Q4 2022 Corteva Inc Earnings Call
Please standby.
Good day and welcome to the core curve up for Q2 thousand 22 earnings call. Today's call is being recorded at this time I'd like to turn the conference over to Kim Booth, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to Cortez fourth quarter and full year 2022 earnings conference call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer, and David Anderson, Executive Vice President and Chief Financial Officer. Additionally, Tim Glenn Executive Vice President <unk>.
Innes unit and Robert King Executive Vice President crop protection business unit will join the Q&A session.
We have prepared presentation slides to supplement our remarks during this call which are posted on the Investor Relations section of the court Teva website and through the link to our webcast.
During this call we will make forward looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including but not limited to those discussed on.
This call and in the risk factors section of our reports filed with the SEC, we do not undertake any duty to update any forward looking statements.
Please note in today's presentation, we'll be making references to certain non-GAAP financial measures reconciliations of the non-GAAP measures can be found in our earnings press release and related schedules along with our supplemental financially.
Summary, slide deck available on our Investor Relations website, it's now my pleasure to turn the call over to Chuck.
Thanks, Kim good morning, and thanks for joining us today I hope everyone's year is off to a great start.
There are several key messages I'd like to share with you today, including our strong 2022 performance an overview of the market fundamentals and an update on our value creation plan with a closer look at what's ahead for 2023.
Kurkova executed well amidst the dynamic market environment, delivering double digit sales and operating EBITDA growth.
As well as over 200 basis points in margin expansion.
Enlist <unk> soybeans reached about 45% market penetration in the U S and.
New product sales in crop protection reached over $1 9 billion for the full year, an increase of more than 30% over prior year.
On capital deployment, we returned more than $1 $4 billion to shareholders via dividends and share repurchases for the full year.
Our 2022 results support the value creation plan presented at Investor Day, where we outlined a framework to achieve $4 4 billion of EBITDA by 2025, with a margin range of 21% to 23%.
And we're on track to do just that.
The framework is simple and straightforward and hinges upon four key elements.
Portfolio simplification royalty neutrality product mix and operational improvements the.
The strategic and operational actions implemented since we announced the plan show that we are already making progress on accelerating our performance and.
And we were even able to achieve some of that value in 2022.
We remain committed to our value creation plan in 2023 is going to be a year largely focused on execution.
As a reminder.
A critical part of our refined strategy involves increasing investment in R&D.
We're focused on delivering greater value to farmers through more differentiated and sustainably advantaged solutions and leveraging our pipeline to drive advancements and global food security and climate change.
On the M&A front, we announced our intent to acquire symbol, Oregon Stoller to biological acquisitions, which are both set to close in the first half of 2023.
These acquisitions reinforce our commitment to providing farmers with environmentally friendly sustainable tools with proven effectiveness that complement evolving farming practices and help them meet changing market expectations.
Communicated previously we expect that biologicals will be the fastest growing segment in the crop protection industry over the next decade.
Turning to the outlook, we entered 2023, well position with best in class technologies to continue to deliver market leading value for our customers as we tilt our portfolio towards our differentiated offerings.
This is a big step change year for our enlist platform, we're expecting E. Three U S soybean market penetration in the mid fifties and.
And our royalty reduction benefit of over 100 million organic sales of new crop protection products, including our enlist herbicide are expected to grow by an additional 20% and we're on track to cross $1 billion in annual sales with our <unk> franchise.
More broadly, we expect that favorable pricing and mix. In addition to productivity and restructuring benefits will continue to outpace headwinds associated with cost inflation.
We will also continue to monitor the effects of currency, which.
Which we believe will be a headwind this year as.
As a result for 2023, we expect to deliver 5% sales growth in between $3 4 billion and $3 6 billion in operating EBITDA translating into yet another year of impressive margin expansion.
Now, let's spend a few minutes on the market outlook on slide five.
Market fundamentals remain constructive as we enter 2023 global grain and oilseed stocks are tight due to last year's below trend yields which were impacted by dry weather in the northern hemisphere, and the war in Ukraine crop prices, which remained well above historic averages are supported by tight supply demand fundamentals.
Globally.
Farmers are financially healthy with strong liquidity and they will continue to prioritize yield to meet market demand and offset inflationary pressures.
Farm income is expected to be one of the largest ever albeit below the record achieved in 2022.
And demand for corn and soybean oil is expected to grow in 2023 supported by strong energy prices and policy adjustments focusing on low carbon energy sources.
Crop area is forecasted to be up in most major crop producing regions. In 2023. The USDA gave a January update indicating U S. Planted area is estimated to be 91 million acres for corn and 89 million acres for soybeans, both showing increases versus 2022.
We continue to monitor the effects of weather around the globe, including the drought conditions in Argentina.
Brazil is projecting that national green output for the 'twenty two 'twenty three crop season will be a new record translating to low to mid single digit growth.
We expect these positive market conditions to continue throughout the year and could extend well past 2023, depending on supply demand dynamics, which is consistent with our previous messaging that global grain and oilseed inventories need to be rebuilt over at least two years.
With that let me turn it over to Dave to provide details on our financial performance as well as updates on the 'twenty three outlook.
Thanks, Chuck and welcome everyone to the call, let's start on slide six which provides the financial results for the quarter and full year you.
You can see in the table. We finished 2022 with another quarter of strong performance quickly touching on the fourth quarter organic sales were up 11% versus prior year led by Latin America, and North America. The strong organic sales translated into earnings of $370 million for the quarter more than 200 basis points.
Of margin improvement.
Turning to the full year organic sales grew 15% versus 2021 with broad based pricing and volume gains global pricing was up 10% over prior year with notable gains in both seed and crop protection.
Seed volumes were flat due mostly to lower planted area in the U S canola supply constraints and the impact of our Russia exit and EMEA crop protection volume was up 9% for the year driven by strong demand for new products. These new products delivered over $475 million of sales growth year over year.
Increase of more than 30% we.
We delivered $3 2 billion in operating EBITDA for the year, an increase of 25% over the prior year pricing product mix and productivity more than offset higher input costs and currency headwinds.
This earnings improvement translated into more than 200 basis points of margin expansion year over year, reflecting the strength and execution by our organization.
And as Chuck said 2022, as an early installment or multi year performance goals that we shared with you at Investor Day.
So let's now go to slide seven you can see the broad based growth with strong organic sales gains in every region for the full year 2022 and.
In North America organic sales were up 10% driven by crop protection on demand for new technology, including enlist herbicide seed volumes were down versus prior year, primarily due to a reduction in U S corn acres and supply constraints for canola and Canada soybean volumes were up seven.
Percent driven by penetration of it lifts, both seed and crop protection delivered pricing gains with pricing up 6% and 14% respectively.
In Europe , Middle East and Africa, we delivered 18% organic growth compared to prior year, driven by price and volume gains in both segments.
Seed pricing increased 11% and helped to mitigate currency impacts in crop protection demand remains high for new and differentiated products driving volume growth of 15% for the year.
In the fourth quarter volumes were muted by approximately $50 million related to the war in Ukraine, and our previously announced exit from Russia.
In Latin America organic sales increased 23% with notable gains in both price and volume pricing increased 16% compared to prior year driven by our price for value strategy, coupled with increases to offset rising input costs.
<unk> volumes increased 4% with some pressure due to tight supply of corn, while crop protection volumes increased 10% driven by demand for new products.
Asia Pacific organic sales were up 9% over prior year on both volume and price gains seed organic sales increased 23% on strong price execution and the recovery of corn planted area.
Crop protection volume was down 1% due to wet weather and low pest pressure in certain areas, partially offset by demand for new products.
So with that let's go to slide eight for a summary of 2022 operating EBITA performance for the full year operating EBITDA increased approximately 650 million to $3 2 billion and as I covered on the prior slide strong customer demand drove broad based organic growth.
With price and volume gains in all regions, and we particularly benefited from the strong finish to the year, including favorable year over year performance in our functional spend.
We incurred approximately $1 2 billion of market driven headwinds and other costs over the course of 2022, driven by higher seed commodity costs crop protection raw material costs and freight and logistics, we delivered approximately $250 million in productivity savings, which helped to personal.
We offset these headwinds SG&A as a percent of sales was down more than 230 basis points versus prior year as we maintained disciplined spending and accelerated execution on certain cost actions.
Currency was a $290 million headwind driven primarily by the euro and other European currencies.
Standing back to performance in 'twenty. Two is a result of strong execution by the organization demonstrating our ability to meet increased customer demand, while effectively managing costs through pricing product mix and productivity.
Turning now to slide nine I want to provide an update on our full year free cash flow performance free cash flow for the year was approximately $270 million compared to over $2 billion. In 2021. They are year over year decrease was driven by higher working capital balances, primarily accounts receivable and inventory.
Receivables increases were largely due to higher sales, reflecting both volume and pricing.
Importantly, DSO metrics remain healthy benefiting from the strength of farmer incomes and also customer collections.
In the case of inventory, you'll recall, we had significant drawdowns in 2020 in 2021, particularly in crop protection. This inventory drawdown was driven by significant customer demand in the face of supply chain challenges product availability and shipping and logistics.
Issues. This set of challenges was obviously not unique to <unk> and effected broader industry.
In 2022 inventory increases reflect a rebuild of safety stocks to support growth.
Higher input and commodity costs as well as the impact from market volatility we have now been able to rebuild our inventory levels. We believe we have about the right balances at this time.
Due to supply chain dynamics and their impact on working capital over the last few years, it's meaningful to look at the free cash flow to EBITDA conversion over the most recent two years.
Rather than either year in isolation.
Cash flow conversion averaged 42% in the two year period from 'twenty, one to 'twenty two.
In 2000, and 2022, we return $1 4 billion to shareholders, including $1 billion in share repurchases, a clear commitment to deliver value for our shareholders. Our pension liability continues to be well managed despite volatility in both equity and bond markets.
As of year end, the funded status of the U S plan was 92% and we do not anticipate cash contributions to the U S plan in either 2023 or 2024.
Now transitioned to a discussion on the guidance for 'twenty three on slide 10.
We expect net sales to be in the range of 18, one and $18 4 billion, representing 5% growth at the midpoint driven by pricing and strong customer demand for differentiated best in class technology and increased U S planted area keep in mind.
This growth is muted by approximately $600 million of product and geographic exits.
<unk> 2023, operating EBITDA is expected to be in the range of $3, four and $3 6 billion, a 9% improvement over prior year at the midpoint margins are also expected to improve with pricing mix and productivity actions more than offsetting further cost inflation and currency headwinds transfer.
Letting to roughly 70 basis points of improvement at the midpoint.
Operating EPS is expected to be in the range of $2 70.
And $2 90 per share an increase of 5% at the midpoint, which reflects earnings growth lower average share count, partially offset by higher effective tax rate and interest expense.
We expect our 2023 tax rate to be in the range of 22% to 24% an increase from the 2022 rate of 26% largely driven by U S tax law changes impacting foreign tax credits and the treatment of R&D expenses.
Higher interest expense is driven by higher borrowing costs and higher debt balances as you know we carry significant commercial paper balances throughout most of the year to fund cash needs. Our 2023 guidance assumptions include a higher average interest rate on the commercial paper balances as well as higher borrowing.
To finance growth, including the biologicals acquisitions.
We expect that free cash flow will be in the range of one 1% to $1 3 billion with higher earnings partially offset by the higher cash taxes and higher interest expense at the midpoint. This translates into free cash flow to EBITDA conversion rate of roughly 34% or approximately.
40% over the last three year period.
On slide 11, I want to remind you of the value creation framework, we laid out in September to accelerate our performance and deliver greater value to shareholders. The growth targets. We presented included a 2025 operating EBITA of $4 4 billion or 22%.
Margin at the midpoint.
This slide includes our 2025 performance targets from Investor Day, and it also reflects our actual 2022 performance in today's guidance for 2023.
Execution on our strategic decisions, including focusing on core crops and markets Pri.
<unk> for value being disciplined in cost is driving margin expansion, while also enabling increased R&D investment.
Again, our performance in 2022 was a major installment when the path towards 2020 financial targets, coupled with our guidance for 2023, we're confident we're on track to deliver those targets.
So let's now go to slide 12 to discuss the operating EBITDA bridge for 'twenty three.
You can see the pricing in 2023 will be in the mid single digit range, which were more than offset the impact from higher commodity costs and raw material inflation increased planted area in the U S and demand for our best in class technology, including continued penetration of enlist <unk> soybeans.
Are expected to drive volume increases in North America, Latin America seed volumes are expected to be up for the full year with the increased weighted to the second half due to supply constraints early in the year from last season's dry weather.
Volume growth in North America, and Latin America will be partially offset in EMEA, driven by lower expected corn planted area and an approximate 200 million impact from our decision to exit Russia.
Demand remains strong for differentiated technology, which will drive increased volume in crop protection.
Sales of new crop protection products will add approximately $300 million of incremental organic revenue will benefit from the ongoing <unk> capacity expansion as we expect that franchise to generate more than $1 billion in sales in 2023.
Volume growth will be partially offset by the approximately $400 million impact from our previously discussed product exits, including commodity glyphosate.
And while we're seeing some slowing in the rate of inflation as well as overall supply chain improvements. The operating environment is still dynamic for the full year of 2023, we expect approximately 6% increase in market driven cost headwinds, including higher commodity prices input costs.
And freight and logistics this impact should be largely weighted to the first half of the year, reflecting seed commodity cost impact in the sell through of higher cost inventory.
This translates into high single digit rate of inflation in the first half of the year dropping down to low single digit in the second half. In addition to these market driven costs, we expect additional headwinds on other cost of sales and.
Importantly, the outlook includes approximately $100 billion reduction in royalty expense and an additional $300 million of productivity and restructuring benefits.
Another key element of our cost structure and consistent with our multiyear plan, we are increasing our investment in R&D in 2023.
Regarding currency, we expect continued headwinds our assumption is for a weaker exchange rate relative to the dollar for several key currencies, including the Brazilian real the euro and the Canadian dollar, we estimate 3% to 4% currency headwind on revenues and low double digit headwind.
On EBITDA now it's important to note. The guidance does not include the impact of the biologicals acquisitions, which are expected to close in the first half of the year. We will provide an update for 2023 to include these acquisitions in the quarter in which they close.
So, let's now go to slide 13, and summarize the key takeaways.
We had great performance in 2022 with 15% growth in organic sales more than 200 basis points of margin improvement amidst a dynamic operating environment, we have favorable momentum and we'll carry that into 2023 and expect another year of strong performance and growth supporting our 2025.
Our financial targets.
And finally, we're investing in innovation and the future of core Teva, we remain committed to a disciplined capital allocation strategy that is a balance of investing for growth, while returning cash to shareholders. Since 2019, our capital deployment was heavily weighted towards returning cash to shareholders.
We returned more than $3 6 billion through share repurchases and dividends in 2023.
Against the backdrop of M&A this distribution will be tilted towards investing for growth as we close on the previously announced biologicals acquisitions in the first half of the year.
Let me turn it over to Kim.
Thank you Dave now lets move onto your questions I would like to remind you that our caution on forward looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A operator, please provide the Q&A instructions.
Thank you.
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Our first question will come from Vincent Andrews with Morgan Stanley .
Alright, Thank you and good morning, everyone.
I'm wondering if I could ask on the value creation program.
Just it looks like Theres, probably with some upside from that in the fourth quarter versus expectations, just given how strong the quarter came in in what is normally a very weak quarter.
Are you just finding that you are getting stuff done faster are you finding more stuff to do or is it both.
Yes, good morning Vincent.
That's right.
We look at the performance for 2022.
I'd start with is we're very pleased with the year and we had a very strong year across the board.
And really focused on execution, obviously the market fundamentals are robust. We have said that we believe that conditions are going to be constructive through 2023 and potentially in the 24, depending on supply demand and when it comes to the value creation framework.
Now, we'd say, we're actually a little ahead of the plan and that's really driven by we got after some of the portfolio decisions a little sooner than we thought and we took some of the cost management actions and you can see that hit the bottom line.
If you look back to the value creation framework that we proposed in September .
We indicated somewhere between 100 and 150 basis points per year in.
In 2022, we hit 200 basis points. So there's some acceleration there we are finding new opportunities every day.
So it will give the market an update at the right time, but what I would say right. Now is we're very comfortable with the $4 4 billion in the 21% to 23% margins by 25% in 2022 sort of reflection of that and with a bit of an acceleration from some of the actions we took a little faster than we thought we could get after.
And our next question will come from David Begleiter with Deutsche Bank.
Thank you good morning, Chuck on 'twenty three guidance, the low end $3 4 billion I.
I guess the question is why so low given the strong tailwind, we're seeing I understand cost FX headwinds, but.
How conservative is that low end of the guidance range in your view.
Yes. Good morning, let me give you the high level view that I have and then I'll ask Dave to talk about.
The low end, but also the top end of the guidance range, because there's a pathway to the top end as well.
First of all what we'd say is the guidance range, obviously fits nicely within the 25% value creation.
Framework and as I've mentioned already we are on track and a little ahead of schedule.
I'd say that the guidance range also reflects some of the headwinds from the portfolio changes. So this is a big year of.
Finalizing a lot of the country exits and the AI rationalization last year, we were pretty aggressive as I mentioned, we did over a dozen country exits last year alone and we have a similar amount lined up for 2023, so there'll be a lot of the portfolio decisions made in this year.
And then finally from a guidance perspective, there's a bit of a disconnect and Dave will explain it in detail we.
Obviously included the higher interest rates to finance some of the growth, particularly around Stoller and Sim Board, but we did not include any of the earnings contribution from those acquisitions.
There's a bit of a mix there from a guidance perspective now when you think about the guidance range I'll have Dave talk about the specifics go ahead, Dave sure.
Good morning by the way.
Think about the high end of the guidance versus the.
The midpoint of the guidance.
Nearly more corn acres in the U S would be a positive favorable cost realization of price would.
It would be a positive and then also looking at some upside potential in terms of Brazil to your point on the bottom and it really still is very much a focus on our part.
<unk>.
Currency impacts and also just the dynamics in terms of the rate of inflation, which continues to be.
Somewhat dynamic we're seeing.
Positives early indications on that but that continues to be something we're very very focused on so you can think of that and then of course in this business. There's always Dave as you know weather impacts that we would consider.
Chuck mentioned symbol.
<unk> and Stoller.
Our expectation is run rate for 2022 on those businesses in terms of EBITA collectively is in the range of $120 million. So depending upon the time of the close.
And Chuck you may want to comment a little bit about that you could think of something like two thirds of that coming through and actually benefiting us and that reflects the fact as you know stoller with being Latin America focus that will be towards the end of the year <unk> really Europe some of that some of that performance and earnings.
<unk> we wont.
Really capture in 2023, but in 2024 in terms of run rate, we're going to see some very attractive contribution from both of those businesses, which will be very additive both.
Obviously revenue additive that EBITDA and EBIT EBITDA margin additive for the company. If you want to talk a little bit about timing, yes, David if you recall in the prepared remarks, we mentioned closing the deal in the first half what we've got a bit more of an update we've seen some of the regulatory filings come in so what we can.
Say right now is that we received all the pre closing regulatory approvals that are required for <unk>. So that's very good news and we expect that will be in a similar position with the solar transaction very soon so now we're thinking that we'll be able to close both of these acquisitions in Q1, so a little earlier than we thought and of course good.
News as Dave indicated these are going to be good earnings contributions and will be accretive to EBITDA and certainly even accretive to margins and as we look at it we're pretty excited that this is a a biologicals platform now that we'll be able to continue to grow. So we've got high aspirations for this part of our portfolio and it looks like.
Will be able to close both of these transactions in Q1.
Thank you and our next question will come from Kevin Mccarthy with vertical research partners.
Good morning, this is corey on for Kevin.
And coming up with the 2023 free cash flow range of $1 one to $1 3 billion what are your assumptions for working capital in 2023.
Essentially what we've what we've assumed particularly very importantly, good question around inventory is our inventory levels in terms of inventory to revenue or inventory sales basically constant. So in other words that would end up being inventory would be a contribution.
The change on the change will be a contribution to cash in 2023.
Two of the key items beyond working capital the very important.
Somewhat embedded in my prepared remarks earlier, one was the expectation for higher interest expense, obviously, both amount of debt, but also.
The rate on that debt in 2023.
And that will flow through us.
As a cash use for incrementally 23 compared to <unk> 22.
And then the other one is higher cash taxes.
It's predominantly related to the R&D tax credit phenomenon, if you will the capitalization and amortization as opposed to expense benefit that we've been receiving we're not unique in terms of that challenge and of course, that's something thats. Okay.
<unk> going to continue to be very much the focus of legislative loving because its really we think highly punitive so it's really.
Working capital actually ending up net net of increase in receivables being a source of cash.
Then higher usage of cash on both the interest and on the tax side, yes, Dave maybe it's a bit more instructive to talk a little bit about working capital and specifically the inventory. If you go back to 2020 in 2021, obviously the entire industry <unk> included had significant supply chain challenges right across.
The board, we saw raw material shortages logistics challenges and as a result, we were forced to draw down our inventories to what we would consider to be unhealthy unsustainable levels and our service levels for our customers, especially around some of the products that are very unique to core Teva. So think about our seed portfolio, but also think about the <unk>.
This platform. These service levels became unacceptable. So last year, we saw an opportunity to rebuild those inventories we feel now that we've got the right service levels in place to support our customers and don't forget the global <unk> market is expected to grow mid single digits. This year. So we are preparing for another good year in.
Sure we are preparing for another good year of growth and we feel we've got the service levels now to support our customers very important.
And our next question will come from Joel Jackson with BMO capital.
Hi, good morning.
I just wanted to ask a question on free cash flow conversion so.
<unk> been targeting about 50%.
<unk> talked about getting a 42% average cross 'twenty one 'twenty two.
Can you talk about.
Why the free cash flow conversion global lower in 'twenty, three and then thinking about that question and thinking about some of the acquisitions. This year, what kind of share buyback capacity do you have this year.
Sure Joel.
The sort of the short answer on the free cash flow conversion for.
For 2023 relates to the.
Points I made in the previous question, which really has to do with the higher on a year over year basis.
Higher cash taxes, and higher interest theres. Some theres some other other factors in there, but those are the those are the biggest components of that.
In terms of capital allocation as you know.
And we've really demonstrated that balance in terms of our overall capital allocation with history. If you will up through 2022 <unk>.
Very much of course weighted towards returning cash to shareholders.
That was it.
I think very very smartly executed during that period of time 2023, it's going to be much more significantly tilted towards growth and specifically M&A with the stoller and <unk> acquisitions, we anticipate continuing.
Continuing on our share buyback, but thats going to be at.
Likely we will be at a reduced level just given the significance of those acquisitions.
And our next question will come from Christopher Parkinson with Mizuho.
One of the best success stories, I think our $10 22 was just the progress you've made in CPC margins.
You laid out some helpful framework in the Powerpoint, but if you could just offer some further color on.
First of all just obviously the price cost environments, new product growth exit of certain business lines.
It seems like things are probably ahead of schedule as it pertains to your longer term margin guidance. So just any additional framework you could offer them that would be very helpful. Thank you so much.
Let me, let me introduce very quickly and then I'll turn it over to Robert for his comments Youre exactly right. Chris I mean is the combination of those things the focus on differentiated products new products, what we've been able to do in terms of managing the headwinds associated with by the way not only.
Cost inflation in terms of in terms of material costs are market driven costs, but also currency that's been a big headwind.
For both businesses.
To include crop. So this set up right now I think for 'twenty three is positive the thing to keep in mind of course.
<unk> mentioned that I mentioned in my prepared remarks is the headwind just a volume headwind thats associated with the product and geographic access is particularly the product exits for crop in 'twenty three Robert you want to talk a little bit about some of the formula.
Sure.
Yes, Chris when you look at look at 'twenty, two just quick recap on how do we do it and what were some of the key drivers there Dave hit on a few of them, but it really starts out with our strategy around price per value and productivity. We continue to be able to offset inflation in that year of inflation was about 10% as you roll the Europe .
Yet we were able to continue to put new technology on the ground and the demand for it continues to grow up continues to.
Go up with the growers.
Our new product growth finished up about 33% as you've seen in and this is really a good story around that technology that continues to be a pull into the market. So.
These types of things with our supply chain, becoming more resilient, we delivered nearly 2% more volume last year. This.
This will be the continued story into 2023 as we begin to look at.
How will we manage margins, what's that look like and how do we how do we get through the year.
We're going to continue to follow our Prost provides strategy, we do expect.
We will have a little headwinds in the first half of the year for inflation, and we'll work with that and productivity to continue to offset that.
And then.
Really what you look at in 2022 as structural changes that we're making.
And with the exit set of started we will finish up it will be about 70% done with all of our AI exits in 'twenty. Three so 23 really becomes a transformation year that we begin to change our portfolio and positioned us for even even better.
Margin margin accretion as we move forward into the future.
Okay.
Thank you and our next question today comes from P. J <unk> with Citi.
Hi, Good morning. This is Patrick Cunningham on for P. J.
In crop crop volumes in the quarter crop protection, we're down outside of north of that.
<unk> fungicides.
Pretty big here can you walk us through why the crop Chem volumes were so weak in the quarter. Thank you.
Okay.
Sure.
Q4 is one that that played out really in South America for Us in Latin America as you look at the Big volumes, we have strong northern northern hemisphere with enlist continuing to go to go to.
Fill tanks and took over lot of tanks.
Q4, but in in Latin America. The drought is really bad when it comes to Argentina, and southern Brazil, and so the fungicide.
Growth that we typically would see there we thought we would see didn't come through just wasn't it wasn't a demand and so that's really what the difference was in Q4 when.
When you look at volumes the other thing I would mention is rolled.
Roll back to Q4 2021, Brazil.
Brazil had.
Mid mid Twenty's growth in that quarter alone and so.
Had a huge huge mountain to compare against as well when you begin to look at Q4 versus Q4.
And we have a question from Steve Byrne with Bank of America.
Yes. Thank you very much thanks, Oliver Tiano sitting in for Steve.
Just wanted to ask about the settlement charges youre, taking on the worst bombed I think this was the third quarter. This year that you took the charge and.
Even though can you start providing.
Commentary on what to expect next year for new charges and what these as we think about that.
<unk> media this year, what is the cash flow impact from the settlement.
Mostly.
Our future cash flow impacted probably already paid the settlement how should we think about that.
Yes.
This is Dave so.
As we as you know, we really have not provided.
Cannot provide any kind of forward view theres just no estimate that's available there.
All of us to do that.
We do we will have an $87 million charge for the full year of 2022.
There's just.
At this time limited.
The forecast visibility as what that would translate to in terms of 2023.
And we've really just not prepared to come on and comment on that in the same way on the cash side I mean, I think that's very very much TBD, we'll obviously update.
As actual actuals occur and actuals progress.
And our next question will come from Frank Mitsch Fermium research.
Okay.
Yes.
Good morning, I wanted to follow up on the crop protection chemical.
Growth that you saw in <unk>.
New products, obviously that was a nice success story for 'twenty two.
The original guidance was for $300 million increase in 'twenty two when he came in at $4 75.
You're guiding again for $300 million and 23, so I'm wondering what went right in 'twenty two and.
What could go right in 'twenty, three or what could go wrong in 'twenty three.
Frank Thanks, hopefully more goes right than wrong in 'twenty, three but as you begin to look at new products.
Yes, we had a great year, finishing up about $1 9 billion for the year and the sales of those products and how you stated therefore under $75 million increase.
The strengths around it really centered around <unk>.
Three big molecules that led this enlist.
Primarily with.
The demand that we're.
Following with Tim and the seed and we're 80 plus percent at our last estimate amount of acres over the top spray with.
With enlist.
<unk> in Latin America, or excuse me in Europe .
Europe was a strong performer as well and as you know this this herbicide is one that has a growing demand also and then finally I would say our insecticide of Innotrac was a third one that was a standout there the helping us grow this.
When he began to roll that now for 2023.
We expect that our new products will continue to see a high teens growth.
It's going to have three those three products will be well over $300 million each in total revenue.
And the upside there is that is it.
It's going to depend on more demand from our technology is strong.
And we don't see a whole lot of downside from the new products primarily because.
Farm.
<unk> fundamentals are healthy growers are are setting on good profits.
And then with that they are trying to maximize value and to do that you turn to new technologies to do that and that's that's where we come to play in this area. So.
This is a this is a good story that really helps us play out I guess, a proof point of our strategy to build more differentiated portfolio and these new products are a key piece of that.
Frank maybe I'll add one other point, it's not necessarily a new product, but we've got a new <unk> franchise capacity that will come into the market in 2023, so beyond what Robert said around that existing portfolio. We've got a capacity expansion in one of the most profitable franchises, we've got with <unk> and that will start to go.
Into the market the new capacity. This year. So we're looking forward to good things from that franchise as well.
And moving on to ruin this morning with RBC capital markets.
Great. Thanks for taking my question. So just looking at the guidance it looks like.
You've noted that the cost headwinds are largely weighted to one when <unk> 23.
Is there any potential for maybe.
Cost to surprise to the downside or upside how would you kind of look at that end and if so is the pricing that you have in place sufficient to offset some higher costs. If there is any possible.
Increase or would you be able to enact pricing to offset that and I'm. Just wondering what drives kind of the lower end of your range there.
Maybe I could just.
Introduce and then Tim and Rob If you guys could comment respectively on your business as we said.
And you correctly stated that the majority of our call it market driven headwinds so think of that as commodity.
And input costs as well as freight and logistics the majority of that on a year over year basis will occur about 80% of that in terms of our forecast is going to occur in the first half.
We'll see improvement slash relief still we've got.
Those costs going up at a much at a much more moderate rate modest rate in the second half of the year and the big picture on the pricing.
We expect as we did in 2022.
We will see seed pricing.
More than offset those commodity costs.
Increases in our crop protection, we will see the ability to cover.
Those costs and by the way it also offset currency impacts and we built into the guide in the EBITDA per inch as I shared with you earlier, Tim you want to comment a little bit more about seat yes.
Yes, Dave.
Seed side I'd say for the first half we have a very good understanding of what our seed costs are that we would have produced last year and so.
Considered in the barn, and well understood in terms of the cost that we have there.
And we've been live in the marketplace with pricing for really since August in North America and <unk>.
Given where we're at in the market. We've got great performance very good demand for our technology and I would describe are our pricing is being well accepted in the marketplace and then again, that's largely driven by good value proposition and our ability to go out there and demonstrate value to our customers. So in North America.
In a great spot we've been live in Europe for about three months and and and again understood. What our cost tradition was in <unk>.
And again pricing I was in Europe last week.
<unk> is holding well in the marketplace and great implementation, you think about exposure for the rest of the year on feed Latin America, we're still in the field producing our seed in Brazil, especially in but also Argentina, and so we have a little bit more exposure. If you will in terms of in terms of those costs, but obviously were.
We're working hard and we factor that in I think to our to our guide so far and in terms of pricing, we still have flexibility there we're not live in the marketplace per se.
So we're going to continue to evaluate where we're at there we've got a great track record of capturing value in Latin America, and and so we believe we're positioned very well for value strong value proposition and again, we've got.
Excellent track record in terms of being able to capture value and confident that we're going to be able to more than offset what that inflation pressure is.
Then in crop protection just to add little bit to that is that we continue to see as I said before mid single digits inflation that will continue with us it will be heavier in the first half than the second half.
But our Prost provides strategy and productivity will continue to help offset that.
So far we're seeing we're seeing.
Good progress in all of our markets with with what we're what we're doing and what we're going to market with.
And the other thing I'd say is just to comment that one of the one of the key indicators for US is what's going on the generic market and how is pricing holding there and all the leading generic producers have come out and said that prices are stable for the first half of the year from what they can see so far and so that's always a good indicator for us as well as what's price going on there. So we expect we.
Can offset the cost using the same strategy that we've used in the past for for crop protection.
And our next question will come from Joshua Spector with UBS.
Hi, Good morning. This is like it's fallen off Josh I just wanted to go back to the top of the 2020 targets.
Looking at your EBITDA for this year, I mean, thats progressing pretty ratably.
You sort of highlighted why youre free cash flow is going to be depressed in the next year, So you're kind of looking at like at.
Mid thirty's conversion versus that 55% to 75 target. So could you just kind of help US bridge, how the free cash flow is going to converge towards the target range.
You see any risks and now given it's sort of more back weighted versus what's happening with David.
I think I would just comment that we've got on a year over year basis, obviously.
Those additional headwinds.
That I mentioned to you.
The other thing that I would mention is that we will get the cash contribution over time.
From acquisitions, its not going to be significant but it will be important to the overall equation, but the other thing is just the growth in EBITDA thats going to occur over that period of time.
We also see some call it.
Improvement.
As we look to more normal patterns in terms of the cost and inflation issues in some of the supply chain issues that.
We've been dealing with in the industry have been dealing with in general all of those are going to be able to be contributors towards those towards the targets that we've talked about and by the way just to reinforce again.
The 22 performance combined with the 'twenty two 'twenty three guide.
It is again, a very important statement, we think we're making about the attainment of those 25 numbers, yes, Dave maybe just a couple more.
Minutes on this topic.
When David and I look at the free cash flow conversion. It is obviously a focus for the company. So if you think about what we've done as an organization, we started with the portfolio and the strategy and then the operating model for <unk>.
And I think we've made a lot of progress in 12 months in those areas. So now the next level of focus obviously is looking at the cash conversion. It is a high priority for the management team, it's a complete focus for us.
And as we make the structural changes to the portfolio.
I mentioned, we still have some country exits some AI exits that's going to be looked at through the lens of earnings of margin, but also a cash generation and that was always the plan. So what I'd say is we're very comfortable with the path that we're on and by the time, we get to the end of 'twenty three from a.
Arjun and EBITDA perspective, we're going to be halfway through this journey.
And we believe that there is a pathway to get free cash flow conversion sort of north of where it is today as well.
And that'll be a primary focus as we look through the rest of the portfolio changes that we're planning to make.
And moving on to Adam Samuelson with Goldman Sachs.
Yes, thanks, good morning, everyone.
I wanted to maybe come into the market assumptions.
Have both at the industry level.
Core type of level for 2023 and just.
Maybe on the crop protection side.
Right.
I know, there's some noise related to the portfolio exits and but mid single digit kind of market CPC growth.
Help me think about the core table.
Volumes organically for FERC Teva in that in that context.
And any maybe differentiation by region and.
Along those lines kind of where you see channel inventories okay.
Going into 2023, and your key operating regions.
Yes.
Thanks for the question of what's going on in the market as it.
It's going to be a dynamic year, but as we look at it it's.
We're expecting the market organic growth to be in the mid single digits call It, Florida, 4% to 7%.
With biologicals outstripping that there'll be the fastest moving segment.
Overall the demand.
Continued very strong across all regions and again, it's it's growers are chasing yield.
That's where we that's our sweet spot I guess is what I would say with the products we have.
He asks about channel inventory.
Now, we see inventory to be about normal across all regions with a few hotspots around some pockets that we're going to have to watch one being we talked about earlier the fungicide in Latin America is elevated a bit.
To a lesser extent Europe , not not near as much but a couple of areas in Europe , and then insecticides in Asia as elevated as well because it's just been wed not have pest pressures.
But if you roll all that together those inventory levels, what we see in the channels is very manageable across the year across the seasons.
No issues there from a standpoint of will it will work itself out.
We do see that the pace of price for the year flattening as compared to a year over year.
Comparison.
But we like we said before mid single digits inflation, we're still expecting four for crop protection.
Again more weighted towards the first half I.
I think the thing to watch is the global supply chain. So all things are trending in the right direction. If you look at all the key indicators for for the global supply chain market.
But what I would say is it's stable, it's not getting any worse for the first time in a while and.
I guess I'm cautiously optimistic that that continues to improve.
But thats one to watch as well to see how does that drive the market as we move into this year. So overall from a market standpoint, it's.
It's poised to have a really good year.
<unk>.
We think we're sitting in a pretty good position across all levels, there as well maybe.
A couple of comments on seed, Yes go ahead Tim.
Yes, I think.
When you think of seed this year one of the big movers, obviously as the shift back towards corn here in North America. We believe we will have an increase area in both corn and beans, but that tilt towards corn.
<unk> is very important clearly for US we were still operating at a very healthy environment as well customers are are generally good in terms of what their farmer income is in.
And there is certainly as always demand for the latest and best technology, that's going to help them be most productive.
The dynamics between corn and soy.
We watch that all the time up through final decision, making and it continues to tilt towards corn in and.
I'm comfortable with the current 90 189 as a as a reasonable assumption around the world.
Certainly dynamics are different than what we see here in North America.
In Europe , I'd say that we're probably more expecting corn to be flat ish in the marketplace.
It's driven by a couple of markets, including Ukraine impacting that Latin America still strong momentum there certainly were in the midst of planting this sapremia season than in here in a few months, we'll be out selling next summer corn as well as soybeans and then onto sapremia that outcomes very fast, but still tremendous.
Growth in across Latin America, and no reason to see that actors won't be up not just this season, but also.
In the coming seasons as well for Brazil.
Brazil in particular.
And we will go to John Roberts with credit Suisse.
Thank you good morning actually this is edlin Rodriguez quick.
Quick follow up on seed for Tim I mean, this is the first time in a long time, where the Sip business as a positive EBITDA in the fourth quarter can you talk about how sustainable would that trend is going forward and also with minus what's driving that change.
Okay.
Yes.
I'd say for quarter for us, it's our second smallest quarter lets not forget that we're heavily heavily weighted towards the first the first half of the year and the big driver in.
In the fourth quarter is certainly Latin America that live market that we have in that.
<unk> tends to be somewhat.
It can change between fourth and first quarter, depending upon how timely that sapremia season starts in this year I'd say, we had a timely start to the season and very strong demand for product in Latin America, I think Youre also seeing here in North America.
Our our business, we don't move a lot of pioneer through the Rep model because that business is direct to farmer and so very little of that is taking place at this time of the year, but we are seeing an increase in the importance of Provence in our multichannel business and and we would expect that to continue on so it's never.
Kind of set in stone they are still some seasonality elements, depending upon how the year is going but obviously part of it was pricing part of it was volume and certainly those are those are healthy.
Those are healthy factors and we expect to see Latin America business continue to grow over time, so that that that late.
The end of the year business is going to be there and we expect our multichannel <unk> business to continue to grow so that's.
That's certainly a factor that supported the fourth quarter, but it's a little bit of luck and obviously good execution here because it was driven by customer demand.
Thank you and that does.
This concludes our question and answer session I will now hand, the call back over to Kim.
Okay.
Thank you and that concludes today's call. We thank you for joining and for your interest in quick Teva, We hope you have a safe and wonderful day.
Well. Thank you that does conclude today's conference. Thank you for your participation and have an excellent day.