FMC Corporation (FMC) Earnings Call Transcript & Summary

Well, good afternoon, everyone. Our next discussion is with FMC, which is one of the largest ag chemical company, they make herbicides, pesticides, insecticides, and from FMC, we have FMC's CFO; Andrew Sandifer. Andrew has been CFO since 2018, and has been with the company since 2010. Prior to his current role, he was a VP of Strategic Development and VP of Corporate Transformation before being named Treasurer in 2016. So with that, let's welcome FMC and Andrew.

Thanks, P.J.

Andrew, so let's start with your outlook for 2023, which you talked about in your fourth quarter for ag chemicals. You talked about low single-digit growth for 2023 particularly strong in Europe or EMEA, but somewhat sort of weak guidance in Lat-Am. So can you talk about what are the regional drivers? What do you see? Just go around the geographies and give us a state of the union?

Glad to. Thanks, P.J. Yes. I think when we look at the ag market, particularly the market for crop protection chemistry in 2023, I think that the first context point we have to have is just how strong a year it really was for the industry in 2022, right? The estimates we follow, we see growth around in the low teens up to about $76 billion in sales globally for the crop protection industry last year. So pretty, pretty strong growth around the world in 2022. So while we're anticipating some deceleration from that in 2023, we're still anticipating at that low single-digit basis as you talked about, which is not out of line when you look at 20- and 30-year horizon growth of this industry overall. Regionally, certainly the strongest growth we're expecting is in EMEA, in Europe. We've had a couple of seasons in a row of really rough summers in Europe, particularly in core EU countries with very dry hot weather. The early pre-spring weather here that we had, they've had a milder winter. There's been good precipitation. So I think we're optimistic there with more favorable weather. We expect to see some higher planted area for cereal crops, which are a big driver of the business for us in Europe as well for the overall market. Other markets, we'll keep going to them in descending order. I think if we look at North America, we're still expecting solid growth, low single digits. Again, a very strong year in 2022 in North America. A bit of dynamics that we're going to see in a couple of regions with non-selective herbicides, glyphosate, dicamba, 2,4-D, glufosinate. It'd be very clear product lines that FMC does not participate in that had outsized growth in 2022 due to commodity price inflation. We've seen some normalization of prices in those product lines, and that's really a downdraft on overall market growth. You think about how significant those products are in the overall market size. Again, for FMC, not really an issue, but for the overall market, it's a bit of a downdraft. Asia, we're seeing more flat for the market. Again, we have some element of these downdraft from nonselective herbicides. There's also some pretty meaningful FX headwinds in different parts of Asia. So again, just for clarity, when we talk about market growth, we're expressing on a U.S. dollar basis. So that's the outlook in local currency is for low to mid-single-digit growth in Asia. And then finally, it goes to Latin America. Latin America really had an extraordinary year last year, very, very strong growth. A lot of it price driven. And a lot of that price driven, again, by nonselective herbicides by the glyphosates and similar products to where as those prices are coming back down to more normal levels, it's a significant downdraft on the overall market. So again, a low single-digit overall market environment. For FMC, though, we still expect to see very strong growth. We're guiding 6% revenue growth for the year and continuing that trend of growing at a multiple of the overall market growth.

Can you talk a little bit about because you've got significant pricing last year, oil was going up, raw materials were going up. Oil has come down, but not a whole lot. What's your expectation of pricing? And how do you offset FX headwinds?

Yes. So for FMC, we had 7% total price increase last year, 11% volume growth, 7% pricing growth, so 18% organic growth for full year 2022. For this year, we're looking at 6% top line growth, some modest FX headwinds, again, in the low single digits. And then the organic growth being more evenly split between price and volume. So pricing, again, a key lever of growth for us. We have been pricing to recoup raw material cost inflation. We have not fully, by any means, recouped or offset that raw material inflation. That raw material inflation and input cost inflation for us has not stopped. We still have year-on-year cost headwinds at the COGS line, what we would refer to as input costs in the first half. We are starting to see some changes as we look ahead into the second half. It ties into why we need pricing throughout the year. We're going to need pricing in the first half to help offset the continued increase year-over-year and the input costs that we're facing. In the second half, where we're starting to see signals of a swing to where we're anticipating a modest tailwind from end-up cost. We still need additional price because we've not recouped the cost that we -- the magnitude of the full cost increases that we've seen over the past several years.

Great. Let me talk about diamides, which is a big franchise for you that you bought from DuPont. I think the sales are close to maybe north of $2 billion from where you bought, it was maybe less than $1 million or $1 billion. So how fast can that grow? What are the key drivers there? And then I have a question about patent exploration that I'll come to.

Sure, sure. So when we talk about the diamides, we're talking about 2, 4 active ingredients Rynaxypyr chlorantraniliprole or Cyazypyr, which is chemically known as Cyantraniliprole. We acquired those molecules from DuPont back in 2017. As P.J. mentioned, we've essentially doubled slightly more than doubled that business in the 5 years we've owned it, with sales in 2022 just shy of $2.1 billion and growth in the year in the mid- to high single digits. So still a very, very strong growing platform. And fundamentally, what you have is a product that works better than the alternatives. It's safer. It has less off-target impacts. It's very effective, have very long sustained control of insects. It's displacing older chemistries that are harsher, less safe, less helpful to the environment. So as a number of those old chemistries get removed from the market, or is it just simply becomes untenable to continue using them, the penetration, the share of the diamides just keeps increasing. Now that said, diamides is the largest class of insecticides. There's still less than 1/3 of the total insecticide markets. There is still a lot of room for them to continue taking share and continue growing. We have been managing a strategy of utilizing partnership relationships where we supply 5 major global partners as well as over 50 regional partners with our diamides today, they sell in their own formulations under their own product names to get -- broaden the access that these products have in the marketplace. So that's been a big part of continuing to sustain that growth. And now as we look to the rest of the decade, mid- to high-single-digit growth of our branded business in 2023 is our expectation. We look to the end of the decade, sustaining mid-single-digit kind of growth. You do run at the law of large numbers here, right? As you know, when you have a $2.1 billion franchise, 5% growth is over $100 million. That's a new active ingredient essentially. That's a new product for the world for many companies every year. So some tapering of that growth rate from the mid to high to mid range is probably to be expected over the next several years.

Can you talk about patent expirations on diamides? You've done some interesting deals like one you did in India with UPL.

Absolutely.

Can you just talk about how do you see the cadence of these expirations and what can you do to extend a life?

Absolutely. So for anyone who really wants to get a deep dive on this, we published about 10 pages of slides in our Q2 of 2021 earnings call that goes through in a lot of depth. I'm not going to go through every detail. But just to give you the big picture, the diamides, Rynaxypyr and Cyazypyr, we have 30 patent families include about 1,000 patents, both granted and applied for that cover broad array of issues that protect the diamides. The one that gets the most initial focus is the composition of matter patents, is literally the patent on the molecule itself. Some of those patents have already started to expire for Rynaxypyr. In fact, in several countries, China, India and certain Eastern European countries, the patent for Rynaxypyr expired in 2022. Now, that's just one of a small part of the total layer of protections we have around these molecules. We also have patents on the manufacturing process to make Rynaxypyr and Cyazypyr. We have patents on the intermediates, the composition amount of patterns on the intermediate materials that are used in that process. So for example, for Rynaxypyr, it's a 16-stage synthesis process. Many of the intermediate steps and the chemicals that are produced there really have no other use than for making Rynaxypyr. We have patents on their composition of matter. We have patents on the process to make several of those as well. We also have patents on formulations on how that product is finally formulated to take to market. So we've had this broad set of patent protections. We are also provided some protection to the use of our regulatory data and the way registrations are managed in different countries. They give us protection that continues well until the end of this decade and, in some cases, a bit longer. And certainly, with -- speaking directly to Rynaxypyr, which has earlier expiration dates, Cyazypyr goes a little bit further. But as you pointed to, P.J., it's not just relying on the patents themselves. And obviously, we've been very aggressive in enforcing the patents. We have won cases for infringement in both China and India and continue to aggressively defend our patents. But we've also engage partners and brought other people in the business ahead of any kind of patent expiration. We don't believe that in our industry, in crop protection, that there really is a patent cliff. It's more of a long plateau as you transition from being a fully-patented to a post-patented life. And I'll tell you, we have post-patent molecules in our portfolio that are about as profitable as Rynaxypyr that are well more than a decade off patent. So it's not only about the patent in terms of maintaining the profitability. But these partnerships, and in particular, the most recent one that you mentioned with UPL are a big part of that, right. Getting other innovation-led players into the game where they're taking out and doing -- using their own formulations and going to their customers and parts of the market we can't reach as effectively on our own, it's been a big part of the doubling of the franchise since we've owned it. And it's a big part of protecting the franchise as it becomes off patent. And in the case of UPL, UPL is a very strong manufacturing company. It's the world's largest generic ag chemical producer. If there is any company in the world that is capable of reverse engineering or manufacturing process or finding alternative processes, I'd suggest UPL is probably one of them. UPL chose to do a deal with us instead of doing that. To me, that signals the strength of the process patents that we have, the difficulty it really takes to actually make these products. And the advantages to being affiliated with the brand Rynaxypyr as well, not just with the chemistry. So I think it's all of those balance and factors, the patent enforcement, the partnerships, the way we've managed registrations, the way we're developing value-added formulations that combine them now and just coming to market now, it takes so long to get product -- new products to market in the ag industry that will bring new ways, new products, higher value to farmers, where you're not just selling a straight chlorantraniliprole generics and Cyazypyr or excuse generic Rynaxypyr, you're selling a differentiated product and continue to keep it that way.

Great. Now let's turn to biologicals, which has been a big topic of discussion. You launched 17 new biological products in 2022. Can you take a second to explain what they are? And also talk about are these region-specific products? And what kind of growth rate do you expect from biologicals?

So biologicals are a place that gets a lot of interest because they typically are less harsh chemistries. They typically have less unintended consequence, less side effect, if you will, let's put in a pharmaceutical kind to speak. They are either chemicals secreted by or extracted from a living molecule or synthesized from that molecule, or in some -- from that organism. And in some cases, it can be the organism itself. It's a very fragmented space, where it's -- right now, we have a plant health business that's reported revenue in 2022 of about $235 million. About half of that is biologicals. And we're 1 of the top 3, 4 players in biologicals in the world, right? So it is a very, very fragmented space, and it's growing rapidly, but it's still a small part of the over crop protection environment. Now one of the -- couple of factors that people tend to think about with biologicals; one, they have been typically smaller in terms of product size. You don't see the $1 billion product that we have not yet in biologicals. What you see typically are smaller, more focused products. They often have a little less duration and control than a synthetic chemistry might have, and one of the trade-offs would use. And in some cases, they have been more regionally limited, particularly if it's the use of a living organism where there have been some regulations preventing use across borders. But when you look at products that are actually using something that's either expressed or extracted and concentrated from a living organism, that's where you're starting to see more global opportunities. And of the 17 new products that we introduced last year, a vast majority of them were, in fact, global or multiregional, if you will, where we were able to take them to market, not just in a single country or a single region in the world. So a couple of examples. We have a biofungicide called Provilar. It's just been introduced in Brazil for use on soybeans and cotton, and has a very, very strong data that supporting its improvement in yields for growers. We're, right now, pushing for registrations in additional 20 countries the globe. It will take a couple of years to get all those countries up and running, but this will be a truly global product. Accudo, which is a biostimulant used in specialty crops. We've got field data, it shows 15% yield improvement. And it's another one where we're registering in multiple countries. Finally, a final example I use is Zironar, which is a nematicide and fungicide used in corn that we've introduced in the U.S. has another significant productivity yield improvement and is one that we expect to be able to introduce across multiple geographies.

Is that -- does that contribute to double-digit growth in...

Yes. I think we've been growing biologicals in the double digits for several years. We would expect to continue doing that for quite some time.

Great. And then you made the acquisition of BioPhero, talked about new pheromones with BioPhero and you want to get to $1 billion by 2030. Can you just tell us about that acquisition? How is that going so far? And then your plans to...

Look, we were super excited to buy BioPhero. We've been an investor in BioPhero for 1.5 years through our FMC Ventures arm. We were an early stage investor in the company. We got very familiar with the technology and with the team and at the right time, so this is a product we really want to, not just invest in, we want to own. And fundamentally, what BioPhero has is a biological process to produce pheromones. So pheromones are naturally occurring chemicals that insects and other organisms used to signal and communicate with each other. So for insects, is a part of identifying where each other are for mating. And pheromones are used today in agriculture, typically in very high-value crops, tree fruits, for example, where you will use a synthetically produced pheromones sprayed out in the field. And it confuses the insects to where they can't find each other. They can't find each other. They can't mate and there are fewer bugs in the next generation. So it's not as an immediate reduction of insect pressure as you get with an insecticide, but over the life cycle of a crop and the multiple generations of insects that you have in a growing season, it reduces substantially the amount of bugs that are there. BioPhero's biggest innovation is they've got a biological process to produce these pheromones, uses a genetically modified yeast that is modified so it produces this chemistry. So it's a biological production technique. You concentrate it through a fermentation after you've grown these particular yeast. And now you have a much lower cost point than traditional chemical synthesis. And that's where we think, rather than the addressable market being just fruits and vegetables, specialty crops, now you're at a cost point where you can take it to broad real crops, and where it can be a very good complement to traditional insecticides like for Rynaxypyr. So we have very, very high expectations. We'd expect to get our first large-scale commercial product in the market either late '24, or early '25, and then a very steep ramp in the second half of the decade to where it's a $1 billion revenue potential for us by the end of the decade. The integration itself is going great. It's a small company, very technology-driven. They just happen to be 5 miles down the road from our European Innovation Center, which is the base of our biologicals business globally. So we've relocated the team and have them together. The R&D team has been incredibly productive. When we acquired the company, there were 5 pheromones in the pipeline, they're now 9. So we're already accelerating the number of pheromones that is identified and where we're being able to do the early stage preparation for production. So at this point, I'd say we're just very, very pleased with progress with BioPhero, very, very excited about the potential there.

So you're saying this [ BioPherons ] are more environmentally friendly, less environmental footprint. And they are cheaper -- how much cheaper are they?

It's an order of magnitude cheaper than the conventional synthetic market for pheromones.

And then how much of the sort of growth insecticide is coming from row crops, corn, soybean versus some niche crops, fruits and vegetables and others? Can you sort of break that down between the 2?

Yes. Look, big picture for FMC. One of the things that is different about FMC versus many of our peer companies, we have a broader crop participation. Certainly, we do participate in corn and soybean. So it means about 20% of our sales, corn is a little less than 10%. But we are substantially lower in our participation in corn and soybean than many of our peer companies, particularly those that have big seed businesses. So historically, we've had big participation in specialty crops, fruits, vegetables, sugarcane, cotton, coffee, rice, other crops beyond soy and corn. Now that said, we've been growing across all of those crops. But in the past several years and in several key markets, including the U.S. and Brazil, we have made investments in selling resources to go out and expand our market access in soybean and cotton. In Brazil, in particular, we have people out there working very closely with large distributors and large cooperatives, helping their teams explain the benefits of how to best use our products to growers and pulling through demand. And we've actually seen very substantial share gain in soybean and corn in those markets. Now, we are still a small player relative to some of the other guys. And again, we still have the benefit of that broader crop balance, but it has been a very strong growth area for us. And insecticide certainly are a key part of that. It's also been a very good opportunity for us in herbicides, where we're a little less -- we're underrepresented relative to the market, but we are making substantial investments in new product development.

Right. We talk a lot about diamides and biologicals. How is the legacy FMC business doing, which is what you're talking about herbicides and all that. How fast can that grow?

That business is actually doing quite well. So just to connect a few dots. We grew top line last year for the total company 15%. Diamides grew in the mid- to high single digits. So therefore, the rest of the portfolio, which -- yes, legacy is probably a misnomer at this point. It's including the longtime FMC active ingredients as well as some new active ingredients that we've introduced, new formulations that we've been developing using those active ingredients. They are growing strongly. Herbicides are a part of this, including Bixlozone new active ingredient, new herbicide for wheat and other cereals that we introduced 2 years ago in Australia and are rolling out in Argentina this year. We'll continue rolling around the world as we move through the rest of the decade. So certainly, that's a part of the growth in new products as well. But even in insecticides, some longtime FMC powerhouse ingredients like bifenthrin, we have some very good value-added formulations that compete very well and that have grown very, very well, not just in the last year but over the past several. So I'd say the -- while with good cause, there's a lot of focus on the diamide portfolio at FMC and there should be. It's a little more than 1/3 of our total sales. It's more than that of our profit. It's been a big driver of our success. It's not everything. The core -- the remaining portfolio, particularly the new products, whether it's new active ingredients and new formulations, are really driving strong growth and helping maintain industry-leading profitability.

You guys are very good at these formulations. And I think that seems to be driving force behind these sort of the old generic products to keep creating new formulations. Can you talk about your strength in formulations?

So that's certainly been, from a historical FMC, a core competence. I think the synergy of putting together the legacy DuPont R&D organization, which is now really the guts of our R&D platform, with FMC's formulating capability, it has just been very, very powerful. Now unfortunately, our industry is slow to get new products to market. So it's just in the last 2 years, we've gotten the first real value-added formulations of the diamides to market. So utilizing some of the FMC's real expertise in developing value-added formulations, we're seeing great, great interest and great growth of Coragen Max, which is a high concentration form of an Rynaxypyr to provide some real efficiency benefits to farmers. For Elevest, which is a dual formulation of Rynaxypyr with bifenthrin, gives you a nice balance of properties. Bifenthrin is very good at quickly killing bugs, again, what they call knockdown. You see visibly that you're killing the bugs that you see in the field, whereas Rynaxypyr is a bit slower, but it has a much longer sustained control. So you get that both immediacy and sustained control.

That's the formulation?

And getting those 2 molecules to live together, not the easiest thing to do chemically. And that's the secret sauce for FMC is being able to figure out how to do that in a formulation. It seems my 2 semesters of chemistry a really long time ago in terms of knowledge, but we have some really deep strength in those areas in the company.

Andrew, can you talk about your inventory levels around the world. I know there is a drought going on in Argentina and Southern Brazil so inventories may be high there as farmers are not spreading chemicals as much. Can you just talk about where inventories are at your level, at the dealer level?

Yes. I mean, certainly, when we talk about inventories, a lot of the focus is on the inventory that's in the channel so downstream from us and our direct customers, whether that be distributors or retailers or growers depending on the market that we're in. Going around the world, let's say, we'll start with Latin America because I think you highlighted one of the hot points. There was a drought and very dry conditions in Southern Brazil and Argentina at the beginning of the growing season in October, November. Some acreage was pulled out of production. There is some lost volume there. So because of that, there is a bit of channel inventory, and something we're very conscious of and managing closely. I would say there has been improvement in precipitation over the past months. Some of that business is just lost. You're not going to pick it back up. Some of it may recover. Rest of Brazil is actually in pretty good shape. So it's really the southern part of Brazil and Argentina that are the hotspot. When I look at the rest of the Americas, the U.S. market and Canada, Canada is still a little early. In the U.S. market, there is a lot of product in the channel because there should be a lot of product in the channel. Planning season starts here in another 4 weeks or so. You need that product in place. So for example, preemergent herbicides, which are an important product line for us. You put those now at or before planting. That's the -- now is the time to have that product in the channel. So I think, from our own estimation and analysis, that levels of channel inventory are in line with the level of sales we've been having. Going around the rest of the world, in Asia, we marked on the call and our most recent earning call highlighted in India. India is another place where we have a little bit of a backup of channel inventory. We have 3 years in a row of sort of uneven or weak monsoons. And I'm not a weather forecaster. I just -- I do know that at some point you revert to me whether that's this year or next year. We went through a similar issue with Australia several years ago. We had a number of years of really pronounced drought. Now they've sort of reversed the threat, and it's a bit of flooding. So I think, this year, India, which is our third largest country, is not likely to be a big contributor to growth as we try to manage through that channel inventory. Europe, generally speaking, pretty good shape. There's a few spots in Southern Europe where there's some pretty hot and dry weather last year. There's a little bit of inventory in the channel, but it's not significant.

So what I'm hearing is there is some -- in some pockets, there is inventory, but you're not concerned overall for the company?

No. No, I think we're managing. I think we know where the issues are, and we're going to manage it proactively.

Also, you had -- when you bought DuPont's business, you also got their lab scientists, R&D machine, so you had plans of getting 1 active ingredient out every year out of your R&D pipeline. Your Isoflex come out, and can you just talk about what do you see in the next few years?

Yes. So look, I think we're trying to get to a pace where -- there's 2 stages in the R&D process, the earlier stage, which we call discovery, where you're really trying to identify molecules that have an interesting activity that have an impact on a particular pest you're trying to control. Once you really get comfortable that there is some activity there, and there's no obvious red flags around its safety, then you move into development, which is a much more resource intensive time period where you're doing all the toxicology work, you're doing field trials to prove efficacy, you do the development of formulations. That's where you spend the real money. So one of our goals has been to get 1 new molecule out of discovery into development every year, with the idea of being as you get into that rhythm, then you start spinning out a new molecule out of development into commercialization every year. We're currently still running in the 0.7 to 0.8 kind of pace. We did have 1 molecule advanced from discovery to development last year. We missed the year before, had 1 year before that. So we're getting to that rhythm. We're not quite at the pace we want to be at yet, but it is accelerating. And it is substantially faster than the historical pace. But we are seeing good things coming out of the pipeline. We've introduced bixlozone, which is a cereal herbicide. And I mentioned earlier, introduced in Australia initially, now in Argentina. We've taken into other countries here over the next several years. We've introduced Fluindapyr, a new fungicide. Fungicide is an area where we're significantly underrepresented in the market. That's been introduced in Paraguay and Argentina, and will next year be introduced in Brazil. So big expectations for that to continue growth, be a $300 million or $400 million molecule for us over a several year period. Next in queue is rice herbicide, tetflupyrolimet, which is not quite yet ready. We're still working registration processes. One of the many things COVID disrupted was getting things through registration processes in countries. So it's taken a bit longer than we would like. But that should be coming to market, hopefully, in 2025. That one is going to be a very interesting one. It's the first new herbicide for use in rice applications in decades. And it is a truly selective herbicide, meaning that it does not impact the target -- the crop itself, but in particularly can take out rice itself as a grass, and you're trying to control grassy weeds within a grass crop. And actually tetflupyrolimet, excuse me, has the ability to do that and very, very exciting chemistry. Just got to get it through regulatory processes.

Okay. My next question, Andrew, is on Precision Ag. So you have a Precision Ag app that you give to farmers for free. It's a cost to you, but a benefit to the grower, can you talk about that? And then does Precision Ag mean that maybe farmers use less of your chemistry because they know precisely know where to apply, when to apply?

Yes. So let's -- we'll talk first about Arc. So Arc is our own proprietary platform that helps our growers manage insect pressure, uses traps, sensors in the field to monitor and not only the number and quantity of pest but identify what kind of pests are in your field. And through some predictive algorithms, many of which are patented, help you identify the best time to apply and how to best apply throughout the field to get the maximum control. That product -- that app has been incredibly popular. Now -- it's now on over 20 million acres, and we have a couple of hundred million dollars of sales that are related to it. But as you pointed out, we don't charge for it. It's a part of building engagement with the grower. And what we can observe, and we have very good data on, growers that use Arc, spend more with us, buy additional products, not just insecticides, and stay with us longer, multiple seasons that we've had out in the marketplace. So we're going to continue investing in Arc. We'll continue to expand it across other countries and crops. And we think that's a good part of using technology and data to help growers have better impact from the insecticides they're using. Now it speaks to the second part of your question, which is the dreaded volume question. And I say it somewhat facetiously, because I'm not worried about volume, worried about value. And we have had multiple experiences with taking through formulation technology, taking a chemistry and reducing significantly the volume that's required to get the desired output, but yet you're extracting the same, if not more value from the product. And that really illustrates for me and hides for me, the idea that, look, there are certain opportunities for using precision application that would reduce the amount of particularly nonselective herbicides that are used. The whole idea with a glyphosate is that the crop that's genetically modified is the only thing that survives being sprayed with glyphosate. So you spray everything with it. So if you're able to more selectively spray it, yes, you can reduce substantially the volumes. We don't play in that field. The herbicides we sell are selective herbicides that only target the weed, don't target the actual crop that's been grown. You already apply that only in the areas where you have weeds that are showing up, that are resistant to other herbicides because selective herbicides are more expensive than nonselective herbicides. So it's not to say that there can't be impacts from precision applications, they probably will be. But I think we have already significant experience that suggests you focus on delivering value for the farmer, you can get paid for it. And the volume is really not the driving variable. We don't have a big manufacturing infrastructure, backward integrated into other things that we need to feed and absorb fixed costs from that needs to drive volume. We're worried about driving value. And the way we drive value is the same way when we think about value-added formulation, how we create a product that has better impact for the farmer.

Great. Now my next 2 questions are about CapEx and R&D. CapEx is going up. Can you talk to us about where that is going? And then also same thing about R&D, and where do you think R&D expenses are going?

Sure. So CapEx was about $119 million last year. We're guiding in the midpoint about $160 million this year. So it's a meaningful tick up in CapEx. And DuPont put that into context. We're guiding revenue of $6.15 billion this year, with $160 million in CapEx. This is not a fixed asset-intensive business. It is a step up. Where is that going? It's going into capacity for active ingredient manufacturing and for formulation capacity to support our growth. It's going to further diversify our supply base, where we're investing in active ingredient manufacturing capacity in India, in the U.S. and in Europe, particularly in Denmark, to complement the historical sourcing that we have in China. So it's a part of balance, it's a part of continuing to support the growth. I think that's probably the right kind of range for the next several years. We've got new active ingredients we're bringing to the market that as we bring them to market, we need to bring new capacity to manufacture them. But I don't see a huge acceleration from that level.

How big was China before -- what is it now as a percentage?

So if you trace China back in our supply chain, not just from direct purchases, but also 2 or 3 layers back into where our suppliers are buying from suppliers they're buying from China, China in 2012 was probably 90%. As of today, it's about 40%. And if you look at the chemical industry broadly, especially in fine chemicals, you know this better than I, the portion of the installed capacity of the world and especially in fine chemicals, you're not going to get much below 40%. You might give yourself the illusion of that you're not, but if you really trace back, you're going to be dependent on China to a degree. So it's not about not being dependent on China. It's about making sure you have multiple sources particularly in a highly regulated industry like ours, where your registration is tied to the source point that the active ingredient is produced. If you don't have that active ingredient registered at multiple production sites, and you have a disruption anywhere, you can be short -- out of supply for a while. So we've, over a 10-year period, really worked to build resilience in our supply chain, both by updating registrations to have multiple source lines, by developing multiple suppliers. You give up a little bit of purchasing economics, but you get a tremendous upside and resilience. And it's something that really paid off well for us through the pandemic and all the disruptions that we've had there. It's not cost neutral, but it does allow you, particularly in very high-margin products like ours, to have continuity of supply and availability of materials.

How big China as a market for you?

China is in our top 20, but at the bottom end. It's probably $100-ish million in revenue. So as an end market for sales, it's not a big market for us. The Chinese domestic market is largely generic, and it is not a place where our differentiated products get as much value in the marketplace. As a sourcing point, more important.

Right. And about R&D, let's go back to R&D?

Yes. So R&D, we spend a pretty significant amount of money on R&D, a little over $300 million last year. This year, we expect R&D spending to grow a little bit faster than sales and trend back up to about a 6% of sales level. Percentage of sales is probably not the best -- it's not the only way of thinking about R&D spending. The way we really are building up that spending is looking at the projects in the pipeline, and what it's going to take to keep advancing them. And as I said, like we had 1 molecule this year that we moved out of the early stage of discovery into the development process. And that's where you start really spending money. Now you're doing field studies, you're doing toxicology studies, doing large-scale trials that start to burn up a lot of money, right? So there is a little step up as that next molecule moves into the development process. But it's still at a level that's comparable, if not below what our peers spend. Crop chemistry is a little less R&D intensive than seeds. We don't have the same heavier load that most of our seed-based competitors seem to have. But I think just for people looking at the structure of our P&L, 6-ish percent R&D is probably the right place for the next couple of years.

And my last question to you, and then we'll take questions from the audience is on M&A pipeline. You relied on M&A consistently. Where are you looking for? Is it biologicals? Is it geographies that you're targeting? And how is your M&A funnel looking like?

Yes. So look, I think for us right now, our company and its configuration exists because of antitrust divestitures from the last wave of consolidation and the top tier of crop chemistry. An immediate net wave of large-scale consolidation. The real M&A is really driven around technology. And you could describe it as augmenting our internal R&D efforts. So where we spent money on M&A, we bought out our development partner [indiscernible] 2 years ago. This year, we bought BioPhero, which we were speaking about earlier, earlier-stage technology, potentially game breaking -- game-changing technology. We're looking at a lot of things in the biological space, which tend to be smaller companies, it's $10 million and $20 million and $50 million kind of deals, not hundreds of millions of dollars of deals. So I think you should expect we will continue to be active looking at technology. And even further early stage through our FMC Ventures group, as I mentioned, BioPhero was initially an equity investment that we eventually ended up buying the rest of the stake out of. We've made investments in peptides and robotics and drone technology, most recently in an ag fintech in Brazil, looking at bringing different sources of working capital financing into growers in Brazil. So those kinds of places, smaller amounts. So it should not consume all of our free cash flow, not transformative. Part of the challenge with biologicals, it is a very fragmented space. There are not a lot of big things to go out there and buy.

Correct. With that, let me stop here and take any questions from the audience.

Quickly you mentioned the expansion in the capacity that you guys were doing. And I think you answered this, but in terms of the inputs there, are any -- as you guys expand, are any exclusive to you guys? It sounds like you have multiple sources there, but just in terms of potential bottlenecks going forward?

Yes. So looking back to the intermediate raw materials that we need to feed those manufacturing -- new manufacturing capacity, some of it is we'll do long-term partner or supply agreements. Some of it is, it's a mix of spot in long term. But I think, to your broader point, we're very, very careful to make sure we're not sole sourced on any critical material.

Any other questions? Well, if not, I have 1 more question for you, which is a question we're asking all the companies at this conference. So what are the top 2 or 3 innovations, mega trends or structural changes affecting your company in the next 5 years? May not be within the company from outside, what are the 2 or 3 mega trends that you see?

Look, I think trying -- the biggest one is one that's been around for a while that is getting different viewpoints on it and different highlights now. We're in a world that has a growing population and a growing need for output from agriculture. How do you increase that yield with having as minimal adverse impact as you can, right? And that's where bringing more sustainable chemistries, whether that's synthetics, like the Rynaxypyr and Cyazypyr or biologicals like pheromones and other biofungicides, bioinsecticides, bringing products that help drive yield, increase productivity of agriculture with less adverse impact. That's the key theme impacting our industry.

Great. Well, if there are no questions, I want to thank you Andrew.

One chain was plugged. November -- mid-November of this year, we'll be holding an Investor Day at our headquarters in Philadelphia. We're in the fifth year of our first 5-year plan as a focused ag company first time in my career in the chemical industry, we've ever made it to the fifth year of a 5-year plan. So we're very excited to share with you what is currently a work in process of our next long-range plan. So look for a save the date shortly, but mid-November in Philadelphia would love to see you there.

Great.

Thanks, P.J.

Andrew, thank you. Excellent.