FMC Corp (FMC) — Q1 2024 Earnings Call Transcript

Thanks. Good morning, everyone, and 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 implied 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 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 estimates 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'll turn the call over to Mark.

Thank you, Curt. Good morning, everyone. Our Q1 results are detailed on Slides 3, 4 and 5. We delivered a solid first quarter with EBITDA at the higher end of our guidance range and excellent improvement in cash generation. First quarter revenue declined 32% versus the prior year period. Volume declined by 27%, in line with the magnitude we've observed in the prior three quarters. The volume reduction was driven by continued channel destocking and is consistent with the change in grower behavior to delay purchases until closer to the timing of application. Market conditions were largely as we anticipated. If not for some negotiated returns in Argentina, first quarter sales would have been in the lower end of our guidance range. We delivered EBITDA in the high end of our guidance range and earnings per share above the midpoint of guidance. Additionally, we reported a significant improvement in free cash flow versus the prior year period. Our earnings benefited from restructuring actions, and we still expect to deliver the targeted savings net of inflation of $50 million to $75 million this year. Slide 4 provides detail on our sales at a regional level. North America sales declined 48% due to lower volume against a record prior year period. Price was essentially flat. New products introduced in the last five years, or NPI, showed greater resilience versus the rest of the region's portfolio with strong growth in fungicides, including Xyway, which is based on flutriafol, and Adastrio, based on our newly launched active ingredient, fluindapyr. Turning to Latin America. Sales were down 20%, a decline of 22%, excluding FX. Volume was lower in most countries and included negotiated returns in Argentina, resulting from a change in the distribution relationship. Lat Am reported the least volume decline of our four regions. Our differentiated products in the portfolio performed well. Branded diamides grew double digits, aided by the recently launched Premio Star insecticide and continued growth of our Cyazypyr brands. New products reported strong growth, including sales of Onsuva fungicide, which is based on fluindapyr. Sales in Asia declined 29%, 28% lower excluding FX. Reduced volume was the primary driver with the most significant downturn in China due to poor weather. India channel destocking continues, although dry weather limited the applications. Pricing pressure was in the high single digits. NPI sales were essentially flat to prior year and outperformed the rest of the portfolio, including sales in Australia of Overwatch herbicide based on Isoflex. EMEA sales were 20% lower than the prior year, a decline of 17%, excluding FX, driven primarily by volume, including headwinds from registration removals and rationalization of lower-margin products and poor weather in the U.K. and Northern Europe. We did grow volume in other parts of Europe, most notably France, Poland, Italy, and Spain. A moderate FX headwind was partially offset by low single-digit price increases. Adjusted EBITDA declined by 56%, primarily due to volume and to a lesser degree, price. Costs were favorable with significant contributions from our restructuring actions and lower input costs more than offsetting other COGS headwinds. Slide 6 includes further detail on our restructuring actions. We're making strong progress and we'll continue to transform our operating model, including how we are organized, where we operate, and the way we work. We've moved quickly to rightsize our organization and remain diligent in our cost reduction and reducing indirect spend. These changes have been made without sacrificing strategic investment in areas such as plant health and our R&D pipeline. Restructuring provided significant year-on-year savings in the first quarter. As the year progresses, our prior year comparisons will include cost actions taken in 2023 to limit spending. This resulted in an outsized cost saving versus Q1 in the prior year compared to what we expect will be reflected in Q2 through Q4. We are tracking to deliver cost savings within our $50 million to $75 million range in 2024, net of any inflation impacts to our operating costs. We continue to anticipate $150 million of run rate savings to be realized by the end of 2025. The sale of our Global Specialty Solutions business is progressing well. We're now in the second round of a robust bid process. There has been significant interest from a mix of both strategic buyers and financial sponsors. We expect the sale of this business to be completed towards the end of the year. Slides 7 and 8 cover FMC's Q2 and full-year earnings outlook. Our full-year outlook remains unchanged. The fundamentals of our business are strong. Grower incomes have come down from peak levels but remain positive in most countries. Generally speaking, weather has been favorable in many countries, which has led to steady application of product on the ground. Overall, we see a healthy agribusiness industry. Data from third parties as well as input from our commercial teams shows that the inventory reduction actions in the channel are making good progress. On a regional basis, the pace of destocking has varied. We see North America furthest along with inventories at the retail and grower level back to normal, while distributors are still working to reduce their level of inventory. EMEA is in a similar condition, except in countries hit by unfavorable weather. In both these geographies, our customers are now targeting to operate with inventories at lower-than-normal levels. In Latin America, inventories are materially lower and are expected to trend towards more normal levels as we move through the rest of the year. We expect India destocking to persist well into 2025, but parts of Asia, such as ASEAN and Pakistan, have made strong progress in destocking in Q1. While these activities continue to yield costs, we're encouraged by the first signs that customers are starting to return to historical order patterns. In North America, we continue to receive orders for products that will be used early in the current season, indicating that the inventories of such products have now been depleted. In Brazil, customers are now discussing next season's volumes, providing visibility that we did not have last year. Our full-year outlook assumes that the market improves as the year progresses, but customers will seek to maintain lower levels of inventory. We are forecasting our second quarter results to be similar to the prior year. Sales are expected to be between $1 billion and $1.15 billion, which represents a year-on-year growth of 6% at the midpoint, driven by higher volume. This is the first quarter during which we expect to report an improvement in year-over-year volume since the start of global destocking. Price is anticipated to be a headwind in the low to mid-single digits and the FX outlook is neutral. Our outlook assumes customers continue to reduce and maintain inventory levels in many countries, with a significant amount of the volume growth we're forecasting in the quarter coming from new products. These include Coragen eVo insecticide in Argentina and the U.S., Premio Star insecticide in Brazil, Adastrio fungicide in the U.S., and JORDI fungicide in Germany. EBITDA in the second quarter is expected to be between $170 million and $210 million, up 1% versus the prior year at the midpoint. At the EBITDA midpoint, we expect that volume growth and restructuring benefits will be offset by lower price and COGS headwinds. Adjusted earnings per share is expected to be between $0.43 and $0.72, an increase of 15% at the midpoint, due mainly to lower interest expense and D&A. Slide 8 provides our full-year financial outlook, which is unchanged from our last update. Sales are expected to be between $4.5 billion and $4.7 billion, an increase of 2.5% at the midpoint. Volume growth is forecasted to benefit from improving market conditions in the second half, with a substantial amount of the growth expected to come from new products. We anticipate strong growth in new products between Q2 and Q4, with the major contributions coming from Coragen eVo insecticide in Argentina and the U.S., Premio Star insecticide in Brazil, Isoflex active herbicide in Australia and Argentina, and Onsuva fungicide in Brazil and Argentina. We're also excited to launch new diamide formulations in Australia, Indonesia, and other countries throughout Asia. We expect moderate pricing pressure for the full year, with the largest impact in the first half. FX is expected to be a minor headwind. Our EBITDA outlook remains between $900 million and $1.05 billion, which is essentially flat to 2023 at the midpoint. Volume growth and restructuring benefits are forecasted to be offset by lower price and COGS headwinds. Adjusted earnings per share is expected to be $3.23 to $4.41 per share, an increase of 1% at the midpoint from lower interest expense and D&A. Slide 9 illustrates the implied growth in sales and EBITDA in the second half to deliver the midpoint of our full-year guidance. Revenue growth of 23% and EBITDA growth of 46% may appear outsized on a percentage basis, but considering the low 2023 comparison, we believe the required growth on an absolute dollar basis is achievable. The implied second half revenue and EBITDA are both in a range that we've delivered in the second half of 2020 and 2021. We expect improving market conditions as we progress throughout the year and transition to more normal conditions in 2025. Slide 10 outlines the various factors that will impact our results within the EBITDA guidance range. The magnitude and timing of improving market conditions remain the biggest variable. Our expectation is that recovery will vary by region, but broadly speaking, we anticipate meaningful improvement in market conditions in the second half. We expect new products will continue to show greater resilience in sales, a trend they've demonstrated for several quarters. We also anticipate that raw material costs will stay flat for the year, and that pricing will be a modest headwind, mainly in the first half, as we shift to more favorable comparisons in the second half. As for what we directly control, we're confident not only in our ability to successfully launch new products but also in delivering the $50 million to $75 million of restructuring benefits in 2024. With that, I'll 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 minor, less than 1% headwind to revenue growth in the first quarter, with the most significant headwind coming from the Turkish lira, offset in part by a stronger Brazilian real, Mexican peso, and euro. Looking ahead to the second quarter, we see continued minor FX headwinds, primarily from the Indian rupee and Turkish lira, offset in part by strength in the Mexican peso. Interest expense for the first quarter was $61.7 million, up $10.3 million versus the prior year period, driven by higher commercial paper borrowings and, to a lesser degree, by higher interest rates. We continue to expect full-year interest expense to be in the range of $225 million to $235 million, down slightly from the prior year, driven by lower debt balances as we reduced borrowings through the year, offset in part by a change in the mix of short- and long-term debt compared to 2023. Our effective tax rate on adjusted earnings for the first quarter was 15.5%, in line with the midpoint of our full-year expectation for tax rate of 14% to 17%. As a reminder, we are forecasting a 1-point increase in the tax rate at the midpoint versus 2023 and providing a broader guidance range to reflect uncertainty related to tax law changes associated with Pillar 2 and transitionary impacts related to our recently awarded Swiss tax incentives. Moving next to the balance sheet and leverage. Gross debt at March 31 was approximately $4.3 billion, up $378 million from the prior quarter. Cash on hand increased over $100 million to $418 million, resulting in net debt of approximately $3.9 billion. Gross debt to trailing 12-month EBITDA was 5.6x at quarter end, while net debt to EBITDA was 5.0x. Relative to our covenant, which measures leverage with a number of adjustments to both the numerator and denominator, leverage was 5.7x compared to a covenant of 6.5x. As a reminder, our covenant leverage limit was raised temporarily to 6.5x through June 30 of this year. It will step down to 6.0x on September 30, 2024, and then again to 5.0x on December 31, 2024. We believe we have ample headroom under these limits as we progress through the year. Leverage is improving as we shift to positive year-over-year EBITDA comparisons in the second half and as we reduce debt through strong free cash flow generation and through proceeds from the anticipated divestiture of our Global Specialty Solutions business. We expect covenant leverage to be approximately 3.5x by year-end. We remain committed to returning our leverage to levels consistent with our targeted BBB or BAA long-term credit ratings or better. As I discussed at our November 2023 Investor Day, we've shifted our midterm net leverage target to approximately 2x on a rolling 4-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, we should approach targeted leverage by the end of 2025. Moving on to free cash flow on Slide 11. Free cash flow in the first quarter improved over $725 million versus the prior year period. This is a critical first step towards substantially improving cash flow in 2024, which is an essential part of our deleveraging plan. Adjusted cash from operations improved by $748 million compared to the prior year period, driven by working capital release from lower inventory as well as lower accounts receivable. Capital additions were lower as we continued to constrain investment to only the most critical high-return projects. Legacy and transformation cash spending was up due to costs related to our restructuring program. We continue to expect free cash flow of $400 million to $600 million for the full year 2024, a swing of more than $1 billion from 2023 performance at the midpoint of the range. This increase is expected to be driven by a significant cash release from rebuilding accounts payable and reducing inventory, partially offset by higher accounts receivable due to the revenue growth in the second half of the year, and with modest improvement on other items such as cash interest. With this guidance, we continue to anticipate free cash flow conversion of 104% at the midpoint for 2024. And with that, I'll hand the call back to Mark.

Thank you, Andrew. We started 2024 as we planned, serving customers with innovative technologies, improving our cost structure to deliver on our restructuring targets, as well as delivering much improved cash flow. The crop protection market has started to turn to more normal buying behavior, and we believe market conditions will continue to improve as we move through the rest of the year and into 2025. Growers are constantly looking for new technologies to combat pest resistance, and FMC is delivering these innovative new products. We expect approximately 17% of our revenue this year will come from products introduced in the last five years, a record for our company, up from 10% in 2021. This growth is despite the challenges the industry has faced over the last year and shows the value growers place on new technologies. With that, we are now ready to take your questions.

Wondering if you can give a bit more color on the first quarter sales. You referenced the Argentina issue that would have gotten you to the low end of your sales guidance. Could you just tell us a little bit more about that, and then help us understand what could have happened that might have gotten you to the midpoint of 1Q? It also sounds like you're expecting volume growth in 2Q to largely come from your new product initiatives. So what does the base business need to do in 2Q in order to hit your guidance?

Yes. Thanks, Vincent. Let me just expand on the Q1 comment, first of all. We did highlight, obviously, a distributor arrangement that we changed in Argentina. We talked before about being very careful how we do business in the Southern Cone and in Brazil. We've been extremely diligent in protecting our balance sheet. We saw an issue with a distributor that we had in Argentina, and we decided to take material back from that distributor and that relationship. So that's the type of activity that, yes, it slowed down the top line. But from a balance sheet perspective, it was absolutely the right thing to do. I think the second feature that impacted us in Q1 that we were not expecting was really the terrible weather in Northern Europe. For those of you that follow these things, the U.K. has had, I think, its wettest spring in about 200 years and the same in Scandinavia, Germany, Holland, and Belgium. That was really the other factor that brought down our revenue. So over and above everything else, pretty much all the regions performed as we expected. Moving forward and looking through Q2 and then into the rest of the year, I would start by saying, first of all, the market, the fundamental market, the use of products and technologies on the ground remains robust around the world. Yes, there are pockets where weather has impacted, but generally speaking, growers are protecting their crops with the best technologies they can find. What does that mean for us? Well, relationships with our growers are, I would say, at a different level in terms of communication and conversation about the future today than we've seen in the last year. I'll give a couple of examples. In Brazil, our orders on hand today are significantly higher than where they were this time last year. In other words, growers have depleted much of their inventory. They are now asking distribution and retail and hence FMC, we need materials going into the next season. Acreage is expected to increase in the 24,25 season in Brazil, so they're expecting a good year. We now have those orders on hand. What does that mean for us? It gives us better insights into the second half, but also it's given us confidence to now carefully start bringing back manufacturing lines that have been closed over the last year. So we're bringing back manufacturing on the basis of the orders that we have on hand for Brazil. That also means we're extending payables now, which is the first time we've really started to buy raw materials over the last year, and Andrew can comment on that a little later. In Europe, conversations with growers are now changing to be about what do I need for the rest of the season rather than what do I need for this week or the next week. So that starts to give you the feel that there is more of a longer-term view. Yes, people have changed their inventory levels, and that's the way they're going to operate their business, but they're asking for materials. In the U.S., we're still selling products that are used very early in the season, even in May, which is unusual. What does that tell you? It tells you that the inventories of those products have been totally depleted. We're selling products that will be used right now. So you take those three big regions alone. There is better visibility for us as we move forward, contributing to our view of new products and our launches of new products. I listed in the script numerous products that are being launched from herbicides to new fungicides to insecticides. It's the new technologies that drive the value, and growers are always looking for new tools to invest in resistance breaking, and that's what we provide. So generally speaking, that's how we expect the year to flow. It's why today in May, we feel confident to leave our forecast where they are versus where we were in February. We have a better sight of where our customers are today than we had in February.

This is Ryan on for Aleksey. Just a quick one for me. Can you guys talk about the level of pricing for your brand in diamides versus the rest of the portfolio? Just any color there would be helpful.

Yes, we don't give pricing for our products versus other parts of our products. I think you all know that the diamides are a very healthy franchise for FMC, continues to be so. When I look at Q1 and I look at this year, we expect that diamides will perform better than the overall portfolio. We did highlight in the release that our diamides in Brazil grew double digits in Q1 and that is against a very difficult backdrop. The reason they grew is exactly what we said we would do in November at the Investor Day. We're producing new formulations that are differentiated, and they are being accepted by the market. Premio Star is a brand-new insecticide for soybeans, and it has been well received in the marketplace. That allows us to move from the older products to the newer products and gain market share and growth.

This is Harris Fein on for Chris. Just a quick one for me. In North America, obviously, volumes were down on a tough comp pretty significantly, but you still held price flat. Just curious what your thoughts are on potentially adjusting the rebate structures to get volume slowing again. Is that something that you think could be necessary or that you're exploring?

No. When we look at the portfolio, I think one of the facets that's kind of being missed in FMC's North American business is just the sheer mix change that's going on there. Something like 25% of our revenue has come from products launched in the last five years. That's probably the highest of any region we have in the world. The North American team has done a great job introducing new insecticides based on the diamides and new fungicides, such as the one I mentioned, Xyway and Adastrio. This presents new market opportunities for us. Generally speaking, when we introduced those new products, they are at a higher price point and a higher profitability point, bringing new attributes to growers. So when we change that mix, obviously, we see the business starts to change. So, no, we're not doing anything with our rebate programs in North America. We believe that our proposition to grow is based upon technology and availability of that technology. We feel good about where the North American business is. I think if you looked at that on the face of that statement, you might wonder why, if your business is good, would you drop 48% in Q1. Frankly speaking, Q1 2023 was a blockbuster quarter, mainly driven by Canada. There was huge pest pressure in Canada last year, and we haven't seen that same pest pressure this year. That's normal for these agricultural markets, but the North American business is fundamentally in very good shape.

So I wanted to ask specifically on your second half guidance. I think one of the parameters you have in there is second half pricing flat year-over-year. Can you characterize your level of confidence in that, especially given that you're seeing mid-teens down in Latin America today, high single digits down in Asia. What normalizes that? And would you flag that at risk or not at this point?

Andrew, do you want to make a comment?

Yes. Thanks, Josh. Look, I think you have to look at the price of where we are and the overall progression is correct. We have downward price movement in Q3 and Q4 of last year as well as in the first quarter of this year, with overall low single, mid-single digit, minus 3% in Q3, minus 5% in Q4, low single digit, mid-single digit kind of price ranges overall, but with a significant amount of pricing being in Latin America. As we finish the season, we will be going into the new season in the fall, anniversarying very significant price reductions in Latin America. So we're not anticipating that there will be big shifts in pricing as we go into the new season given where we already are.

I was hoping to get a bit more color on kind of the market expectations and performance in India. It's the one area where I think the destocking kind of trend is still moving to high channel inventories. It feels like that's been a pretty consistent narrative in that market for running on two years now. And just love to get what gives you line of sight to maybe that ending, if anything? And how maybe you're disaggregating channel destocking and potential lower application rates from any competitive pressures that might exist there?

Yes. Thanks, Adam. Yes, India is a very important market for us and one that is facing its own individual challenges, not necessarily related to the same reasons as the rest of the world is facing with channel inventories. I would say India is almost unique in the sense that the pressure we face there is purely due to weather and dislocated monsoons over the last few years. We're not the only market participant to comment on this; others have also noted it. It's an industry-wide phenomenon, and it's just time that takes us to get through that. The monsoon in the last season was not great. We're hoping for better weather conditions as we move through the rest of the year. We are reducing channel inventory every quarter. Some quarters are faster than others, but it will take time to remove what is a significant level of channel inventory. The markets themselves are good in India, where the weather is favorable. Overall, Indian growers like to use the latest technologies and the more advanced technologies. It's one of the few markets in the world right now where we have online spray services with drones, which is a differentiated approach that allows us to apply our brand-new products in a way that benefits the small farmholders in India.

A lot of talk about destocking, but I had a question on your own internal inventory. It looks like that came down $324 million on a year-over-year basis, if my math is correct. Can you frame out where you are now versus where you would like inventories to be? Thinking about, Mark, I think you made a comment about bringing some manufacturing back online relating to Brazil, and inventories in other parts of the world may be a little bit higher. So perhaps you could kind of put that internal effort of rationalization into context for us? Any related thoughts on operating leverage would be appreciated.

Yes, absolutely, Kevin. Thanks for the question. I'll make an overarching comment, and then Andrew, if you want to jump in with some different views. Yes, we peaked inventory around August last year internally, and we've been obviously on a track since we first came into this channel destocking to remove inventory as fast as we could. We're getting close to the point; we’re not quite there yet, but we're getting close to where, at the macro level for our inventory, we will be pretty much where we want to be. We do have pockets where our inventory levels are lower than they should be, and hence, we're now bringing up manufacturing. As normal, not everything moves at the same pace. By the time we get through Q2 and into Q3, we expect to be in good shape concerning our revenue reset this year versus where our inventory needs to be. It's important to note that we took some significant steps here. We really curtailed manufacturing, which is painful in an organization like ours. But we're now coming through the other side of that and will rebuild specific inventories as we see that demand materialize. Andrew, would you like to add any further comments?

Yes, certainly, Kevin. I think we're certainly mid-innings in the journey of getting our own inventory in the right place. As Mark pointed out, our reported inventory at June 30 was about $2.1 billion. We're now down to just under $1.6 billion this quarter. We have another couple of hundred million to go. It won't be one big step. It will be step by step because there is a delicate balance of ramping up production, as Mark noted, particularly for products where we are already in short supply, and balancing it with the inventory we have on hand and its sell-through. This is part of the algorithm for generating free cash flow this year as we ramp up that production, and build up our payables back to more historically normal levels while maintaining inventories more in line with our current sales levels. You can expect another couple of hundred million of inventory to come out of our balance sheet through the rest of the year and that will translate into a positive contribution to free cash flow generation for the year.

Yes. Andrew, just to add one comment, Kevin. Andrew mentioned that it is what we call a fine balance. Remember, we have to go to our raw material suppliers and ask for products to feed this pipeline. Many of them are in the same position as we are. This is a very complicated and lengthy supply chain, and starting this process back up will be interesting. As we run down our inventories over the last year, our customers have become accustomed to us holding their inventory. That is not going to occur in some markets with some product lines. This whole notion of distribution and retail folks operating at very low inventory levels compared to historical standards, that has never happened. It will be interesting to see how this plays out for the value chain and how we manage inventory going forward as growth starts to return.

I'm going to ask a few questions in one. Just you reset, I think, senior management in Brazil. Maybe you could first talk about what's changed there, maybe what you're seeing, and what you've learned with the new eyes looking at it. Secondly, just to reconcile a couple of things you said on this call this morning. I think you said that you're seeing customers now put out order visibility a bit later than they were hand to mouth, but I think you also said that customers are going to be running with lower inventories than they normally have. I may have got that wrong, but can you reconcile those two comments, if I got that right?

Yes. Thanks, Joel. Yes, new management in Brazil. It's the first time that FMC has brought someone in from outside the company to be the president of the region in a very long time. We have a robust human capital process inside the company where we develop talent and move them around the world. However, we felt it was a good time to bring in talent from the outside, and we're now working with a very experienced industry veteran who has both crop protection and retail distribution background. We're learning that we can expand our customer presence in the sense of exploring new market pockets. That's a good sign from a market growth perspective. Also, bringing that retail and distribution mentality allows us to think about how we build our offers to increase the attractiveness of FMC's overall portfolio. I think from the order visibility and lower levels of inventory, Joel, both are valid. The fact that people are holding lower levels of inventory is one thing, but where it is in the chain is something to consider. It may be that distribution wants to hold lower inventory levels, but retail might not because they have to service the customer with what they have. So don't think of the two pieces as opposed to one another; they actually work hand-in-hand.

When we look at your volume trends over the last five years, there is a meaningful difference between first half and second half. And perhaps that's a reflection of second half being nearly half driven by Latin America. But when we look at your volumes in this first quarter, they're lower than the two to five years of volume growth. So something really led to sharp contraction in the first quarter in volume, but yet your second half volumes presumably look like they're going to get back to 2022 levels just reversing 2023. So I guess I'm trying to understand the difference between the first and second half. And is the second half potentially driven by robust demand for insecticides? Are there some additional insect pressures in South America these days?

Andrew, do you want to make some comments?

Yes, Steve, it's Andrew. Thanks for the question. First, just to put some of this in context, I think Q1 of '24 is the last quarter where we're comparing to a pre-channel inventory disruption world. As Mark mentioned earlier, Q1 of '23 was a record quarter for us, with our North America region up 41% in Q1 of '23 year-on-year to put it in perspective. So we're dealing with a big swing from peak to a more corrective zone. The volume performance in Q1 of '24 is very much in line with what we've seen in the prior four quarters of this channel correction. Q2 of '23 saw a drop of 31%, Q3 of '23 dropped 27% in volume, and Q4 dropped 25% in volume. This is the Q1 performance, just a continuation of the channel correction that we've always said would take at least a year to clear out. Considering the second half, if you look at percentage growth, while they appear large, the absolute dollar size compares favorably with what we delivered in the second halves of 2020 and 2021.

Andrew, I have a question on the cash flow discussion that you hit on a couple of questions ago. So you've said or at least indicated that cash flow will be more back half weighted in 2024. But I also heard Mark talk about starting to rebuild some of those payables already in Brazil. So can you give us a sense just for the cadence of cash flow from here? The second quarter is typically a source on a free cash flow basis, but just any sort of relative sense, how back-end weighted should we expect it to be? And then if I can sneak in a tiny follow-up, you did mention continued deleveraging in 2025. This year appears to be mostly cash inflows and debt repayment driving that. Is next year going to include debt repayment as well? Or is that more about EBITDA growth?

Certainly. Thanks, Andrew, I appreciate the questions. Look, I think on a dollars of cash flow basis, free cash flow is very heavily weighted to the second half this year. We were negative free cash flow in the first quarter, as is normal, but significantly less so than the prior year quarter. That's a big inflection, marking the change in inventory levels for us, where we traditionally have a working capital build in Q1 with growing inventory. Q2, I would expect will still probably be breakeven to negative, but we're not going to guide it precisely. Too many moving variables. Essentially, all of the positive free cash flow will come in the second half, driven by reduced inventory and rebuilding of payables. This is a balance that Mark and I have been discussing. We are starting to spool up and restart production lines. This will pull through purchases and add to our work in process and finished goods inventory. We will be carefully balancing these actions. Therefore, you should expect another couple of hundred million of inventory to come out of our balance sheet, translating to positive free cash flow generation for the year. Regarding leverage, we will continue to prioritize free cash flow utilization for debt repayment until we reach our targeted levels by the end of 2025.

Just a quick follow-up on market normalizing. As inventory destocking comes to an end and as you get into 2025, how do you see volume growth for the portfolio in 2025 and 2026?

Yes. As we go through '25, we expect a more normal type of growth for the marketplace. Acres continue to grow, especially in Latin America and Brazil, so we expect that to be a driver. After all, people will be resetting from a lower level of inventory. You would expect a normal market growth, which typically grows at about 2% to 3% annually. We generally outgrow the market with our differentiated portfolio in the long haul. Demand on the ground is strong. We expect that to continue as conditions change. Our NPIs are growing rapidly, so we expect '25 and '26 to show growth that exceeds what we see in '24. Additionally, we face several cost headwinds currently impacting our EBITDA margin. These will turn into tailwinds as we move into next year. These factors will contribute to a more favorable outlook for 2025.

I think, Mark, as we look at '25, one of the headwinds we're dealing with this year is unabsorbed fixed costs from low manufacturing activity. By the end of this year, we anticipate being past that, resulting in a stronger base for performance in '25 with top line growth and better manufacturing costs. The absence of headwinds in the future will help us bring our leverage back to normal as we are confident about our outlook and growth drivers. We have a couple of quarters to navigate, and Q2 is crucial for returning to volume growth. The second half appears much improved compared to what we witnessed in 2023.

I was hoping that maybe you could give a little bit of additional color on the recent new product launches and how they're performing relative to expectations. And then you mentioned just now that you would expect some acceleration in '25 and '26. Perhaps you could help us understand how you see grower adoption evolve and how those adoption rates change from the launch year into the second and third year post-launch for those new products.

Yes. If you look at what we've been discussing, the NPIs launched in the last five years represent an increasing portion of our sales; we've gone from about 10% of our portfolio in 2021 to about 17% this year. It takes a while to reach peak sales, which can range from five to ten years. We have some active ingredients that are over 10 years old that continue to grow as we find new applications. We've talked about our fungicides in North America, which are doing well, especially fluindapyr-based fungicides, which have now been launched in Brazil and Argentina. We expect fluindapyr to grow significantly in '25 and '26. The diamides continue to introduce new formulations and gain market share, as evidenced by the growth of Premio Star insecticide. Pest pressures persist in Brazil, and we have by far the most robust portfolio of insecticides globally. This market will continue to expand, and we're excited about the new herbicide Isoflex now going into Australia and Argentina. Furthermore, we will have a groundbreaking rice herbicide debut in 2026 with the first new killing method for grass in 30 years, targeting Asia. Our biologicals and pheromones will see a soft launch of our first pheromone in Brazil in '25, building into '26 and '27. The robustness of our R&D efforts is making excellent progress as our manufacturing and supply chain come together beautifully.

Congrats on a good Q1 here. I just wanted to ask about the second half. Andrew, you provided some very useful comments. I guess, noting that on a dollar basis, it looks like your second half should cap at 2020 or 2021 levels, and you will be exiting according to your guidance, at least at the midpoint at around $1.25 billion or so on an annualized basis. Is that kind of how you’re thinking about 2025 and maybe shaping your comments for '20, you did that $1.25 billion; in 2021, you did $1.32 billion of EBITDA? I know it's still a way to go, but just kind of thinking if you think that second half guidance really encapsulates that normalization.

Yes, it is essential to remain cautious when annualizing a seasonal business, right? We understand different dynamics in each quarter. Your broader point stands; particularly, a return to sales levels that reflect the earlier success periods is a reasonable assumption for 2025. Of course, we have some moving parts to navigate, but the improvements we anticipate in inventory levels are notable. Keep in mind that the overly aggressive buying from 2022 led to the excess channel inventory, while 2023 saw an overcorrection. As those downstream inventories rebalance, manufacturing will align more closely with grower demand, aiding in healthier top line performance in 2025 compared to 2024, as mentioned earlier. On the EBITDA side, we note that as we ramp up production, the absence of fixed cost headwinds will also positively contribute. This combination should lead to a favorable opportunity for growth.

This is Dan Rizzo on for Laurence. You talked a lot about getting inventories down and managing payables. I was just wondering about receivables if you're comfortable with where they are, or is that something that needs to be worked on as well?

Sure. Thanks for the question. Yes, I think we're comfortable with our receivables. There are always opportunities to improve efficiency. This is a working capital-intensive business. As we return to growth, some cash use in the second half will naturally increase our receivables. However, we've been very disciplined regarding our balance sheet throughout this correction period. We have been careful about pricing. This means we've withheld from aggressiveness in building receivables and potential long-term collection risks. Our position remains strong, and we're aware of our risks. While we recognize the importance of continual improvement, we are confident about our current balance sheet metrics.

Thanks, everyone. Have a good day.