FMC Corp (FMC) — Q1 2023 Earnings Call Transcript

Thank you, Glenn. Welcome to FMC Corporation's First 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 first quarter performance as well as provide an outlook for the second quarter and implied first half expectations. He will also provide an update to our full year outlook and imply second half expectations. 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 certain 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 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, Zack, and good morning, everyone. Our Q1 results are detailed on Slides 3, 4 and 5. In Q1, FMC delivered solid results with strong pricing actions, accelerated growth of new products, increased market access and cost discipline, driving margin expansion of over 60 basis points versus the prior year period. We reported $1.34 billion in first quarter revenue, which is flat on a reported basis and up 4% organically. Revenue was flat due to FX headwinds and lower volumes. Adjusted EBITDA was $362 million, an increase of 2% compared to the prior year period and $7 million above the midpoint of our guidance range. EBITDA margins were 26.9%, an increase of over 60 basis points compared to the prior year period. This margin expansion was driven by pricing gains, strong mix and cost discipline. Adjusted earnings were $1.77 per diluted share in the quarter, a decrease of 6% versus Q1 2022 but $0.04 above the midpoint of our guidance range. North America had a record quarter with sales growth of 28% or 30% excluding FX versus the first quarter of 2022. You will recall, we built inventory for the region at the end of last year in anticipation of another strong quarter and aided by our investments to increase market access. We were able to take advantage of the available supply to gain market share, especially in Canada. Canada achieved record first quarter revenue and effectively doubled in sales compared to the prior year period due to high customer demand particularly for insecticides such as the recently launched Coragen MaX, low channel inventory for FMC products, price increases and product mix were also drivers for the strong performance in Canada. Product mix across North America also benefited from higher sales of new products with 29% of branded revenue derived from products launched within the last 5 years, including a significant contribution from the successful launch of a new patented diamide formulation Altacor eVo for use on tree nuts and other crops. Branded diamides grew more than 20% in the quarter. Sales in EMEA declined 4% year-over-year and were up 2%, excluding FX. Robust pricing actions offset lower volumes of herbicides in core EU countries, anticipated registration losses and the impact of discontinued sales in Russia. FX continued to be a headwind in the region. Branded diamides grew mid-single digits in the quarter versus the prior year period. Switzerland, Turkey, Hungary, Romania and Ukraine all grew double digits compared to the prior year period. Moving now to Latin America, where revenue declined 12% versus the prior year period. As expected, drought conditions and missed applications in Southern Brazil and Argentina led to lower volumes in the quarter. Demand in Mexico and the Andean region remain stable. In Asia, sales decreased 22% and were down 15% organically. Australia experienced a dry start to the growing season impacting sales in the area. In addition, we continue to actively manage India's elevated channel inventories to bring them down. Fungicides grew more than 20% in the quarter driven by Japan. And finally, new products contributed to 17% of the region's branded sales in the quarter. Overall, adjusted EBITDA for the first quarter was up 2% year-over-year driven by pricing gains, partially offset by lower volumes, inflationary impacts on costs and FX headwinds. Price was up $96 million in the quarter. FX was a $32 million headwind. And once we saw volume slowing mid-quarter, we took deliberate action to control costs, especially in SG&A. Hence, the overall cost headwind was limited to $27 million for the quarter, driven by higher input costs. Before I review FMC's full year 2023 and Q2 earnings outlook, let me share our updated view of the overall market conditions. Crop commodity prices remain elevated, and growers continue to rely on advanced technologies to maximize yields. This was reflected in the success of our new products in the first quarter and the continued momentum is anticipated for our innovative technologies for the rest of the year. However, the price normalization that we highlighted last quarter in nonselective herbicides, a segment in which FMC does not participate has accelerated, especially in Latin America. Droughts have impacted key geographies such as Brazil, Argentina and now Australia. We have seen a trend where some distributors are delaying purchases to manage their working capital. We see this as a result of the higher interest rate environment. Taking these new factors into account, we are revising our view of the overall crop protection market and now expect the global market to be down low single digits versus our prior forecast of up low single digits. Breaking this down by region, we now expect Latin America to be down high single digits. EMEA is now projected to be up mid-single digits. North America is still expected to be up low single digits, and Asia is now expected to be down low single digits. FX is still projected to be a headwind to market growth on a U.S. dollar basis. To be clear, the key driver to the changing market outlook is nonselective herbicides. And let me reiterate, this is a segment in which FMC does not participate. Excluding nonselective herbicides, we expect the global crop protection market to be flat versus the prior year. We still expect to deliver revenue growth in this environment driven by pricing gains as well as volume growth through new products and expanded market access. Slide 6, 7 and 8 cover FMC's Q2 full year first and second half earnings outlook. We anticipate revenue in the second quarter to be flat compared to the prior year, with further price increases, particularly in EMEA, growth of new products as well as market access gains to be offset by lower overall volumes and FX headwinds. North America purchase patterns are expected to return to normal levels after 2 consecutive quarters of very strong demand. Channel inventory is anticipated to remain a focus in India as it will for the rest of this year. Our diamides partners are lowering their inventory levels in light of working capital concerns impacting volumes in Q2 and the rest of the year. EBITDA guidance is flat compared to the prior year of $360 million, and EPS is expected to decline by 9% year-over-year, primarily due to higher interest rates. FMC's full year 2023 revenue forecast is unchanged in the range of $6.08 billion to $6.22 billion, representing an increase of 6% at the midpoint versus 2022. Driven by pricing gains as well as volume benefits from higher new product sales and increasing market access. Our forecast for contributions from these new products has increased from approximately $720 million in our previous guidance to over $800 million now. FX will continue to be a headwind to revenue. We are raising guidance for full year adjusted EBITDA by $10 million based on the first quarter outperformance, continued pricing gains, positive mix and projected cost tailwinds. We now expect full year EBITDA to be in the range of $1.5 billion to $1.56 billion, representing 9% year-over-year growth at the midpoint. 2023 adjusted earnings per share is raised by $0.04 at the midpoint and is now expected to be in the range of $7.34 to $7.94 per diluted share. Representing an increase of 3% year-over-year at the midpoint, reflecting higher EBITDA, the benefit of share repurchases completed in Q1 as well as somewhat higher interest expense. Consistent with past practice, we do not factor in any benefit from potential future share repurchases into our EPS guidance. Looking at the implied guidance by halves, first half '23 revenue is expected to be flat versus the first half of '22 and second half '23 revenue is expected to increase by 12% compared to the prior year period. While drought conditions are expected to impact sales in the first half, revenue in the second half is anticipated to benefit from continued growth of higher-margin new products and especially in North America and Latin America as well as pricing gains and expanded market access. EBITDA guidance for the first half of '23 indicates a 1% growth over the prior year period, driven by pricing actions. Full year guidance implies a 17% year-over-year EBITDA growth in the second half of the year. Compared to last year, our EBITDA growth outlook is second half weighted with significant year-over-year gains projected in Q3 due to input cost tailwinds. Turning to Slide 9 and the updated range of 2023 EBITDA outcomes. The global crop protection market is now expected to be down low single digits versus the prior year, primarily driven by normalizing prices of nonselective herbicides. Input costs continue to decelerate and there is a lower likelihood of major supply disruptions. New products are growing at a faster pace than previously anticipated, resulting in better mix as well as significant share gains in selective markets. We continue to have strong pricing and FX is still expected to be a minor headwind to full year EBITDA. Despite our tight internal cost controls, we are continuing to invest in commercial and agronomic resources to grow our market access. We've seen the very positive results from these investments in the U.S., Canada and Brazil, and we are now expanding the program to the Middle East, Africa and parts of Asia. As a result of all the factors I've mentioned, we have narrowed our guidance range and raised the low end of the guidance by $20 million. I'll now turn the call over to Andrew to cover details on cash flow and other items.

Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a 4% headwind to revenue growth in the first quarter, with the most significant impacts coming from the Turkish lira, Canadian dollar, Pakistani rupee, Euro and Chinese renminbi. Looking ahead through the rest of 2023, we see continued modest FX headwinds in the second quarter, which diminish as we move through the rest of the year. For the second quarter of 2023, these headwinds stemmed primarily from Asian currencies, particularly the Indian rupee and the Pakistani rupee. Interest expense for the first quarter was $51.4 million, up $21.5 million versus the prior year period. Substantially higher U.S. interest rates were the primary driver of higher interest expense in the quarter. We now expect full year interest expense to be in the range of $205 million to $215 million, an increase of $5 million at the midpoint with the increase driven by somewhat higher short-term borrowings to support working capital than previously assumed. Our effective tax rate on adjusted earnings for the first quarter was 15%, in line with the midpoint of our full year expectation for tax rate of 14% to 16%. Moving next to the balance sheet and liquidity. Gross debt was $4.2 billion at March 31, up approximately $900 million from the prior quarter. Gross debt to trailing 12-month EBITDA was 3.0x while net debt-to-EBITDA was 2.6x, as expected, given the normal seasonal working capital build. Moving on to cash flow generation and deployment on Slide 10. FMC generated free cash flow of negative $915 million in the first quarter, down roughly $250 million versus the prior year, entirely due to lower adjusted cash from operations. The modest growth in EBITDA was more than offset by higher cash used for working capital, particularly receivables and inventory, growth of which was driven by price increases and cost inflation as well as higher other nonworking capital items. Capital additions and other investing activities of $51 million were down slightly compared with the prior year. Legacy and transformation cash spending was essentially flat versus the prior year at $13 million. We returned just under $100 million to shareholders in the quarter and a combination of $73 million in dividends and $25 million in share repurchases. The repurchase of approximately 194,000 FMC shares more than offset the dilution of the share-based compensation, resulting in weighted average diluted shares outstanding of 126.1 million for the first quarter. We now expect share count to remain at this level through the rest of the year in the absence of any future share repurchases. We are maintaining our free cash flow guidance of $530 million to $720 million in 2023, up more than 20% year-on-year at the midpoint. We continue to expect adjusted cash from operations to be $800 million to $920 million, up $200 million at the midpoint, with the increase in EBITDA guidance offset by minor changes in other items. We continue to expect capital additions to be $140 million to $180 million as we expand capacity to meet growing demand and support new product introductions. Legacy and transformation cash spending is expected to remain essentially flat at the midpoint after adjusting for the benefit from the disposal of an inactive legacy site in 2022. This guidance implies free cash flow conversion of 65% at the midpoint for 2023 with a rolling 3-year average free cash flow conversion of approximately 67%. Looking to cash deployment for the remainder of the year, free cash flow will first be used to fund the dividend. Cash will then be used to fund inorganic growth should attractive opportunities become available. Free cash flow remaining after any such investments will be directed to share repurchases. At the midpoint of guidance for 2023, this would imply approximately a further $220 million returned to shareholders through dividends and up to $300 million in additional share repurchases.

Thank you, Andrew. Before I make my closing comments, I'd like to invite you to FMC's Investor Day on November 16 at our headquarters here in Philadelphia. Our agenda promises to be robust with dynamic showcases multiple speakers from commercial and functional areas and a chance to interact with FMC's executive leadership team. We will share more about our short- and long-term strategies, outline long-range financial goals and provide an early look at 2024 expectations. Please visit our website to register your interest in attending. I'm also pleased to announce a new collaboration with the Halo Trust, a humanitarian nongovernmental organization that restores livelihoods of people affected by conflict through demining activities. As you may recall, FMC was the first crop protection company to exit Russia 1 year ago, and we continue to support Ukraine and its farmers through various initiatives. As part of the collaboration with the Halo Trust, FMC is donating 3% of its 2023 sales revenue in Ukraine to support expansion of its demining efforts. With this funding, the Halo Trust will be able to significantly increase its capacity to remove land mines from Ukrainian farms. This project not only ensures Ukrainian farmers can safely return to their fields for planting and harvest but it also contributes to improving food security around the globe. Finally, I'm proud to share that FMC is among just 6 companies in the world and the first crop protection company globally to have its net zero target by 2035, verified by the science-based targets initiative organization. FMC has made substantial progress in recent years on its sustainability and net zero goals. The company reduced Scope 1 and 2 greenhouse gas emissions at its operating sites by at least 2% in the last year, while at the same time, delivering record growth and increased volume. In closing, FMC continues to perform strongly in a volatile market. Our performance is a result of our innovative portfolio of products that address a variety of grower needs across diverse crops, applications and geographies. It is also a reflection of the power of our product pipeline, which continues to provide us with exciting new synthetic and biological technologies. We have taken strong pricing actions to help recover from 24 months of unprecedented cost inflation and improved our product mix at the same time. Market access investments made over the past couple of years provide growth opportunities, especially for our new products. Input costs are receding, and we have good visibility into the year-over-year tailwinds in the second half of the year. But finally, other costs will be managed prudently while maintaining investments in R&D and expanding market access. These factors give us confidence in our raised guidance and position us to deliver another year of earnings growth and increased cash flow. I will now turn the call back to the operator for questions.

Just given how well it appears price cost is trending at least to begin the year given your Q1 margin result. Can you just speak to the confidence that you have for your volume growth outlook for the balance of the year? And for those who may be skeptical on it, what would you say to them inclusive of where you think your progress on reducing inventories in key regions?

Yes. Chris. Maybe I'll start by just making a comment on the elements I talked about in terms of the overall market. I think one thing you have to put in perspective is although we're talking about volumes in Q1 and Q2, you have to remember that last year was an absolute record year in terms of total market for crop protection chemicals, driven a lot by volume, not just price. So although we're looking in the first half at what we would consider somewhat low volumes, it's lower. It's not absolutely low. So let's put that in perspective. The market is still operating at a very, very high level. On-the-ground usage is very robust in most parts of the world. So the actual market itself is looking good in terms of soft commodity prices are remaining elevated, growers are looking to plant as much as they can. We're going to see area increase in Brazil as we go through the end of this year as we enter the '23, '24 season. So all the signs are all good. Yes, we're seeing some adjustments that we talked about in terms of how we think about the marketplace. But overall, the volume perspective as we go through the year will improve for FMC. And let me talk about why I think that is. First of all, we talked a lot about new product introductions. And for us, those are the products that are introduced over the last 5 years. We just increased since our last guidance from $720 million to over $800 million of revenue this year from those products. The majority of that comes in the second half of the year. So that's growth we have in places like the U.S. and Brazil. These are brand new formulations that are continuing to grow. So we see this dynamic of new products taking share in markets that we wish to participate. The fact is also 2% of our revenue this year will come from products launched this year. It's about $120 million that again, is more second half weighted than first half weighted. Give you an example of what some of that looks like in Brazil, we're launching a brand-new Rynaxypyr bifenthrin formulation for use on soy and corn as well. That's new market access for us. We have a new Fluindapyr, which is our new fungicide launch this year called Onsuva, which again is there to treat Asia soybean rust, which is one of our first products in that new market. And I think what's important about those 2 new formulations is they got prioritized registrations in Brazil. What does that mean? It means they're seen as critical to enabling growers to combat pests and your registrations come quicker than you thought. These are the reasons why we've just increased our new product introduction metric by pretty much close to $100 million because we expect to see that. So from us, new product introductions the whole market access gains that we've been talking about in the U.S., in Brazil and now in other parts of the world as well as a backdrop where frankly, Latin America, the market this year suffered because of the drought in the South and in Argentina. We forecast for normalized weather conditions. So we expect that to be a normal weather condition in Latin America as we go through the end of the year. So Chris, those are the sort of reasons why we're more confident of volume in the second half than we are in the first half.

That's helpful. Mark, you mentioned the non-diamide portfolio growing slightly faster than the diamides, contrary to the previous assumption of mid-single digits. Could you provide a quick update on that, as well as your projections for biological growth? If I recall correctly, you indicated a volumetric growth contribution of around 230 to 300 plus. Based on your PowerPoint commentary, it looks like you're on track as of the first quarter. Additionally, if you could discuss these two further dynamics in more detail, I would appreciate it.

Yes. Thanks. So listen, on the portfolio itself, last year, we had 15% growth as a company. And this year, we're aiming for our rough 6% growth. When you look at the portfolio itself, the rest of the portfolio last year grew faster than the diamides. And that's not to say that the diamides weren't growing at a good rate. They were, and they have been since we acquired the products. This year, we expect the diamides to grow in that sort of mid-single-digit range, and the rest of the portfolio will grow at the same rate. That's the strength of that investment we've been making in the new products. So we have a very balanced view of how the company is growing across fungicides, insecticides and herbicides. The Plant Health business, of which biological is the major component, that business is expected to grow over 20% this year, and biologicals will grow pretty close to 30%, if not over 30%. So again, we have a strong mix there. We have more new products coming into the marketplace. But as you think about FMC going forward, you should think about that growth as more balanced across the overall portfolio, not just from a geographic perspective, but also from an intent perspective.

Wondering if I could ask on the cost side of the equation for the back half of the year. I noticed that your expectations for raw material costs are still sort of at the midpoint of your outlook. So could you talk about sort of the visibility you have there and why it's going to be more 3Q loaded than 4Q? And then just as we think about the overall second half, if I look at what you're guiding to, it looks like revenue up about $375 million year-over-year. And EBITDA is up about $115 million year-over-year. So is there anything else in between those 2 numbers beyond just price being up, volume being up and raw material costs being down? Is there sort of an SG&A or an R&D catch-up in the back half of the year? That's embedded in there or anything else like that?

Thanks, Vincent. I'll share some high-level insights regarding the overall cost outlook for the year. After that, Andrew can address some of the specifics you mentioned. We have a solid understanding of our costs, particularly for the third quarter, and we're nearing clarity for the fourth quarter. As you know, there’s typically a six-month delay between when costs are incurred and when they affect our revenue. Currently, we have confirmed our expectations for Q3. The reason we anticipate the second half of the year to be more heavily weighted toward Q3 is that last year's Q3 was significantly impacted by raw material costs, which reached an all-time high. This trend seems to be reversing, and most of our costs for Q3 are already secured, indicating a substantial increase in Q3. Therefore, we should not view the second half as being weighted toward Q4. While Q4 may still show positives, Q3 is where we expect the most considerable improvement in EBITDA due to costs. We are effectively managing our selling, general, and administrative expenses. FMC has successfully done this for the past two to three years, demonstrating flexibility in adjusting SG&A as needed. We successfully illustrated this in Q1. Andrew, feel free to elaborate on the cost flows.

Yes, Vincent, I think, look, our outlook for cost is essentially unchanged from the beginning of the year. We still expect a pretty substantial headwind from input costs in the first half and then a reversal of those into a tailwind in the second half. As Mark noted, Q3 of last year was the biggest cost increase we've ever had in our history, $169 million of cost increase in 1 quarter. So that reversal is pretty pronounced and really drives much stronger results in Q3 anticipated for this year than certainly the split in that second half being very Q3 heavy for the EBITDA growth. I think as you also noted, certainly, a part of that cost headwind is growth in SG&A and R&D. And we do fully intend to continue investing in the growth of the business through new product development through market access investments and resources, both commercial and agronomic, to go support the our new products out in the world. That is a nontrivial portion of the cost headwind for the year, probably on the order of 40%. And that is something that in Q1, we did modulate a bit as we saw the quarter evolving and slowed some of our SG&A investment as you saw in the reported P&L, net of FX benefits, SG&A spending was actually down in the quarter. If you remove those FX benefits, we did spend more in SG&A this year than we did last year, but probably at a bit slower pace than what we'd anticipated going into the quarter. We'll continue to adjust spending, particularly in the noncustomer-facing non-growth supporting areas as we go through the year and see how the business evolves. But I think, look, the bottom line is the cost environment is pretty much as we expected. I think we're managing through that. And that lapping, that big headwind from Q3 of '22 is a big factor in driving our second half EBITDA growth.

Okay. And if I could just ask a quick follow-up. Slide 10 on the cash deployment. You do talk about the potential for inorganic growth through M&A this year. I would assume that's going to be on the sort of smaller side of the equation, if anything comes to fruition? Or is that not correct?

Yes. No, I think, Vincent, we've said many times that we're very interested in adding to our technology portfolio, especially in the Plant Health Space, whether biologicals or one of the other elements. They do tend to be lower investments in the tens of millions of dollars although we did make the BioPhero acquisition last year, which was pretty close to $200 million. So you can get up there into the couple of hundred million, depending on what it is you're buying. But generally speaking, the things we're looking at are more in the tens of millions of dollars right now.

I wanted to also talk about raw material costs a bit. So as costs go deflationary in H2 and presumably, that continues into '24, how do you see your prices holding up maybe at an industry and an FMC level?

Yes, from an FMC perspective, I want to emphasize that we are not a commodity chemical company. Our prices do not fluctuate dramatically in a short time. It’s essential for everyone to understand this. Over the last few years, we have absorbed significant inflation in input costs. Early in 2021, we began adjusting our prices, gradually increasing as the year progressed, and we continued to do so last year. We are still adjusting prices today and do not intend to slow this down. Our goal is to recover all input costs associated with inflation. While we acted as a buffer for our customers during this price increase, we plan to maintain this approach as we move forward. We are very confident in our ability to sustain our prices, as seen in Q1, and this will carry on into Q2, the rest of this year, and into 2024 as well.

For a follow-up, you're clearly optimistic about the growth of your new products. However, I'm curious if we should anticipate an increase in capital expenditures for new capacity. How do you envision capital expenditures evolving over the next couple of years?

Yes. I'll just give you my view and then Andrew, please jump in on some of those CapEx numbers. We do plan forward. Obviously, it takes us 3, 4, 5 years to get new facilities up and running from the initial stages of planning. We're already well into that curve. We have a very robust pipeline of new active ingredients, and that planning is folded into our near-term view of CapEx. When we get together in November, we'll give you the longer-term view of what CapEx investment will be. CapEx tends to be more modest for a company like ours, even when we're investing in the real active ingredient synthesis. So our forecasts include what we need today. But Andrew, do you want to make a comment?

Yes. So certainly, Tony, I think you've seen a step up in the capital additions and investing activities that we're guiding for this year in the range of $140 million to $180 million. At the midpoint, that's a little over $40 million increase versus the level of CapEx in the prior year. And that step up very much reflects what Mark is pointing to in terms of the investment to support new products and capacity growth. I think that $160 million to $180 million range is probably the right number for the next couple of years. We do have a succession of new products coming to market that will require investment in capacity to be able to support their production and their growth and not the least of which continue to build out support for all of our broad products, including biological. I don't think you should expect it to go much further north than that 160 to 140, 180 range over the next several years. I think just in terms of the pace of our growth, and as Mark mentioned, just the lower capital intensity of our business shouldn't be a significant difference from there. But again, at a midpoint of $160 million in CapEx this year on the guided $6.15 billion in sales, a very low capital intensity business.

Our view on new crop chemicals is that they generally take a long time to ramp, this metric that you're quoting or 15% of your sales from products introduced in the last 5 years. Would you characterize that as a faster ramp than say, historical ramps on new products and more importantly, what are you doing differently to drive that? You mentioned, Mark, about investing in commercial. Is this staffing that's driving this? Is this your outreach to farmers in some way? Or is this just sharing the margin with the retail channel? What's driving it?

I think a few points are worth mentioning. On the growth front, I don’t view the current growth rate as unusually fast; it’s relatively typical for products to grow at this pace. What sets us apart is the increasing number of new products we are introducing. Our pipeline for discovering and developing new active ingredients, along with local formulation efforts in our research labs, is on the rise. As a result, the total number of products grows each year because we continue to push forward without slowing down. For instance, some of our insecticides have been around for 20, 30, or even 40 years, and they remain successful as we develop new formulations. Thus, the number of products is crucial. Our R&D team is highly productive. Additionally, we've invested in substantial resources over the past few years to support growth. When we discuss market access, we’re referring to more than just sales personnel; we’re including agronomists, technical service staff, and marketing experts who can help launch products in specific regions. This holistic approach to introducing new products has shown positive results for us. Looking at our pipeline, both in terms of active ingredients and product development within the regions, it continues to gain momentum. This year, 2% of our revenue comes from products introduced this year—an impressive figure that we have maintained over the last couple of years, and we expect this trend to continue. The success isn’t due to any single element; it’s about how we've developed the entire system to bring new products to market effectively.

And then, Mark, maybe just a little bit on your outlook for the overall market. It seems like you're a little more cautious with excluding the nonselective herbicides, it's now you're looking for a flat market. Is that primarily price-driven or volume?

Yes. I think I'll just explain why we feel the nonselectives are driving the overall market. I think it's going to be a combination, depending on region of price and volume. I don't think there's any one that I would say it's all volume or all price. I mean we do see growth in North America and Europe and the Middle East and Africa. So those markets will continue. That will be a combination of price and volume. Latin America, we're talking about a down market. We see that mainly driven as price. Volume is pretty good. As I said, we expect an acreage increase as we go through this year into the next season in Brazil. So volumes will be good. It's mainly price that we see from an overall perspective in Latin America. And then Asia is down low single digits. Again, more likely to be priced than it is volume. Although India, as we've talked about, we have higher channel inventories. We know the market has higher channel inventories there may be some volume impacts in places like India as well.

Just wanted to ask about the Plant Health business. It looks like it grew 30% in the EMEA, 10% LatAm, Oh God, only 8% organically. So you talked about North America sort of what you're seeing there and sort of how that should play out through the rest of the year given your overall expectations for growth, 20% overall.

Yes. Listen, the Plant Health Segment has its ups and downs just like any of the other segments in the Crop Protection. So it's not unusual to see similar trends across the regions. North America is a market that we expect the business to grow rapidly. We have a number of new products that we're introducing, some of them pretty sophisticated formulations of synthetics as well as biologicals to aid the grower to give them new tools. Brazil is already a big market for us and continues to grow. I think in Europe, we're getting some more traction in terms of not just the biological piece, but the nutrition piece as well. So we have a very full range of micronutrients that we sell around the world. Europe is a key market for that. And then I would say the next piece is Asia. Asia is very fragmented in terms of each country has its own requirements. We're making very good progress in places like Korea. We're now targeting India as another market that we feel we should be selling more of these products into. So when I talk about the biologicals growing pretty close to 30% and plant health overall growing at 20-plus percent is really coming from pretty much every region in the world, but with a very different mix.

Great. And just a follow-up in terms of new product sales. North America saw a big uptick in the first quarter at 29% versus 19% in the fourth. So is it fair to say, as you move through the year, that's going to continue to add cumulatively. So how big could it get by the time you get to the fourth quarter, that's definitely going to be helping margins as well, I would assume.

Yes. I mean when you think of the new product introductions on a full year basis, this year, we're targeting something like $120 million of sales within this year. So if you look at the first quarter, it's pretty much on a little bit lower because it's more second half weighted in terms of North America and Latin America, getting ready for the next season. So you launch initially at this part of the season, and then you gain the full benefit as you go through the year. So you should expect to see that build. But the overall number of $120 million is what we launched this year, the overall number of just north of $800 million is building nicely as we go through the year. We're getting traction across all those products that we've launched in the last 5 years.

Two questions on the volume side. I guess when you think about Latin America and the volume shortfalls in the first half because of the drought conditions, I guess, what gives you confidence that inventory levels aren't at risk to the back half or into next year? And kind of similarly on the diamides, where you talk about some partner channel destocking. What's the visibility that, that doesn't bleed into the second half as well?

Yes. I think on the channel inventories, we'll see how we go through the second quarter. The markets are moving. You know what, if the market doesn't change much, yes, there will be some channel inventory hangover as we go into the next season. That occasionally happens. As the weather patterns improve as we go through the second quarter, we should be eating away at some of that inventory. So we'll see where the market gets to. Our expectation, as we're forecasting is for a more normal season as we enter Q4 and Q1 into next year in Latin America. On the diamides, what we're telling you in our guidance now is that the partners that are reducing inventories, that's not just an event now that continues through the rest of the year. So that's already built into our forward-looking guidance.

On the topic of India inventory adjustment, Mark, can you describe the progress that has been made so far and how much longer this could take?

Yes, certainly. We've been discussing this for a couple of quarters. There have been two to three years of varying monsoon patterns in both the northern and southern regions. Last year, we saw a notable decrease in rice acreage. These factors have contributed to higher inventories. We plan to manage this situation throughout this year and likely into early next year. Given the timing of the two seasons in India, different products are associated with different crops. Once we address one part, we must wait for the subsequent season; it's not a continuous flow. Therefore, in India, our approach is to work through the inventory this year into early next year and then continue pursuing growth in this crucial market. We have strong new product launches and a solid portfolio, and it's clear that there are inputs necessary to boost the productivity of Indian growers.

And just because Asia was the largest drag on sales this quarter, you also mentioned dry conditions in Australia and they come as a first bullet in your Asia comments. Was this a larger negative than India? And do you have any broader comments about Asia, whether this will continue to be sort of the most negative region for you this year?

Yes. The impact in Australia was greater than what we're experiencing in India. Many people may not view Australia as a significant part of our overall portfolio, but within a single quarter, it can have a notable effect, especially as we enter the season. Weather delays can affect a region, as we saw in Asia. However, we expect to move past that challenge. As we shift our focus to other markets like the ASEAN region, certain parts of China, and Pakistan, which is performing well for us, those countries will help balance the overall performance. Therefore, I do not anticipate replicating those numbers as we progress through this year. Australia was a major factor, and we were unaware of these conditions when we provided our last forecast. The impact is primarily due to weather, rather than the performance of the portfolio.

Question for Andrew. As we consider cash flow, particularly regarding the timing of working capital throughout the year, I understand there is inflation affecting sales. Typically, this would lead to an increase, and there is usual seasonality; however, there appears to be a larger than average increase in receivables in the first quarter. Could you help us understand the timing of working capital and cash flow management in the current environment?

Sure, I'd be happy to explain. For us, the first quarter typically shows significantly negative free cash flow due to the timing of sales and our geographical growth. Additionally, we received substantial prepayments from customers in North America during the fourth quarter, which means we are shipping a large volume of product in Q1 that has already been paid for. This year, the negative free cash flow reached $915 million, an increase of about $250 million compared to the previous year, reflecting our business growth of over $800 million last year along with price and cost inflation affecting receivables and inventory. In fact, the negative free cash flow we reported this quarter was slightly better than our internal forecasts, thanks to improved collection discipline. Year-on-year, receivables and inventory are significant drivers of this trend, primarily due to inflation in working capital. Our working capital and cash flow patterns this year will closely resemble the last four years, with strong negatives in Q1, modest positives in Q2, and substantial positive cash flows in Q3 and Q4. We will not see positive cumulative free cash flow until the third quarter, which also affects our cash deployment strategies, such as share repurchases, which are typically weighted toward the latter half of the year when we start generating positive cash flow. In summary, we are satisfied with our free cash flow performance in the first quarter. While the figure is substantial, it reflects the seasonal nature of our working capital and turned out to be slightly better than we anticipated, with expectations for a normal pattern as the year progresses.

That's helpful information. Regarding costs, I appreciate the management of SG&A and the occasional timing differences in spending from quarter to quarter. How should we view the potential range of year-over-year spending growth for R&D and SG&A, and what would be necessary to guide us on what that might look like for the remainder of the year?

Yes. We can give you some rough thoughts here because it's very easy to be falsely precise with a 9-month outlook here. I think our general expectation is SG&A is probably growing in line with sales for the full year. We could adjust that depending on market conditions, and we have some ability to both from timing of spend and choices when we make some investments, we could slow that down in a given period. But I think assuming that SG&A growth generally in line with sales growth this year is not a bad assumption. R&D, I would expect to grow substantially above the growth of sales this year. We are investing very heavily in our new product pipeline and the continued development of differentiated formulations. And we do have a step-up this year in the acquired Fairmont business where we are investing a nontrivial amount of incremental R&D versus what we had in 2022 results and continue to drive forward the Fairmont product line to start bringing products to market here shortly. So something north of the sales growth level for R&D growth would be what I would expect.

Could you maybe elaborate a little bit on what products or types of products would likely or see more stickier pricing than others?

Yes, Joel. I mean, I think when I look at the portfolio, we have a lot of what we call differentiated products across the portfolio, especially from that NPI metric that I talked about. So if you think about the more recent formulations, the more recent active ingredients we've put in place, they're all bringing new modes of action on new ways of removing pests that are highly advantageous to the growers. So it's like a lot of different industries. The more specialty nature you have the more opportunity for differentiation, therefore, you've got more opportunity to hold price. And we see pretty much a large chunk of our portfolio has those sort of characteristics. I would say certainly on the insecticides, almost all on the fungicides because they're all new business for us. And then on the new formulations for the pre-emergent herbicides as an example, in North America, and then other areas of herbicides, whether they're specialty herbicides on cereals. Those are the types of areas where we see us holding price. And then just on your Slide 9, you give your drivers for upside EBITDA guidance range drivers. Better anticipated mix, which is a general statement, but maybe you can give 1 or 2 most likely examples where you could get better than anticipated mix to hit the upside? Yes, we have structured this to show that we are experiencing some positive developments regarding the mix as we enhance the portfolio. Currently, the impact of inflation is overshadowing the mix improvements, but as inflation subsides, the benefits of the mix will become clearer. Andrew and I are focused on this as we work on advancing the portfolio. Gaining market share is crucial, and these gains are not limited to the U.S., where we have discussed our new insecticides and fungicides for corn and soy. We have also improved our market share in Brazil in those segments and are introducing more products to strengthen this further. In Asia, particularly in the ASEAN countries such as Indonesia, the Philippines, and Thailand—where rice and specialty crops are significant—we are investing to increase our market presence. Those are the two areas where we see upside potential. We are also successfully implementing mid-single-digit price increases. Cost pressures are easing as we anticipated, which will be a positive factor in Q3. Currently, we are not experiencing any supply chain disruptions; conditions have improved significantly from a year or 18 months ago, although I hesitate to say things are fully back to normal. On the downside, we expect market growth to be lower than previously projected. However, we have raised the lower end of our guidance, and we are not observing a slowdown in price momentum or deterioration in product mix. Input costs are not reverting to an inflationary trend for us. Overall, we are optimistic about the outlook for our business.

In terms of EMEA, you mentioned the herbicides volume weakness there. Can we get a little more color on what you're seeing? And maybe help us understand if this has more to do with growing conditions or planted acres? Or maybe has something to do with competitive dynamics?

Yes, Mike, I think the way I would describe it is, cereals market, core countries in Europe, so France, Germany, Northern Europe, U.K., growers and distribution, in particular, really taking notice of their working capital in this area. Cereals spot prices in Europe are lower than other parts of the world. I think it's just a prudent approach from the chain, the value chain in Europe on cereals right now. They will be using products. The question is how much do they replenish their inventory as we go through the rest of the season. So it's more of an industry dynamic than it is a peculiar FMC dynamic at this point.

All right. And then in terms of the registration losses and the impact of the Russia exit? Are we lapping some of those headwinds in EMEA, I guess, during Q2 and as we get into the second half of the year?

Yes, we have moved past the impact of Russia in Q2, so that will no longer be a topic of discussion. We are still facing registration losses in Europe, which we estimate to be just over 1% in revenue this year. This is what I would consider a typical figure. Europe is generally where we encounter more of these issues due to its regulatory environment, but nothing unusual is expected for the remainder of the year. As we conclude, I want to note that the questions today have been insightful, covering everything from the profit and loss statement to the balance sheet. I can assure you that we feel optimistic about the second half of the year. We have a strong understanding of our cost structure and are confident in managing our expenses in SG&A and R&D throughout the year. The growth in new product introductions is very encouraging for a company like FMC, especially considering that over $800 million of our revenue comes from products launched in the past five years, with $120 million coming from products introduced this year. This indicates that our R&D, innovation efforts, and marketing are effectively aligned, which gives us confidence regarding new volume for the rest of the year. Thank you.

And that's all the time that we have for the call today. Thank you, and have a good day.