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Channel feedback indicates the destocking actions are a result of three factors: first, higher interest rates have increased the carrying cost of inventory; second, there is increased confidence in product availability as the supply chain disruptions of the past few years have eased; and third, price reductions in fertilizers and nonselective herbicides have led to a wait-and-see approach to ordering.
As a result, growers in the distribution channel are placing orders as close to application as possible.
why sales are lower
Transcript
2023 Q2
10 Oct 23
Parkinson Very helpful. And just as a quick follow-up. I know it's a little bit early, but obviously, there's going to be a lot of focus on free cash flow generation and obviously, how a lot of investors have been thinking about your rolling three-year averages and how '23 is a bit of a hiccup in that kind of longer-term trends. Perhaps either you or Andrew could just hit on the key considerations as we're exiting '23, understanding there can always be a lot of movement between the fourth and the first quarters. But how should investors be broadly thinking about the longer-term algo as it -- specifically as it pertains to hopeful '24 improvements? Thank you.
Andrew Sandifer
Sure. Hey. It's Andrew, Chris. Thanks. Look, I think that the story for free cash flow in 2023 is actually relatively simple.
However, challenging and disappointing it might be in the immediate term.
We have a substantial drop in the EBITDA guidance for the year that flows directly through cash flow. The sales growth is in the second half, and the balance of our sales is more second half weighted as you know well, given the regions in which those sales are made, we won't collect on those sales in the year, so collections are lower.
But building on comments Mark made in our prepared remarks, we are adjusting production levels across our operating lines right now. That means we're not buying anything as we're not manufacturing a lot of -- we have ample inventory at the moment.
So, we're not manufacturing a lot of new material.
So, we're not buying anything.
So, we're looking at somewhere north of a $400 million drop in accounts payable at year-end. I mean simply $180 million drop in the EBITDA guidance and a $400 million drop in accounts payable basically wipes out the free cash flow we had guided for this year.
Now as you pointed to, free cash flow is pretty lumpy. And as you cross, time periods can swing pretty rapidly. We do expect that as we move into more normalized conditions in '24, that we would see a rebound in free cash flow. We’d see a rebuilding of payables. We’d see a reduction in inventory, and we get back to a more normal collection cycle, more balance between the halves of the year.
So we have nothing that makes us feel any different about our long-term goal and expectation that we should operate this business at a 70% plus rolling average free cash flow generation. It's just these -- the rapidity of these adjustments in this channel inventory reset this year is just too much to overcome unfortunately, in the six-month period.
So that's the reality of free cash flow. But again, I think we feel very confident about the cash-generating capability of this business over the long term, and you will see that rebound as the situation normalizes.
cash flow normalize?
Transcript
2023 Q2
10 Oct 23
Given the size of the NPI sales today, to put it in perspective for you, in Q2, about 14% of our revenue came from products launched in the last five years. That was up from 10% in Q2 2022.
npi
Transcript
2023 Q2
10 Oct 23
es. Listen, I think given the strength of the portfolio, and I just alluded to the fact that our products launched in the last five years were very robust in the quarter and have been so far this year. That's a lot to do with the type of products we're bringing that are differentiated. And with differentiation, you have the ability to hold price, which is what we're talking about now.
pricing/differentiation
Transcript
2023 Q2
10 Oct 23
While we have not seen this magnitude of volume change across multiple regions at the same time before, we have successfully managed through demand shocks in the past and have always emerged a stronger, more profitable business. I am confident this will happen again, especially as we have the benefit of good grow demand for our products around the world.
unprecedented
Transcript
2023 Q2
10 Oct 23
While we have not seen this magnitude of volume change across multiple regions at the same time before, we have successfully managed through demand shocks in the past and have always emerged a stronger, more profitable business. I am confident this will happen again, especially as we have the benefit of good grow demand for our products around the world.
unprecedented
Transcript
2023 Q2
10 Oct 23
This guidance implies a rolling three-year average free cash flow conversion of 47%, well below our targeted 70-plus-percent due entirely to the cash flow impacts of the channel inventory reset.
While it's too early to comment in detail, we do expect cash flow to rebound as we move past the current disruptions.
cash flow outlook
Transcript
2023 Q2
10 Oct 23
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