conditions, but they also contribute higher margins, which will positively impact mix. We expect NPI sales to grow by over $200 million in 2024, with the majority of the growth occurring after Q1. Market recovery in the second half will also contribute to EBITDA growth, as will benefits from our restructuring program, which will build through the year as initiatives are implemented. As you can see, we have built a plan primarily based upon elements we control and are not reliant on an outsized market recovery to achieve our guidance. With that, I'll now turn the call over to Andrew.
spk13: Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a 1% tailwind of revenue growth in the fourth quarter, with the strengthening of the Brazilian RIA, Mexican peso, and euro only partially offset by weakening of the Turkish lira. For full year 2023, FX was a 1% headwind overall, with the most significant headwinds coming from Asian and European currencies. offset in part by strong Brazilian RIA and Mexican peso. Looking ahead to 2024, we see continued minor FX headwinds on the horizon. For the first quarter of 2024, these headwinds stem primarily from the Turkish lira and Pakistani rupee, offset in part by a strengthening euro. Interest expense for the fourth quarter was $56.7 million, up $11.9 million versus the prior year period, driven by both higher interest rates and higher debt balances. Interest expense for full year 2023 was $237.2 million, up $85.4 million versus the prior year. Substantially higher U.S. interest rates were by far the largest driver of higher interest expense for the year, with higher balance as a secondary factor. Looking ahead to 2024, we expect full year interest expense to be in the range of $225 to $235 million, down slightly to the prior year driven by both expected interest rate reductions and lower borrowings as we reduce leverage through the year. Our effective tax rate on adjusted earnings for full year 2023 came in slightly better than anticipated at 14.5%, driven by a somewhat more favorable mix of earnings across principal operating companies than expected. The fourth quarter effective tax rate of 13.3% reflects the true up to the full year rate relative to the 15% rate accrued through the third quarter. As you may have noted from our earnings release schedules, there were two extraordinary events that impacted our GAAP provision for income taxes in the fourth quarter. First, our Swiss subsidiaries were granted new OECD Pillar 2 compliant tax incentives. As a result, we recorded deferred tax benefit assets of approximately $830 million net evaluation allowances to reflect the estimated future reductions in tax associated with these incentives. These incentives will allow FMC to maintain our advantage tax structure for at least 10 additional years, despite the implementation of Pillar 2. Second, changes in Brazilian tax law allowed us to release a long-standing valuation allowance position in Brazil, generating a tax benefit of approximately $220 million. Along with other items, this resulted in a GAAP income tax benefit of roughly $1.2 billion. For 2024, we estimate that our tax rate should be in the range of 14 to 17 percent. up one percentage point versus the prior year at the midpoint. The increase in midpoint and broader guidance range reflect uncertainty associated with changes in tax laws related to the implementation of Pillar 2 and transitionary impacts related to the new Swiss tax incentives. Moving next to the balance sheet and leverage. Gross debt at year end was approximately $4 billion, down $158 million from the prior quarter. Gross debt to trailing 12-month EBITDA was 4.0 times at year end, while net debt to EBITDA was 3.7 times. On a full-year average basis, gross debt to EBITDA was 3.6 times, while net debt to EBITDA was 3.2 times. Relative to our covenant, which measures leverage with a number of adjustments to both the numerator and denominator, leverage was 4.17 times as compared to a covenant of 6.5 times. As a reminder, our covered leverage limit was raised temporarily to 6.5 times through June 30th. It will step down to 6.0 times at September 30th, and again to 5.0 times at December 31st. We expect to have ample headroom under these limits as we progress through the year, with improving leverage as we shift to positive year-on-year EBITDA comparisons mid-year, and as we reduce debt through free cash flow generation and through proceeds from the anticipated divestiture of our global specialty solutions business. We expect covenant leverage to be below 3.5 times by year-end. We remain committed to returning our leverage to levels consistent with our targeted BBB-BAA2 long-term credit ratings or better. As I discussed at our November investor day, our mid-term leverage target is now approximately two times net on a rolling four-quarter average basis. While we will still be meaningfully above this level at the end of 2024, we are confident that with EBITDA growth and disciplined cash management that we will reach our targeted leverage in 2025. Moving on to free cash flow in slide 13. Free cash flow was negative $524 million for 2023. Adjusted cash from operations was down $960 million compared to the prior year, driven by significantly lower payables and EBITDA, offset in part by lower cash used by receivables and inventory. Cash interest and taxes were also headwinds to cash from operations. Capital additions and other investing activities of $144 million were up $25 million compared with the prior year, with continued spending on capacity expansion to support new active ingredient introduction. Legacy and transformation spending was essentially flat for the third year in a row, after excluding one-time proceeds from the divestiture of an inactive site in 2022. Compared to our November guidance midpoint, free cash flow improved by more than $225 million with this improvement nearly entirely due to better than anticipated net receivables performance. Looking ahead now to free cash flow generation and deployment for 2024 on slide 14. We are forecasting free cash flow of $400 to $600 million in 2024, a swing of more than $1 billion from 2023 performance at the midpoint of this range. Underlying this forecast is our expectation of adjusted cash from operations of $670 to $850 million, up over $1 billion at the midpoint, with the increase driven by significant cash release from rebuilding accounts payable and reducing inventory, partially offset by higher accounts receivables due to revenue growth and with modest improvement on other items such as cash interest. Capital additions of $95 to $105 million are down roughly $45 million at the midpoint as we tightly manage capital investment in light of our current leverage. That said, we continue to fund needed capacity expansion to support introduction to new active ingredients over the next several years. Legacy and transformation cash spending is expected to be between $155 and $165 million, with underlying legacy spending generally in line with prior years and with spending of approximately $75 million for our restructuring program. With this guidance, we anticipate free cash flow conversion of 104% at the midpoint for 2024. In terms of cash deployment, we expect to pay $290 million in dividends at the current rate in 2024. The remainder of free cash flow, as well as any proceeds from divestments or disposals, will be used to pay down debt. And with that, I'll hand the call back to Mark.
spk07: Thanks, Andrew. Our first quarter guidance reflects the trend of volume declines and related impacts to EBITDA that we've seen over the last three quarters. The destocking trend is expected to level off and start inflecting after the first quarter. Looking more broadly at 2024, we have a plan that is based largely on elements that we control. First, NPI sales are expected to drive revenue growth this year after already showing resilience in the prior years. We have demonstrated a history of growing this high margin segment of our portfolio over the past several years. We are not counting solely on market growth in 2024. And second, the restructuring program we initiated last year is well underway. and this is another area in which FMC has demonstrated strong execution in the past. We're also taking actions to increase visibility into inventories in the channel as well as grower levels through a combination of system implementations and strengthening our relationship with the grower. This is going to be a transition year for the crop chemicals market and we are taking the actions necessary to position ourselves to achieve our medium and longer term goals. Despite the updated guidance for 2024, Our outlook for 2026 has not changed. While it may take well into 2024 to start to rebound from the global channel inventory reset, the drivers for our industry and business remain strong, and many of the challenges we are facing this year, such as working through high-cost inventory, are temporary. With the anticipated return to more normal market conditions in 2025 and 2026, along with our portfolio and deep pipeline of innovative products, we see strong growth ahead. With that, we can now open the line for questions.
spk09: Thank you. Ladies and gentlemen, we will now begin the question and answer session. To be placed in the queue, please press star key, then one on your touch-tone phone. If you're using a speakerphone, please pick up your headset before pressing any keys. Please limit yourself to one question and one follow-up. If you have any additional questions, you can jump back in the queue. To withdraw from the queue, please press star, then two. And at this time, we will pause momentarily to gather any questions. Okay, our first question comes from Elski Yefermov from Key Corp. Elski, your line's now open.
spk06: Thanks, and good morning, everyone. Mark, can you discuss your dynamite business? You're talking about healthy sales and your brand of dynamites. Could you also provide an update on non-branded? What is the situation there and what is the outlook?
spk07: Yeah, sure. Listen, we do that deliberately because there are two very different businesses, obviously. We've discussed this multiple times in the past. Our branded business continues in a very strong fashion, as we talked about in November. We're launching new products on a constant basis. and especially the latest one, which is Premier Star in Brazil, which has done extremely well in its first quarter of launch. Those are the products that are really expanding the Diomide franchise. Our partners are doing exactly what we and the rest of the industry are doing, which is drawing down their inventories. They did this in 23, and their current forecasts show further declines as they draw their inventories down. At some point, that will come to an end, and we'll move forward. But 24, from our view of where our partner revenues are, look very similar to what happened in 23, which is basically just drawing down inventories.
spk06: Thank you. And just to follow up on that, do you have visibility into consumption of your partner's versions of diamides? Is that healthy and also about pricing of those partner sales?
spk07: Yeah, listen, it's impossible for us to talk about what they're doing with their revenue growth targets or where they're growing. We don't have insight into that. All we do is provide them either finished formulations in some cases or, more importantly, actual technical active ingredient. And don't forget, you know, a lot of our partners use these products for seed treatment applications, which is a very, very different market from us. So treat it as a separate market. We don't get involved in it. We provide the raw materials. That's how we think of it.
spk06: Thanks, Mark.
spk09: Thank you. Our next question comes from Kevin McCarty from VRP. Kevin, you may proceed with your question.
spk14: Yes, thank you, and good morning. Mark, in your prepared remarks, I think you mentioned that you anticipate a moderate headwind from pricing in 2024. kind of talk through your expectations in terms of where you're more optimistic, less optimistic on pricing by region. And with regard to the first quarter in particular, do you think that price will be any better or worse than the minus 5% that you posted in the fourth quarter?
spk07: Yes, certainly, Kevin. I mean, first of all, the dynamic this year is going to be pretty much the reverse of last year, where we had very, very strong pricing as we went through the first half of 2023. Obviously, as we go through this year, we're going to start to lap those price increases so the differential gets a little different. I would say, obviously, we've highlighted EMEA as a highlight for us. It was in 23, continues to be that way in 2024. North America is looking good as well in terms of managing price. I would say the place where we expect the most headwind is, no surprise to anybody, will be Latin America. And that's mainly in Q1. We expect that to abate as we go through the year, mainly because of that lapping of price as I just talked about. So think of it as Latin America with really Brazil as being the main area there. With regards to Q1, We talked about a pricing headwind. It is a small number in terms of percent. So I would suggest less than the 5% that you just mentioned. We already see that in Brazil. So that's part of what we have forecast for Q1.
spk14: Okay. Thank you for that. And then secondly, perhaps for Andrew, can you talk about the amount of working capital that you think you can extract in 2024, including inventory. And as you draw down inventory, what impact do you think or do you expect that that will have on your earnings, if any? I imagine it creates a fixed cost absorption challenge. Is that true? And how would your guide be be different if you weren't drawing down inventory, if that makes sense.
spk13: Yeah, thanks, Kevin. Sure. I think certainly as we're looking to free cash flow for 24, working capital, particularly accounts payable into a lesser degree inventory, are really the big drivers of cash release in 2024. And that's in part because of an expectation as we go through the year that we start rebalancing production and inventory. We have been intentionally throttling back pretty severely manufacturing over the past two quarters and well into Q1. We would expect to see some ramping back up in manufacturing activity as we go through Q2 and through Q4. That will help with bringing up accounts payable. At the same time, we're selling down from the higher levels of inventory we have right now, which includes some higher cost carryover inventory from prior years. So, you know, if you look at the bid contributors, it's about two-thirds accounts payable, one-third inventory that are the benefit from a cash flow perspective. From a P&L perspective, Q1 in particular is impacted by the carryover of higher cost inventory from last year. You know, as we get further into the year, you know, we have been buying at lower cost. There are lower cost materials in inventory that we'll get to as we work it down. And then as we rebuild production, we expect that to be at or better cost than what we have in inventory right now. So this is a part of that, unfortunately, that the pronounced quarterly cadence this quarter as well. And I think certainly as you finish the year, we'll have reestablished a balance and a more normal balance between inventory and payables. And the inventory we will have will be at a more normalized cost base to current market costs. So that absence of that headwind going into 2025 should be a powerful tailwind as we look ahead.
spk14: Got it. Thank you both. Thank you.
spk09: Our next question comes from Joel Jackson from BMO Capital Markets. Joel, your line is now open.
spk12: Hi, good morning, everyone. I want to ask a little more about the cadence of the year. You've given Q1, you've given the full year. There was a comment earlier on this call that you expect EBITDA contraction to turn to growth mid-year. It would seem like you would need about 30% plus growth in the last three quarters, EBITDA growth, to get to your 975 midpoint. I assume Q2 is going to be an interesting quarter. What does Q2 look like? Still contraction, end of the quarter starting getting growth. Anything you can help to help us bridge how we go from contraction back to growth would be really helpful.
spk07: Yeah, sure, Joel. Andrew, do you want to take that one?
spk13: Sure. Look, I would put it this way. We've long said that we think that this channel inventory correction takes a full year in every market to reach sort of a bottom. We have not gotten to that full year yet. This phenomenon really started in the latter part of Q2 of 2023. Thus, the Q1 revenue drop pretty much in line with the previous three quarters where we've been going through this channel to stocking trend. So I think as we think about trajectory for 2024, Q2 is the real transition. We expect a shift to growth in Q2. It may not be significant growth, but we do expect a growth as we anniversary the initial drop that started this phenomenon. And as you pointed out, I mean, certainly in that last three, the Q2 through Q4, our guidance implies about 16% top line growth, excuse me, 15% top line growth and about 30, 32% bottom line growth. That starts in Q2 where you have this inflection and then accelerates in the second half. And as Mark commented on in his prepared comments, Yeah, it's really driven by new product introduction, right? And I can't emphasize enough when, you know, $200 million a year on your growth of new product introduction in a year when we're only forecasting $115 million-ish of total revenue growth at the midpoint. It's a significant mixed benefit, and it's very much tilted in the second half. So I do understand it's a bit of a, you know, a very back-end loaded profile. But I think there is a clear logic to it. Q1, we're finishing out the first year of this channel inventory correction, getting past the anniversary of it. We have this hangover from high-cost inventory from the prior year. Q2, we see a transition back to positive comparisons, and then an acceleration in the second half driven by new product introduction.
spk12: You had a really comprehensive investor day about three months ago. and you laid out the targets of, you know, 1.3 to 1.5 billion EBITDA in 2026. I mean, you're obviously maintaining those targets right now. I don't expect you to do major changes three months later. If it's a marathon, you know, and you're now laying 24 out there, a third of the way through the marathon, you're now at a slower, you know, pace than you would have thought. Can you, you know, talk about how you can catch up in 25 and 26 to hit the marathon, I guess, at the pace you thought you would?
spk07: Yeah, Joel, you know, listen, I mean, I think for us, as I said, 24 is a bit of a transition year. Yes, we did lower the full year of 24, but that's fundamentally on one thing. We finished 23 lower than we expected. It is as simple as that. The numbers just flow from there. We were not going to hold a number that we thought was unrealistic just because we said it in November. We don't think that's the right way to run this business. Now, when you look at 25 and 26, particularly 25, Andrew just commented on something that's very important, and I mentioned it. We have a lot of headwinds that are temporary right now that are impacting us in 2024. They will go away. First of all, the high-cost inventory. The biggest impact of that is Q1, gets less in Q2, and then as we go into the second half, it dissipates. We also have the benefit of the mix impact from all the new products we're selling. You know, the $200 million of NPI is at above-average margins for us, so that impact in changes mix as we go through the year. So you take those pieces and then you take the restructuring plan, which is also now underway and building. We intend to have that at $150 million run rate by the end of 25. So you take those pieces, they all build as we go through this year. That allows you to make that catch-up period as you go through 25 and 26. And then obviously the market itself. The market has been unbelievably depressed over the last nine months and going into the first part of this year. That will not stay like that. The market will come back. It'll grow at its normal low single digit growth rates. Once we get into that period, we have a great tailwind going into 25. So I think we catch up. That's why we haven't changed it. We have a view. We know what we're going to be launching. That's an important view for us. So think of it as those elements will make up the 25, 26 period.
spk13: Joe and Andrew, I'd just add one additional comment there. You know, we set out those goals in November. We highlighted, you know, 6% to 9% revenue CAGR and a 9% to 14% EBITDA CAGR of the 26 horizon. You know, with the adjustment with the lower results in 2023 and the slower start in 2024, you're really only talking about increasing that by one percentage point, right? And, you know, as we've shown in the updated slides today, you know, a 7% to 10% top line CAGR and a 10% to 15%. bottom line CAGR. So it's not a fundamental shift by any means in the amount of growth we were targeting and the logic that Mark has outlined here of how we think we can deliver that.
spk09: Our next question comes from Vincent Andrews from Morgan Stanley. Vincent, your line's now open.
spk02: Thank you, and good morning. There was one more piece to all that I think was just the fixed cost absorption, right, that's obviously hurting you now. When do you think you'll get your plant rates back up to a level where you'll get that better fixed cost absorption, and do you have a way of quantifying that for us?
spk07: Yeah, I'll take it at the high level, Vincent, and then, Andrew, you can make a few comments. We have numerous manufacturing facilities that are built up of individual production lines or synthesis units. Those synthesis units are coming up and down constantly. I would say as we enter Q2, we start to see more of those lines coming back. We already have cases today where we're out of inventory. So we've been pushing inventory down dramatically over the last six to seven months, and you can see that in our inventory numbers. That will continue. You always have some dislocation between what sales is selling and what the demand forecast says. So we see that tension now, and that's a change for us. We haven't seen that in the last six to seven months. So we're starting to see the signs of our inventory levels in certain key areas coming down to a point where we know we're going to have to fire up some of those units again. I expect that to happen in the Q2 period. So Andrew, do you want to talk about what impact that has as we go forward?
spk13: Yeah, I think that's certainly, when we think about the cost impact from last year, part of that is the carryover of volume variances of fixed cost absorption. And that really hits most significantly in Q1 and to a lesser degree in Q2. As Mark described, as we start ramping up production more broadly through the first half of the year and definitely into the second half, we'll get past that unabsorbed fixed cost headwind. But it's certainly a contributory factor into why the EBITDA in Q1 is depressed more than the sales drop.
spk02: Okay. And then if I could just ask on the raw materials, It sounds like your comments for the year that they're going to be flat, but that seems to be a function of carrying the higher cost inventory. And I believe, Andrew, you referenced that you're currently invoicing raw materials below what you're expensing them at. So I don't know how you want to quantify it or give us a sense of it, but if raw material prices where they are today stayed flat as we move from this year into next year, what type of deflation benefit might be available to you once things are, you know, kind of back to fully up and running from a production perspective.
spk13: Like Vincent, I think that trend is clear and real. I don't think we're prepared to quantify that today, because obviously it's going to depend a bit on how the rest of the year plays out. But you're absolutely correct, you know, what we said and what we're saying. We are, for the materials we are buying, we are buying them at or below costs of what we have in inventory. So it will be a tailwind as we go through the year and will improve as we get through the year. We'll have to see how the rest of the year plays out to see what the actual magnitude of that tailwind is going into 25. Okay.
spk02: Fair enough. Thank you very much.
spk13: Thanks, Jason.
spk09: Our next question comes from Mike Harrison from Seaport Research Partners. Mike, your line's now open.
spk15: Hi. Good morning. I was hoping that maybe you could give a little bit more color on what you're seeing with new products. Maybe talk a little bit about the commercial traction that you're getting on some of the products that you've introduced over the last couple of years. And maybe just remind us what new launches you're expecting in 2024.
spk07: Yeah, sure, Mike. You know, we talk about this a lot because obviously it's a big driver of our growth and also from our profitability standpoint. I think what we've been doing over the last few years is really a mixture of what we call product extensions, which you've seen in the Diomides area. I mean, we keep talking about Premio Star. We need to put that in context. I'm not going to give you the exact number because obviously we have a lot of competitors listening in on the call, but In Q4 alone, we had tens of millions of dollars of brand new business. So that's extending the diamide franchise in key crops in Brazil, like soy. So those are the types of products that are really driving the growth. When you look at the roughly $200 million of new growth in 2024, about $100 million of that is products that are launched within the year. hundred million dollars in reference it's usually anywhere from a hundred to a hundred and fifty million dollars on an annual basis that's what we've been tracking at so our expectations for the brand new product launches are not out of line with what we've done historically despite how difficult the marketplace is so we know we can sell those new technologies we know growers are always looking for new alternatives to combat pests it's split pretty much across all the regions led by Asia and And then Latin America and Europe and North America are all pretty much similar. So the good news there is it's in different geographies on different crops. So we're not banking on the growth of the new products by one big hit with one molecule. That's the good news. And that's how we like to play this. The other one is really our new fungicide, Fluendipia. That is gaining traction. We launched in Brazil. We launched in Argentina. We expect that to grow considerably as we grow through this year. This is our first real entree into a market that's called Asia Soybean Rust in Brazil. It's a $2 billion market, give or take, and we have very little revenue there today. So that's another example of us taking a brand new product, driving it into a geography and market space.
spk15: All right, that's very helpful. Thank you. And then maybe just a little bit more detail on what you're seeing with channel inventories in India. Sounds like that was an issue in the fourth quarter, but also expected to kind of remain an issue as we go through 2024. Any more detail you can provide there?
spk07: Yeah, listen, channel inventories are high. We are carrying high channel inventories. We are not the only ones. Other people on earnings calls have highlighted India. You've had at least three years of bad monsoons as well as low pest pressure. So there is a lot of inventory that needs to be worked through there. We'll take all of 24 and probably into 25 to work that down, depending on what the weather patterns look like. If they look good, then we may get some acceleration. If not, it's going to take a while. So you're probably going to hear us talk about India pretty much every quarter as we go through this year and certainly into early next year. I doubt we'll be the only ones talking about that either.
spk15: All right. Thanks very much.
spk07: Thanks, Mike.
spk09: Our next question comes from Adam Samuelson from Goldman Sachs. Adam, your line is now open.
spk05: Yes, thank you. Maybe just a bit of a clarification on the assumptions for the full year on price and maybe distinguish a little bit by region because it seems like the pricing competition, it's more severe in Latin America and maybe in India. Just how do we think about the total price cost balance for this year in aggregate? And as we think about that inflection and profitability into 25, kind of how would you frame the risk if pricing doesn't start to probably that price-cost balance doesn't start to flip more favorably again.
spk07: Yeah, Adam, let me just start by giving you an overview of how we think about that price-volume mix around the world. And Andrew, then you can comment on the price-cost element. You know, in these environments, one thing we are determined not to do is go and chase volume. And you can see that in our margins. Our margins are at roughly 22% as we finish the year. They're at industry-level highs. You can't say that for every company out there. And the important thing is that we're managing price very carefully, not chasing volume where there is no volume, and also managing the balance sheet. So you have to take all that into consideration about how you think about FMC strategy on price. We do take price where we can, and we've proven that in Europe and other parts of the world. And then there are other parts like Brazil where it is a price competitive market. Now, remember, when we talk about our price reductions in Brazil, Roughly half of that is activities we put in place to help our customers with their high-priced inventory. So all that price is not necessarily a price drop for the list sheets that you see. So please keep that in mind. When you think about FMC, you look at the volume, you look at the price, and look at the margin. That's how we're managing the company. And you know what? We think that'll serve us well when we come through this period, as we get into the second half of the year, and certainly as we accelerate through 2025. having a base for margins that are based around a solid price. And then when volume comes back, our products will grow into that volume space. We believe that's the best strategy to tackle this. Andrew, do you want to comment on the cost price piece for the year?
spk13: Sure. I think certainly on the price dynamics, first quarter low to mid single digit price headwind, heavily anchored in LATAM, a little bit in Asia. For the remainder of the year, prices are actually pretty flat. We'll be anniversarying, you know, some price reduction in Q3 and Q4, as Mark described. Much of that is rebated incentives, not necessarily list price changes. So it's the absence of headwinds as well in the second half of the year as we see stabilizing market conditions. So for the full year, you end up with a low single-digit price headwind. Certainly relative to cost, cost is going to be a strong tailwind this year as we get through the full year. And Q1, no, but as we get through the full year, input costs will start to turn to a tailwind as we get past the high cost of inventory. And then certainly with all the restructuring actions that we're taking, That will help generate a further tailwind this year. So the net price-cost relationship for the year is positive.
spk05: All right. That's a really helpful call. I'll pass it on. Thank you.
spk09: Thank you. Our next question comes from Steve Byron from Bank of America. Steve, your line is now open.
spk03: Yes, good morning. This is Sal Tertiano filling in for Steve. So firstly, I wanted to touch base again on kind of the Q2 to Q4 assumptions. So as you said before, you're kind of assuming a 15% increase in revenue after Q1 year-on-year. And even if we think about the flattish price you just mentioned and most of the NPI benefits coming there, it still looks to me that you're assuming probably double-digit volume increase on the legacy business. Is that correct? Are there any components I'm missing? And what would drive such a strong growth versus, I guess, your expectations for the market being down a little bit overall? How would you outgrow the market, excluding the NPIs, which I took out of the equation?
spk07: Andrew, do you want to take it?
spk13: Sure. Look, I think as we've talked about, we're expecting pretty strong growth through new products in the second half. The first half is down across the board. So that growth from Q2 to Q4 is stronger than the full year growth. So there is growth in the core portfolio, absolutely. Probably more like high single digits rather than mid-teens. A little stronger growth from new products in that Q2 to Q4 time horizon. I think we have to be a little bit careful with percentages here. We've had a major market reset in 2023. And as the channel starts to settle out and normalize on inventory, the dollar amounts we're talking about in terms of incremental growth are not egregious by any means when you think about the dollar growth that that would imply for our core portfolio. And a core portfolio that's performed pretty strongly historically. So I think we think that's a pretty reasonable balance. But again, that strong base and that strong deriving in the new products is what really helps reinforce the acceleration and the leverage to the bottom line in Q2 through Q4.
spk03: Okay, perfect. And I wanted also to check on what you mentioned before about the non-brand diamides. I'm just wondering, so the idea of having partners was to kind of extend the, you sign agreements and you extend kind of your protection here as you prevent them from competing with you directly at some point. But you mentioned that it's a separate business. You have no visibility into what they do. I'm not really sure why wouldn't you try to, from the start, have an idea of what they sell through or how much they sell in the market? And do you have any plans to start understanding better or request from them more information so you can figure out what's kind of the overall dynamite consumption? in the channel?
spk07: Yeah, I mean, listen, it's a very valid question. You've got to remember that they're selling products still into the marketplace from their inventory. We're not replenishing their inventory because they're not buying it. It's exactly what we're doing with our suppliers and what our customers are doing to us. A big piece of their market is seed treatment. Do not underestimate how much volume of the diamides goes into treating seeds around the world. It's a large volume. They also operate in markets that we don't necessarily have access to, whether it's on a geographic basis or a crop basis. So once again, this is a 70 plus billion dollar market for pesticides that is highly fragmented. It is not unusual for us not to know where those products are going. However, what we do know is that where they see a utility for diamides, they're using FMC's technology. And that's what's important to us. So we think about it in that way. I think the other thing you've got to remember is we're talking about where the forecasts currently sit. Forecasts can change and frequently do. They did last year. The forecasts that the partners put in place in January is very different to what it looked like in September. We could well see a difference in their September forecasts or their August forecast than what it is today. So we'll see. For us, the partners are very valuable. They've worked extremely well since we bought the assets way back in and they will continue to work well. They are just going through the same phenomena that we are. Thank you very much. Thank you.
spk09: Our next question comes from Brian Wright from RothMKM. Brian, your line's not open.
spk08: Thanks. Good morning. Could you give us a little bit of an update on the planned health outlook as far as that reflects for 2024?
spk07: Yeah, absolutely. Plant health was down in 2023, mainly because of the segments that we're in. We have a big exposure to one particular segment in Brazil that was down. We had growth in other parts of the world. We see plant health coming back to its more normal growth rates in 2024. And those growth rates are high teens, low 20s, and with the biologicals component somewhat higher than that. So you should expect to see the plant health business back to its normal cadence We're also doing what we said we would do in our investor day. We're investing in new business models for this business. And despite all the changes we're making, we have carved out the ability to create a new business model in Brazil for the plant health business. So we're going to be very interested in seeing how a purely dedicated plant health business starts to perform once it gets its breadth of portfolio, which it's doing today. So expect it to be very good growth in 2024 for plant health.
spk09: Our next question comes from Lawrence Alexander from Jefferies. Lawrence, your line's now open.
spk00: Good morning. Just given the controversy around dye mines, can you characterize how dye mine margins are performing compared to the overall business? And secondly, in the rebound in the back half of the year, do you expect the new products, including diamide, to rebound faster or slower than the average business? And then lastly, I just can't help it because you mentioned the seed treatment. How large is seed treatment roughly as a percentage of global diamide volume? Is it like 10 to 20 percent?
spk07: Yeah, that last bit we don't break out, Lawrence. I don't know what controversy you're talking about about the diamides. We love the business. Higher margins than normal, in general, have been since we bought the business, continue to be so. Margin profile, very strong. I would expect, I think it was the middle part of your question, that as the diamides continue, we'll see what happens with our India business as we go through all the channel inventory work. That may be a drag. Partners, we've already said, is going to be lower. The rest of the branded we'll see as we accelerate through the year. The new product introductions will definitely be faster growth than the rest. That's how we see the business. It's a strong franchise, has been since we've owned it, and it continues to be.
spk09: Our next question comes from Aaron Vitsnayten from RBC Capital. Aaron, your line's now open.
spk11: Great, thanks for taking my question. Apologies if I missed this, but maybe I'll just ask the question on the longer-term outlook. So you did reiterate the rolling three-year forward view, which, you know, maybe you can just kind of flesh out how you're thinking about 25 as well. So is it, you know, kind of 975 or so for 24 growing to about 1.2 billion of EBITDA in 25, and then that gets you to the 1.4 midpoint in 26? And is that 25 growth really that $150 million of run rate savings and then, you know, maybe exiting the year in a more normal environment in Brazil? How are you thinking about kind of that medium and longer-term outlook at this point? Thanks.
spk07: Yeah, Aaron, listen, I'm not going to guide 25 in February. I can tell you that the growth that we see is related to new product introductions and more normal market growth at the top line. We will then see the benefit of our restructuring program hit the bottom line and the absence of all the headwinds that we're seeing today. Those will reverse and will obviously contribute to the growth in EBITDA next year. Andrew, do you want to give any more color?
spk13: Yeah, look, I think Mark's right. It's a little early to guide 25 specifically, but in terms of shape of the curve, you know, we've always expected 25 was a big acceleration. You pointed to some of the factors that compound that in terms of the restructuring benefits as well as, you know, coming out from under higher cost inventory that we have right now in our inventory. But, you know, with then still continued very strong growth in 2026. So that's how I describe the general shape of the curve at this point. You know, pretty big step up in 25 and continued strong growth in 26.
spk09: Our next question comes from Andrew Kichis from Barclays. Andrew, your line's now open.
spk10: Yeah, thank you. Andrew, can you just talk about the seasonality of cash flow, particularly in the early part of the year? Typically, that's a pretty large seasonal draw. So any high-level thoughts on the magnitude of that relative to historical patterns? And then... The follow-up would just be, can you clarify, I think you said that the covenant leverage would end this year below 3.5, which stood out to me because covenant leverage is typically above the simple Meta to EBITDA. So does that include already the assumption about a divestiture of GSS?
spk13: Great. Thanks, Eric. Sure. Let me hit those questions. I think in terms of seasonality of cash flow this year, we expect a very different profile for cash flow seasonally this year. We would normally have a large working capital build in Q1 driven by inventory build. As you're painfully aware, we have plenty of inventory at the moment. So we would expect a much more limited working capital build in Q1. So a much more limited negative free cash flow in Q1, which is a big part of helping us move forward on deleveraging quickly. I think through the rest of the year, you're going to see a little more acceleration as we go through the year. We are typically free cash flow heavy in the second half in Q4 in particular, but certainly the historic large outflow in Q1 should not be repeated this year. In terms of your question on covenant leverage, yes, we are assuming the covenant leverage at less than 3.5 times. That is assuming that we close a divestiture of the GSS business at some point in the second half. That process is just getting launched. As Mark noted, when we finish preparations, we're getting prepared to go to market formally with that property. We had a lot of expression of interest in it, so we'll run through that process and continue to update as we move forward. But yes, to get under the three and a half covenant leverage, we do need to have proceeds from the GSS divestiture.
spk09: Our next question comes from Richard Garcitorena from Wells Fargo. Richard, you may proceed with your question.
spk04: Great, thank you. Just wanted to touch on the new measures that you've implemented to increase the visibility into the channel inventories. I was just wondering if you've gotten some early lessons from that so far. Are you seeing any change in how distributors manage their own inventories, and have you had any in terms of how you manage your own inventories and then your own supply chain going forward. Thank you.
spk07: Yeah, thanks, Richard. Yes, we have seen already some insights into how distribution is thinking of managing its own supply chain, and clearly distribution is lowering its inventory levels. You would expect that to happen. The good news is some of the insights we already have in certain parts of the world, like the U.S., which we think is probably the furthest advanced at the grower level and at the retailer level. Inventory is probably at or maybe even below normal levels. So it's going to be interesting as we're really rolling to the U.S. season starting in a month or so's time how that really unfolds. The rest of the pieces have been put in place. I do expect Europe to have a much better view. The survey we've put in place is pretty comprehensive and we're really entering the European seasons. Q1 and Q2 are the big growth areas for Europe. So I'm very interested once we get through to the end of Q2, what does that survey tell us when we get to the end of the season? As I said, it's very comprehensive. It's hundreds of different retailers and more importantly growers throughout Europe. So we'll get a good view there.
spk09: We currently have no further questions and that concludes today's FMC Corporation conference call. Ladies and gentlemen, thank you for joining. You may now disconnect your lines.
Disclaimer