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Syngenta AG (NYSE:SYT)

2012 Earnings Call

February 06, 2013 2:00 am ET

Executives

Jennifer Gough - Head of Investor Relations

Michael T. Mack - Chief Executive Officer, Director, Member of Chairmans Committee and Member of Corporate Responsibility Committee

John Ramsay - Chief Financial Officer

Analysts

Andrew Stott - BofA Merrill Lynch, Research Division

Sophie Jourdier - Liberum Capital Limited, Research Division

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

Bettina Edmondston - Kepler Capital Markets, Research Division

Neil C. Tyler - JP Morgan Chase & Co, Research Division

Tony Jones - Redburn Partners LLP, Research Division

Andrew Benson - Citigroup Inc, Research Division

Operator

Thank you for standing by and welcome to the Syngenta's Full Year 2012 Results Call. [Operator Instructions] I must advise you that the conference is being recorded today, Wednesday, the 6th of February 2013. And I would now like to hand the conference over to your speaker today, Jennifer Gough. Please go ahead.

Jennifer Gough

Good morning, and welcome to the call. Today's presentation is being hosted by Mike Mack, CEO; and John Ramsay, CFO. And the slides to accompany the presentation are available on our website, syngenta.com. Let me first draw your attention to the forward-looking statements for Safe Harbor on Slide #2. This presentation contains statements that may be subject to risks and uncertainties. We refer you to the SEC filings for further information.

And with that, I'm going to hand over to Mike who will begin the presentation starting on Slide #3.

Michael T. Mack

Thank you, Jennifer. Good morning, ladies and gentlemen, and welcome to the call. The results announced this morning demonstrate a continuation of the sales momentum, which we've seen since the launch of our integrated strategy 2 years ago now.

Sales at a constant exchange rates were up 10% in 2012. I'm very pleased to report that both developed and emerging markets performed strongly. As of midyear, commercial integration was complete in all 19 territories. And this presentation, we shall be talking about some of the early proof points underpinning our confidence that our strategy is really resonating to customers and will drive future growth.

Development of our seeds technology over the past 5 years is one of the prerequisites for embarking on our strategy. This technology is continuing to prove itself in the field. Double-digit growth in all regions. It's a key enabler of our integrated offers, and we're now undertaking a series of investments in new capacity, the latest of which announced this morning is a significant expansion at our Formosa plant in Brazil.

Last year, many of you will have participated in updates on 4 of our key crops: cereals, corn, rice and vegetables. Advances in these businesses have enabled us to raise our sales target with the 8 key crops combined to $25 billion in 2020. This implies accounts on average growth rate of 8%, illustrating our confidence in our ability to outperform a growing market.

2012 also saw us make a number of acquisitions to expand the breadth of our technology. These acquisitions, which I'll come back to a little bit later, enabled us to leverage our investment in R&D, to get new solutions to growers more quickly.

We turn now to our performance in each of the major regions in Slide 4. Integrated sales excluding lawn and garden rose by 11%. The strongest performance came from North America, where record corn acreage and high commodity prices stimulated investment in the first half of the year. Although drought in the summer caused a drop in yield, lower incomes were protected by crop insurance. Dry conditions were a stark reminder of the need to optimize water use. We were able to demonstrate in the field the value of our trade technology and our integrated offers. At the same time, the growing challenge of weed and insect resistance further underlined the benefits of our integrated solutions.

In Europe, cold weather in the early part of the year obliged many growers to switch to spring crops, favoring our leading sunflower and corn seeds businesses. This was particularly the case in the CIS and Southeast Europe, where we also saw strong growth in Crop Protection with the ongoing modernization of agriculture. In Northern Europe, sales were robust. Notably, in France our fungicide portfolio made significant gains. In Asia Pacific, sales excluding the impact of range rationalization were up 5%. Strong growth in China and Southeast Asia.

Sales in Australia were lower due to extreme weather conditions there. And in Latin America, where high soybean prices have resulted in increased acreage and investment in what is already a highly productive sector. Conversely, sugarcane growers are only now beginning to realize the benefits technology brings in terms of increased output, efficiency and quality.

Overall, the highest growth rate came from seeds. I shall be coming back to that later in the presentation.

Before handing you over to John Ramsay, I'd like to cover the recent performance and outlook in Latin America in just a bit more detail, Slide 5. If you look at the chart at the top of the Slide, you can see how the business staged a strong recovery from the effects of drought early in the year, with sales down 3% in the first quarter. Sales in the fourth quarter alone were $1.6 billion and represented 42% of the annual total. It's important to be aware though that in Crop Protection, a lot of those Q4 sales were herbicides applied early in the season. Because we recognize sales on consumption in this market, a large portion of our fungicide sales will be recognized in the first quarter of this year. We remain very confident on the longer-term outlook for Latin America. We just launched our new fungicide Solatenol in Paraguay and are waiting registration now in the largest market, Brazil. We expect continued strong growth in seeds as evidenced by last year's announcement on new core capacity in Argentina and today's announcement on Brazil.

We now hand you over to John for a detailed review of our financials. John?

John Ramsay

Well, thank you, Mike, and good morning. I'm pleased to announce the financial highlights on Slide 7.

Following a record year financial performance in 2011, I'm pleased to report on another year of strong performance in 2012, another record. Reported sales were up 7% at $14.2 billion, a 10% increase at constant exchange rates, comprised 7% volume and 3% price.

Targeted price increases in crop protection were achieved as planned. EBITDA at constant exchange rates is up 17% at $3.2 billion. Constant exchange rates, the margin reached 23.2% compared with 21.9% in 2011. And the reported EBITDA margin was 22.2%. This included a headwind in line with previous estimates, $325 million for currency and raw materials combined.

Net income, including restructuring and impairment, was up 17% to $1.9 billion. The earnings per share, excluding restructuring and impairment, were 15% higher at $22.30. Underlying free cash flow was strong at $0.9 billion and allowed us to finance a number of strategic acquisitions. Strong performance and business outlook has enabled us to propose a dividend increase of 19% to CHF 9.50 per share. US dollars, the increase will be around 21% with current exchange rates.

Finally, the cash flow return on investment was 15%, once again above our target of 12%.

Slide 8 shows you the detailed sales growth. I'm pleased to report that volume growth increased sales by $880 million as you can see in the light green shaded area. This reflects strong performances in all regions except Asia Pacific, which I will come back to later.

Volume growth had coupled with the achievement of targeted price increases to have total global contribution of $425 million. Lawn and garden, sales are lower due to strategic divestments, which had a positive impact on profitability, which I shall highlight in a moment. Currencies had a negative impact on the top line of $371 million due to the appreciation of the dollar against most currencies.

Slide 9 gives the progression of operating income. In the interest of transparency, I have broken this down in some detail to take you through the different components. Volume, which includes royalty income and mix, together with price, did substantial contributions to increase the operating income. Cost savings amounted to $198 million, arising mainly from our commercial integration. But also some further savings of integration of our global services organization, which has been underway for a few years.

Increases in cost of goods sold include higher raw material costs due to the oil price and higher cost of seed production, particularly in North America. $150 million of cost inflation arising mainly from emerging markets represents an increase of around 3% on the total cost base, including fixed production costs. Total cost increases were more than offset by higher prices.

Investments in growing the business totaled $170 million. And currency had a significant impact on operating income, accounting for around $220 million of the $238 million. And within other, we also had an $80 million charge for settlement of the actions in court case, as well as some sundry gains. Taken together, the operating margin increase was in constant exchange rates and the reported exchange.

Looking ahead to 2013 and given the current market conditions, we'd expect a combined impact of currency and raw materials to be broadly neutral. We will additionally seek further price increases, though I would anticipate those to be more moderate than in 2012.

Turning now to performance by region on Slide 10 and starting with the northern hemisphere. Margins on these charts are at reported exchange rates. We therefore include the negative currency impact just mentioned. This was particularly significant in Europe, Africa and the Middle East, as well as in Asia Pacific. In Europe, solid volumes and price increases across most of the portfolio largely offset the adverse currency impact. The quality of the business in Europe reflects the sophistication of Western European markets and the relatively large proportion of our portfolio in high-margin product lines, notably fungicides. Numbers show that our expansion in the CIS and Southeast Europe territories over recent years has been at an attractive level of profitability.

In North America, sales growth was driven by the breadth of our offer, in particular by our leading Crop Protection portfolio. Our integrated weed and insect resistance management offers are gaining momentum as growers increasingly appreciate the value. Expansion of our corn technology resulted in good underlying seeds growth augmented by corn trade royalty income.

The regional performance in Latin America and Asia Pacific is shown on Slide 11. Sales performance in Latin America has been strong. Commercial integration in Latin America and particularly the early integration in Brazil, now at the end of its third year, has enabled us to drive growth of our seeds portfolio. Seed care expanded rapidly in the region, primarily CRUISER and AVICTA. This helped offset the impact of first quarter drought, which led to only modest growth in high-margin fungicides. Latin America continues to see a relatively high level of growth investments. For example, in sugarcane.

In Asia Pacific, you already have, Mike mentioned, the underlying growth adjusted for currency and range rationalization, was 5% higher compared to prior year. This growth was driven by the emerging markets, Southeast Asia and China, partly offset by a decline in Australia caused by adverse weather. Seed care expanded strongly with multiple performances again by CRUISER and also by CELEST.

Please turn to Slide 12 for a look at our lawn and garden business. The chart shows the 2012 reported margin on sales evolution compared with 2011. For clarity, I've also provided a pro forma 2012 sales and margin calculation showing the annualized contribution as a result of our actions over the last year.

Strategic focus on high-value chemistry and genetics led to that divestments of the FAFARD growing media business and the SHS distribution and brokerage business, both of which were lower margin business units. On the other hand, we acquired DuPont's Professional Products insecticide business which complements our existing [indiscernible] portfolio. And these actions together amounted to around 4 percentage points improvement in annual EBITDA margin and represents a significant progress towards achieving our margin target of 20% by 2015. I believe that lawn and garden business now has a solid foundation in which to base future growth.

Please turn to Slide 13. We continue to report sales by product line for both Crop Protection and seeds. Note that the size of the bars is affected by currency in the year while the percentage change is a constant currency. Crop Protection sales were driven in particular by selective herbicide growth across the Americas. Demand was high for CALLISTO in weed resistance management programs on corn and soybean in the U.S. and increasingly in integrated agronomic protocols for sugarcane in Brazil. Nonselective herbicide sales also increased, primarily reflecting strong volume and price increases in the Americas for our glyphosate product TOUCHDOWN as a result of high demand on corn and soybeans, as well as a shortage of generic supply.

Strong quarter 4 fungicide growth in Latin America offset the earlier impacts of drought. Insecticide sales were up 6%. And excluding the impact of range rationalization, sales were up 10%. The mild winter in the U.S. created heavy early insect pressure. And in addition North American sales of FORCE more than doubled as grower awareness of corn rootworm resistance increased. Technology adoption in Brazil further underpinned growth with strong contributions from ACTARA and DURIVO. Seed care sales were up 12%, led by CRUISER and CELEST/MAXIM. Further advance was made in emerging markets, where growth exceeded 20%.

Slide 14. Let me take this opportunity to focus on the current debate in Europe around the neonic path of chemistry and its alleged impact on bees. The chart is a breakdown of our worldwide thiamethoxam sales, totaling in 2012 $1.1 billion. Just over half these sales relate to the soil and foliar spray insecticide, ACTARA. Through the seed treatment form of thiamethoxam, it's a proven and highly effective technology sold and safely used in more than 80 countries and in over 20 crops. They remain better than any alternative technologies available today. Our EU sales on corn, oilseed rape and sunflower, crops currently under discussion, highlighted in brown on the chart. You can see that this is a relatively small proportion of our thiamethoxam business. With European farmers, however, withdrawal of neonics would mean yield reductions of up to 40%. The total annual economic loss within the EU is estimated at EUR 5 billion. Now clear evidence of years monitoring in the field proves that neonics pose no risk to honeybees. Armed with this evidence, we will vigorously defend our product on the grounds of sound science and sustainability, as well as the economic benefits.

So moving onto Slide 15. The progression of our new products is one illustration of how we're able to sustain leadership in Crop Protection. Sales of these products were up by 36% for the full year and a compound annual growth rate of 44%. Let me give you just a few of the highlights. Sales of the herbicide AXIAL registered double-digit growth in all regions with the largest contribution coming from the key Canadian cereals market. The nematicide seed treatment AVICTA had strong sales growth on cotton and soybean in Brazil, partly offset by lower sales in the U.S. into the summer drought. The DURIVO family of insecticides was ruled out on rice and vegetables in Asia Pacific, while sales in Brazil increased 80%.

The most recent launches, the fungicide SEGURIS and the seed treatment VIBRANCE both have significant potential. Sales of SEGURIS doubled in 2012, and we secured EU registration with this mixed-generation fungicide back in November. VIBRANCE, which is one of the industry's first molecule specifically developed to be used as a seed treatment, generated first sales in North America, with a successful launch on cereals, soybean and canola.

We are equally pleased with the growth we achieved in our seeds portfolio shown on Slide 16. Let me start with corn. Underlying corn seed sales were up strongly in all regions demonstrating the success of our corn technology investments in generating growth. As I mentioned at the first half, corn sales were augmented by recognition of trade royalty income of around $200 million under our licensing agreement with DuPont Pioneer. In soybean, ongoing conversion of our portfolio to Roundup-ready 2 technology in the U.S. is progressing well, while in Brazil, increases in soybean acreage generated strong sales growth.

In Diverse Field Crops, sales of sunflower continued their growth notably in CIS and Southeast Europe, where we are capturing value from the expansion of our leading conventional and high oleic hybrids. Northern Europe, hybrid barley, now in more than 300,000 hectares, is starting to make a significant contribution alongside growth in existing wheat business. Vegetables generated strong growth in the fourth quarter in all regions and has more than offset the weakness in the first 9 months.

Turning to Slide 17. We remain on track to deliver cumulative cost savings of $650 million in 2015. In 2012, we met the full year cumulative target of $300 million with more than half coming from SG&A, in particular commercial integration. In coming years, emphasis will increasingly be on the supply chain and global procurement efficiencies. The total cash cost of the program is unchanged at an estimated $400 million, and you can see on the slide, the income statement charge and cash flow impact for 2012, as well as an outlook for 2013.

Please turn to Slide 18. Operating income of $2.6 billion before restructuring and impairment rose by 11% and 21% at constant exchange rates. Net financial expense was a little lower at $147 million, reflecting some one-off gains on interest swaps. Tax rate for the year was 15% excluding restructuring and impairment. In a forward-looking basis, I would expect this to be closer to 20%. After a net restructuring charge of $182 million, net income reached $1.9 billion, an increase of 17%. Earnings per share increased by 15% to $22.30.

Turning now to cash flow on Slide 19. You can see in the green the pre-acquisition cash flow was strong at more than $900 million. The level of working capital increased in absolute terms during the year from an unusually low level at the end of 2011. And this increase primarily relates to higher receivables in Latin America as our business grows and from higher inventory build for the northern hemisphere.

Average working capital as a percentage of sales was lower in 2012 than 2011, and this demonstrates our continuing tight control. Capital expenditures of $679 million was in line with our guidance an reflects increased investment to meet growing demand, especially in emerging markets. Let's talk more about this in a moment. Market financing and tax expenses at $481 million, pre-acquisition cash flow reached $924 million. This was a higher than normal year for acquisitions. Total expenditure amounting to $654 million, leaving a reported free cash flow of $270 million.

Slide 20 shows our investment profile over the last 5 years. Peak capital expenditure in 2009 coincided with our capacity expansion program, which has enabled the growth in some of our leading chemistries we are seeing today. Future growth potential of our business is already evident in our sales progression, and we are now in a phase of investing in order to enable future growth, especially in the case of emerging markets. As we move toward the $25 billion sales target, I would expect a step up in investment in tangible fixed assets, which we will manage to 5% of sales.

The other component in the chart is acquisition expenditure. We continue to be on the lookout for opportunities, particularly those focused on enhancing our street portfolio and our technology capabilities. Use of cash in such activities will, by their nature, be variable from one year to the next. And at the bottom of the chart, you can see the net gearing, which remains at a low-level following last year's acquisitions, enabling continued increase in cash return to shareholders.

Slide 21 shows earnings per share in the bars with the axis on the left. The line represents dividend declared against the right axis. Over the last 5 years, we have generated double-digit annual earnings per share growth, but over the same period, dividend growth was faster, as we placed greater importance on this component of cash return to shareholders. And for 2012, our proposed dividend is CHF 9.50. This represents an increase in U.S. dollars at current exchange rates of 21% over prior year. And this again above our earnings per share growth of 15%.

Let me take this opportunity to confirm our commitment to delivering sustainable dividend increases as our preferred method of cash return to shareholders. We do however retain the flexibility to undertake tactical share buybacks when appropriate.

To conclude, I will remind you of our financial framework. You can see this summarized on Slide 22. Our ambition is to outperform the market, and I'm pleased to report that in 2012, all figures are provisional. We believe that we have gained further market share. We have committed to delivering profitable growth, and our EBITDA target range is 22% to 24% by 2015. As you've seen in 2012, we are now within this range.

Looking ahead, we expect R&D to follow within a range of 9% to 10% of sales. We target cash flow return on invested capital in excess of 12% on an ongoing basis. We will do this while keeping capital expenditure levels at around 5% of sales, as I just mentioned. We will continue to maintain a strong balance sheet with the flexibility to undertake future growth investments and acquisitions as and when they materialize. And our final objective is to continue to return significant cash to our shareholders. In this regard, as I've already mentioned, we have committed to a progressive dividend policy.

With that, let me hand you back to Mike.

Michael T. Mack

Thank you, John. Please turn now to Slide 24, which shows the breakdown of our sales by crop and the growth rates we achieved in 2012. Highlights include corn. The growth was driven by freight revenue the success of our weed and insect resistance offer in North America, by strong growth in Latin America, Asia and Eastern Europe. Our herbicide programs also contributed to growth in soybean, as did fungicide growth in seeds in Latin America. In Cereals, the acceleration of hybrid barley is contributing to growth alongside Crop Protection products such as AXIAL. And you can see that the 2 crops, which are currently the smallest, sugarcane and rice, are growing rapidly. Specialty crop sales were lower in 2012, owing to a decline in cotton acreage.

Slide 25 shows how all 8 crops are expected to contribute to our targeted $25 billion in sales in 2020. You can also see the upgrades we made recently based on a better understanding of the portfolio potential. For corn, we expect additional sales to come from water optimization, resistance management and further emerging market expansion. Cereals, a key driver is our integrated hybrid barley offer, with estimated peak sales of over $500 million. In rice, our GroMore protocols are surpassing expectations, and we're now expanding the scope of the technical [ph] program.

Please turn now to Slide 26, which we've included in order to help you model our sales progress by region. In line with recent experience, the fastest growth is expected to come from the emerging markets with Latin America, Asia Pacific, Eastern Europe and Africa all achieving a compound annual growth rate of just over 10%. However, we also expect to sustain solid growth in the developed regions over this period, with a growth rate of around 5%. The main drivers by region are shown on this slide. They're just examples of the multiple growth opportunities we see. We believe that our ability to leverage technology across regions continue to be an important differentiator.

Overall, this represents a significantly higher long term growth rate than we could have expected to achieve with our former strategy. And it demonstrates the added value we can realize through integrating our portfolio in the way near-term success is leading to a broader growth opportunity.

And Slide 27 explains that now in more detail. This slide sets out the 3-level target approach to integration and shows you how different offers fit into that approach. Near-term success is currently coming from leveraging our combined field force. All of the early examples shown on the left contributed to our 2012 performance. Corn and soybean sales in Latin America and above average growth in Southeast Europe and the CIS. As our experience in thinking across portfolios deepen, we're able to develop integrated offers for yield, quality and convenience that build on our existing assets. The GroMore protocols in rice, for example, are based on a numbers of existing Crop Protection products which, when used in an integrated and grower focused way, can bring yield increases of up to 30%.

Breakthrough innovation is the final step. And that means bringing to market entirely new offers that from their inception draw upon multiple technologies. Our hybrid barley program, branded Hyvido, was born from the interaction between distinctive genetics and chemistry.

The following slide go into little more detail now on examples from each level, starting with Latin America seeds on Slide 28. Brazil was one of the pilot territories for our strategy. 2012 was therefore its third year of integration. We have for some years been the Crop Protection leader in Brazil, and we're now able to deploy the full strength of our sales force behind our seeds portfolio. And this has resulted in acceleration of growth over the last 5 years and average annual market share gain of 1% in corn and soybean. Of course, we needed to have competitive technology in order to achieve this. This has been evidenced in the quality of our germplasm and the new trait combinations, including VIPTERA. In order to satisfy the growing demand we're seeing, we'll have new capacity on stream in both Argentina and Brazil around middle of the decade.

The next 2 slides move onto the little level of integrated offers, an example of sugarcane starting on Slide 29. The launch of our PLENE program in Brazil has catalyzed increased awareness among sugarcane growers the need to improve productivity through investment. Our portfolio can meet this at every stage of the growing cycle. By following our integrated protocols, growers can achieve a 10% to 20% increase in yield. The consequence, we're already seeing dramatic growth in Brazilian Crop Protection sales for sugarcane, up 37% last year.

Turning now to Slide 30, an update on PLENE, our system for the production of sugarcane steps for mechanical planting. We're currently adapting and rescaling our manufacturing there in order to be able to meet strong demand while increasing the capacity of our Biofactory. We're also stepping up production of our own seedlings growing in the field. Looking further in the future, ahead of plan and trial in herbicide and insect traits and are aiming to introduce agronomic traits within 10 years.

Please turn now to Slide 31 for a look at the results achieved by our irrigation platform operated in partnership with Lindsay in the U.S. This offers growers an automated irrigation program combined with genetics, crop protection and crop enhancement. The brown bars on the chart show the results achieved via standard program using maximum irrigation with 75% reduced rate. The green bars show results from the Syngenta program with the same amount of water. In both cases, the yield is superior. And at 202 bushels per acre, a grower achieves more using 75% water than he does using 100% with the standard program. This represents an average return on investment of $95 per acre. We plan to reach 250,000 acres with this offer for 2015 and the potential market longer-term will be the 9 million or so irrigated acres in the United States.

Slide 32 shows you how we're directing R&D spend to maximize the 3-level approach to integration. Starting point is the establishment of global platforms to underpin a cost-efficient approach that leverages investment globally. We're also stepping up investment in biological assessment in order to expand the scope of our second level integrated offers. This means combined testing of chemistry and genetics across our broad network of local development sites.

Chemicals are the foundation of value-adding protocols. We will continue to make substantial investments in new Crop Protection products. At the same time, we can leverage our existing portfolio by building it into new solutions. We'll also maintain our track record of life cycle management and funding new formulations and label extensions. And finally, we'll exploit cross-crop opportunities to research in RNAi and genetics.

Please turn now to Slide 33. Our acquisition strategy is to seek out opportunities that complement our existing portfolio and R&D projects that fit well within our cross strategies. Devgen and Pasteuria, both completed last year, are excellent examples of this. Devgen will further accelerate our growth in rice, adding best-in-class rice hybrids to our strong Crop Protection offering. The development of its RNAi technology will expand the scope of insect, weed and resistance control within both chemicals and seeds.

Pasteuria brings us a biological platform for nematode control, which will expand the franchise we've already have with AVICTA. The lower chart shows its success in trials versus the leading competitor. The production process for bacteria soil from Pasteuria is already fully scaled up, and we expect to launch the first product for the control of soybean cyst nematode later this year.

Turning now to outlook on Slide 34. Strength of our business in the Americas in the fourth quarter is indicative of strong demand going into the start of 2013. We expect the business to be further supported from the benefit of our first full year of commercial integration. We expect to generate significant free cash flow this coming year, while at the same time making continued investments in R&D, marketing, particularly in developed countries and finally new capacity. We will maintain the flexibility to grasp further strategic acquisition opportunities as they arrive and to enter into new value-adding partnerships. All this puts us on track to achieve our long-term objective of outperforming and expanding market while building on the share gains we've already achieved.

Before concluding, I would like to inform you now about the crop updates we scheduled for this year shown on Slide 35. In July, we'll showcase Diverse Field Crops in one of the key markets, Russia, where you will also be able to learn about the business model there in its high-growth environment. Then in December, we're inviting you to join us in Brazil, where we will cover the remaining 3 strategic crops: soybean, specialty and sugar cane. You'll soon be receiving registration details from Jennifer, and I look forward hopefully to seeing you at these events.

And with that, let me now open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Andrew Stott from Bank of America.

Andrew Stott - BofA Merrill Lynch, Research Division

Mike, you mentioned earlier the -- I think I read your comments, there's a delayed benefit in Lat Am from the growth you've seen as in the mix issue. I'm just wondering why do you not see that every year? So is there an exceptional basis to the product mix in this particular Lat Am season? That's my first question. And then I had a question for John. Thinking of gross margin this year, I mean obviously last year, up a small amount on a reported basis, about 20 basis points, partly obviously linked to currencies and raw mats. I just wonder if you had any thoughts on gross margin year-on-year in 2013.

Michael T. Mack

I guess they're really both phasing questions.

John Ramsay

Yes, I think, first of all, Andrew, in respect of Latin America, I think the point Mike was making is that those -- a little bit of a mix impact in the fourth quarter which wasn't fully anticipated, but it's basically what happened. You'd probably remember, we win [indiscernible] in the consumption basis there. We've got something like $600 million going out in December. The ability to actually get this forecast active has become more and more difficult as we build that Latin America business. But basically, as we got to the end of December, the guys were basically shipping more fungus -- more herbicides in place of fungicide because of the dry conditions. The market was more receptive of the herbicides. And you can see in our results overall, non-selective herbicides were up 42% in the quarter, and I think selective herbicides up somewhere around 30%. And basically, that substituted for fungicides in Latin America. Those fungicides have been shipped and invoiced in January, so it's really just a timing issue. But it did deteriorate from the mix on the margin in the second half.

Michael T. Mack

The corn?

John Ramsay

And the corn -- the question on gross margin, wasn't it? The second question, Andrew?

Andrew Stott - BofA Merrill Lynch, Research Division

Yes, gross margin. Any thoughts this year?

John Ramsay

Yes. Gross margin, I think we suffered in 2012 from the raw materials impacting significantly, as well as higher seed production costs. And I expect there'll be a bit more cost pressure in 2013. But we'll cover it by price. It would be certainly less than we suffered in 2012, which is now behind us. There will be a bit more cost pressure, but that will be covered by price. So that's -- I expect this to be able to move the margin up a bit in 2013 given what -- given our outlook at this point in time.

Andrew Stott - BofA Merrill Lynch, Research Division

Okay. And sorry, can I just come back again on Lat Am. I'm not quite clear whether you're saying Q1 will be up normally good because of the delay or whether it's just a normal situation and you've had a bad Q4 mix, and that's it and we move on. I'm not quite clear on the message there.

John Ramsay

Basically, those fungicides I said, that didn't get shipped in quarter 4 will get -- we've shipped and invoiced in quarter 1, so I would expect that to benefit quarter 1.

Operator

Your next question comes from Sophie Jourdier from Liberum Capital.

Sophie Jourdier - Liberum Capital Limited, Research Division

A couple of questions as well, please. First of all, also on Latin America. I just wondered whether you could give us a bit more detail on the corn seed business, in particular in Latin America. You're talking about market share gains generally. Just wonder whether you could remind us where you are now in Brazil and Argentina, and with these capacity increases that you've announced, where you hope to get to on that, and then perhaps will that paralyze within that portfolio in Latin America as well? That's the first question. The second question actually related to Andrew's on margins. The $170 million growth investments last year you saw, I mean you're talking about a number of growth investments as well into this year. I just wondered is that the same sort of magnitude that we should expect into 2013 or will it sort of go up or down.

Michael T. Mack

Sophie, first on corn seed in Latin America, it continues to grow really nicely. We've got -- as I mentioned, this is the fourth main season where we've had an integrated offer to the channel. But if you look at corn specifically, the corn areas that are growing in Brazil and part of that expansion of the corn areas is driven by being able to control insects better for the first time. And VIPTERA really is a game-changer in that respect with its control of the above-ground insects. So that's part of it, of course. The Investments we've made in germplasm are part of that as well. Our growth in corn seed in Brazil is more than 30% year-on-year. And as near as I can tell, that tops virtually everybody there. Our -- we believe that we gained yet another full market share point, so 100 basis points in a game that continues to be dominated by some of the big players is very encouraging. 13% in Brazil, we reckon we have now and 16% in Argentina, and so that's coming along really nicely. But the corn seed market in Brazil is poised for some significant growth over the coming years, and that underpin the investments that we announced this morning, the $74 million corn seed plant. John, the growth investments broadly?

John Ramsay

Yes. With respect -- Sophie, with respect of this and given Andrew's question previously, just to make a general point about margins so that everybody's clear. I think we are pleased with the margin progress in 2012 in so far as the investments that we've made in growth as you've said. But carrying this against this headwind of the raw materials and the currency and particularly to get headline growth in the -- at the margin, although it's on a few basis points, it's up 130 basis points excluding currency. And given the amount we've invested in the business and those headwinds, we're pleased with that. Looking forward, we do anticipate that we'll have the growth investments in 2013, we will continue at a similar pace and -- as we had in 2012. But when we stand and look at the gross margin, we'd expect some advance because we do have the impact of the raw materials. And we do expect some further price increases and we do expect to get some further operational leverage, but we will be investing more in R&D, which will be a big part of those growth investments. Overall, we have to bear in mind that in 2013, we won't have a repeat of the one-off royalty. We will be making underlying margin advances. We would -- we will have the royalty effect coming out because of the comparison with 2012.

Operator

Your next question comes from Jeremy Redenius from Sanford Bernstein.

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

Jeremy Redenius from Sanford Bernstein. First on just rereading your outlook statement, and I noticed there's no mention of earnings growth in 2013 contrasting to the statement in 2012. I was just wondering if you could talk about that. And then second, could you give us some guidance for your expectations for Seeds royalties in 2013 and 2014? Are you expecting any type of step-up there from VIPTERA or Duracade for example? And then lastly, could you break out Crop Protection chemicals pricing this year and if glyphosate was a material part of that? If you could break that out, please.

John Ramsay

What's the slide? Let's start with the seed -- the royalties. The royalties, we had the recognition of the large gain in 2012, which in itself won't repeat in 2013. But we will see continued underlying growth in royalties associated with volume in relation to the royalty license agreements we've already struck. And there will be opportunity for further one-off type of agreements. But it's difficult to say or give a prediction about that because it's very much dependent on various negotiations. So I would like to be able to predict exactly how they would come out. So as far as pricing is concerned, CP pricing, I think I'm right in saying that glyphosate pricing was marginal. Glyphosate pricing has been up and is marginal in terms of the total, and I think it's somewhere around 20 basis points contribution to the total 3% price increase that we recorded. I'm not sure where we go in the outlook statement, Jeremy. We go and we do -- I think what we can see at this stage of the year that the momentum of the business is continuing very clearly into 2013 given that was only just over 4 or 5 weeks into the season. But then at this stage, we are seeing continuing strong momentum. ForEx should be less of a headwind than we said previously, and we expect to continue to generate strong key -- strong cash flow. It won't be the same level of working capital build of 2012. So I think overall, we're looking at quite a favorable outlook for the year as a whole given what we can see today.

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

I'm sorry, just to clarify on the pricing, could you split then the chemicals versus the seeds pricing since glyphosate wasn't a very big impact?

John Ramsay

The seeds pricing, I think, was up 5%. Crop Protection was up 3%, and because of the mix of the business, significantly bigger in Crop Protection, the overall for the group is 3%. And what I'm saying, of that 3% contribution from Crop Protection, about 20 basis points was contributed by glyphosate.

Operator

Your next question comes from Bettina Edmondston from Kepler.

Bettina Edmondston - Kepler Capital Markets, Research Division

Just on North America in the inventory channels, if -- and you already talked about the demand there. Can you maybe clarify a little bit if this is just a shift in timing moving forward or do you expect again, after a very strong start to the season last year, increase again in North America in the seed season? And also if the inventory channels are quite low, what is your outlook for North American pricing?

Michael T. Mack

Okay, Bettina. Yes, just so far as the North American inventories are concerned, I think your question, so everybody understands, relates primarily to the fungicides which were affected by the severe drought conditions in the autumn. And firstly, we do have -- the industry has higher level of fungicide inventories than normal. But frankly, nobody seems at all concerned about that. We've managed to get price increases on those inventories, and indeed we shipped some further fungicides in quarter 4. So I think it's fair to say given that this is a growing -- a very strong growing segment of the market, that the outlook and I think this is reflected across our competitors and the industry generally is that the market will grow and this opening stock [ph] position is not really of any significance. Generally speaking in North America, people are looking at a strong year. I mean the signs are very encouraging. There is the prospect given the weather, and as you know at this time of the year, a lot of speculation but still some weeks before anything really happens. And people are anticipating an early season. So -- but we just have to watch and wait. At the moment, we can say that things are looking quite positive. So as far as the need for pricing, I think we've managed to get the price increases that we set out to achieve in 2012. I think our level of question mark or anxiety, if you might say, is to whether those control [ph] had diminished at this stage. And given those -- the market sentiment that I've just described, we'd be hopeful of maintaining those price increases that we've already made and that are sitting in inventory and hopefully pushing for price increases wherever we can.

Bettina Edmondston - Kepler Capital Markets, Research Division

And just on market share gains. You talked about a percentage point in Latin America or in Brazil. Can you talk a little bit about the other regions where you actually gained market share? Or is it really just in Brazil on the back of the integrated strategy and other areas are to come in future years?

Michael T. Mack

A couple of years ago, Bettina, now -- in 2011, we set out a 50 basis point a year target of market share gains. And we're broadly on track for that and certainly we have continued to remain committed to it. Too early to say about the northern hemisphere, which is going to get underway in just a couple of long weeks. I wouldn't venture a guess at this point in time, but everything remains on track. The markets that we set out in this strategic -- I think for the reason for highlighting Brazil and Argentina is just what happens particularly in Brazil where we've got a couple of years now behind our -- behind us on the [indiscernible].

Operator

Your next question comes from Neil Tyler from JPMorgan.

Neil C. Tyler - JP Morgan Chase & Co, Research Division

A couple of questions please. Firstly, I wonder if you could talk a little bit about the financial impact in the 2012 year of the acquisitions you made, whether or not you were consolidating more cost in the latter part of the year, with revenues to be sort of consolidated more evenly into 2013. If you could just talk a little bit about Devgen and Pasteuria quickly. And then secondly, the CFROI targets, you're substantially above that now. But the implication I get, rightly or wrongly, is that there may at least be a dip in that measure as investments go up and margins don't necessarily over the next year or 2 before growth accelerates. Is that the right implication?

John Ramsay

I drew up a number for the financial impact of acquisitions there because it largely took place towards the end of the year. Yes, there would be some costs coming in, in the last [indiscernible] but it's not too material to have impacted the numbers significantly. The question on CFROI. I think the 50 [ph] compared with our target more illustrates the balance sheet capacity that we've got and ability to take more on the balance sheet to retain an attractive return on investment at 12%. We will be -- as you heard in the presentation, we'll be stepping up our capital expenditure on tangible fixed assets, and that clearly is needed to service the growing market, the emerging markets in terms of just putting more assets on the ground opposite the volume growth. We do believe that we can manage that to 5% of sales. And if we do that and if you take our growth expectations to our 2020 target, I would expect actually some leverage in terms of asset turns, even though we are spending 5% of sales, which is higher than the historical average. So I don't see this being a margin issue as much as a balance sheet capacity issue.

Neil C. Tyler - JP Morgan Chase & Co, Research Division

Okay. So -- and just to be clear, that 5% of sales is effectively a sort of medium-term step-up as opposed to just to reflect some shorter-term or one-off capacity expansions?

John Ramsay

Yes, that's more of sort of a medium-term outlook in terms of what we think we'll need to spend to service the volume growth.

Operator

Your next question comes from Tony Jones from Redburn.

Tony Jones - Redburn Partners LLP, Research Division

Tony Jones from Redburn. I've got a couple left. Firstly, going back to FX and cogs inflation, I know that you commented briefly on the direction. But could you provide any guidance on the magnitude for the coming year? That would be really helpful. And then on your investments in seed production, is this about bringing in-house some existing sales or is it all pure expansion? So I'm trying to sort of get a sense of what would it do for margin. And then finally on glyphosate, is it still the case that this is one of your main raw materials in terms of percentages of your cogs. And if so, with current hikes in market prices, is it going to be a big inflationary factor for next year?

John Ramsay

Thank you, Tony. First of all, your first question on ForEx cogs. I think from the presentation you've seen in 2012, the impact of those 2 combined was a total of $325 million, the largest part of that being currency and about $90 million coming from cogs. And this is, I think, in line of what we've said between $300 million and $350 million. Now we don't expect that recurring because we've now seen exchange rates move, and that was largely associated with [indiscernible]. But looking forward, at this stage, and I always hate comments on exchange rates, but nevertheless at this stage looking forward, we'd expect a bit of a positive from currency and we expect a slight negative from cogs, so I'd expect a neutral impact. Quite a significant difference from the $325 million from 2012. Seeds investment, this is for expansion basically. But if you look at where we are today in some of these markets, a lot of contract work. And so initially, this will substitute for some contract work, as well as fundamentally servicing anticipated expansion. And therefore, these investments will be positive overall on the margin, both in terms of substituting for contract work and indeed getting operational leverage as we service in expanded business. I must have -- I'm not entirely clear what your question is getting to on glyphosate. [indiscernible] glyphosate is that prices have risen significantly. We would anticipate, depending how will the market develop in 2013, we'd expect to see prices -- there'll still be upward pressure on prices on glyphosate. Now, of course, this is inflationary. But the costs are also inflating. We buy in the glyphosate, and the price increases are basically response to higher cost and the shortage of supply and, of course, as an inflationary impact. So even though it might dilute the margin, we do expect to cover all of cost increases with the price increases.

Tony Jones - Redburn Partners LLP, Research Division

Just a quick follow-up on the seeds question. Are you able to provide any indication what proportion of your seeds you have contracted out at the moment or is it most of it?

Michael T. Mack

I think what John is suggesting here is we're just -- we're up against the outer limits of our current capacity. We have 3 corn seed plants in Brazil, one in the [indiscernible], we've got a smaller one in Formosa and we have one in Macao. And what we are doing is significantly expanding our Formosa site, which we opened a few years ago. When we opened it, we anticipated with success that it need to be substantially expanded, and we're just getting started on that now, but we need the capacity from the growth. It's got a terrific payback, and we'll be getting started soon.

Operator

Our next question comes from Andrew Benson from Citi.

Andrew Benson - Citigroup Inc, Research Division

You mentioned your market share in U.S. corn and soy, how you're doing there. You did talk about I think Roundup Ready 2 implementation. And I noticed your -- the chart with high growth in corn and soy, the soybean one doesn't look too good. Can you just perhaps elaborate a little bit on your soy strategy, how you're going to get that moving and where you are in the U.S.? You may have mentioned it, but apologies because I forgot to get up too early this morning. But working capital, what $1 billion of increase for $1 billion of sales. It seems -- I don't really understand that. PLENE, can you just elaborate a little bit on that? I noticed that, that is growing, but where you are. I think about 6 months ago, you said you have $300 million dollars of forward orders, so just perhaps just give some more space. And then on the Slide 31, on your water optimization, can you just clarify that as well? I don't really understand. Is that the ARTESIAN? Is that the new stuff? And if it is $9 million irrigation, I guess you're targeting why of 3 years time, you're only looking to actually have 0.25 million of acres planted?

Michael T. Mack

Right. Okay, Andrew. The -- first of all, on the soybean strategy, the -- our Roundup Ready 2 Mix has gone up from 30% last year to about 60% now this coming season. And of course, that shift has been driven by, in no small part by the trait provider, the licensee, as you might know, of Monsanto. And farmers have shifted to that new technology, and we're now in the position to shift along with it. And we've got a great offer. The germplasm comes along nicely, and hopefully we'll expand some of our share in soybean this year. But the market is still in front of us, as you know. Corn, same answer. I mean the technology that we have, we've spoken of not only the insect traits, of course. We've got the ENOGEN, where the number of ethanol plants that are interested in this technology continue to come along nicely. And at the -- hook on now to your last question about water op. Water optimization in the United States is just another example of what can happen through an integrated offer to corn growers. And in this case, no, it's not exclusively in the -- it's not exclusively in a discussion about ARTESIAN, which in and of itself has been a native trait development that has a lot of benefits for growth. Water optimization is where we get the long side of grower again who was working on -- with some irrigation. And it just shows that through the delivery of chemistry alongside the good genetics and alongside the trait [indiscernible] that we have, that growers can drive down the amount of water that they use. And water is going to continue to be an increasingly important discussion. So imagine what could happen in a place like the United States where there's so much irrigated land, growers will be able to have equal yields using 25% less water. So it's really just -- the point here this morning is a testimony to what can be done by having a wide toolbox across multiple technologies.

Andrew Benson - Citigroup Inc, Research Division

I can see that, but what -- why are you only targeting 2.5% market share? It seems -- I don't know, it just seems a bit small.

Michael T. Mack

Why are we only targeting 2.5% market share?

Andrew Benson - Citigroup Inc, Research Division

You're targeting 0.25 million acres by 2015 out of potential market of 9 million.

Michael T. Mack

Right. Well, if we have a bigger penetration, then we'll update you on that as well. I mean, I think what we've never done, particularly in the United States because it's a very competitive market, is to get out in front of ourselves on what this can deliver. I think we stand behind the offer and the quality of the integration and quite to places like Brazil where, in subsequent years from having integrated, we can drive this technology through to adoption. If we beat this target, so much the better. John has a question from Andrew about working capital.

John Ramsay

Yes, Andrew, working capital. I think -- I understand the question. Looking at the cash flow, we have something like $900 million of cash outflow associated with working capital. Let me just come back to answer the question specifically, but this one make sure people do understand the dynamic on working capital. And that is at the end of 2011, we'd run down inventories to a level we always should have done frankly, and we lost sales in 2012. And we have pushed to back up again to levels appropriate to growing market, and that's reflected in the inventory numbers in terms of year-end working capital. We also have a dynamic here associated with an increasing proportion of our business in Latin America in the fourth quarter. And despite overall DSOs at being record low levels for that part of the world, we do actually have higher receivables as a consequence of making dollars off quarter 4 sales. So our working capital has gone up from 30% of sales to 32% of sales on a year-end basis because of those factors. But in actual fact, our average working capital during the year fell by 2 percentage points. And both those numbers are all-time lows. We think we're managing our working capital well. Now, coming back to the question of the $900 million. Basically, $500 million of that is consequence of the build in year-end working capital I just described. And that's directly to those factors. I'm also anticipating that, on the chart, we also have non-cash items being reversed but which are in EBITDA. The most significant of those is the royalty, additional royalty income of over $200 million. That is reflected in that $900 million. You also get cash outflows associated with provisions in that number. So environmental provisions and restructuring -- well restructuring could show separate but environmental provisions and other non-cash items are also reflected in there. So that basically makes up the $900 million.

Michael T. Mack

And finally, Andrew, you asked a question about PLENE. Hopefully, you'll be able to join us later on this year where we're going to show you what we're doing down there in sugar cane. PLENE, the concept continues to come along quite nicely, and the quality of the germplasm through these -- through this biofactory has a huge amount of demand throughout that system. And you'd get a sense for how we're scaling this, not only from our plant in the top of the list, but how we're scaling it alongside some of the sugar cane growers down there. So the underlying demand for that continues to come along nicely. It's a bit more -- the bigger part of PLENE, the bud sets themselves is going to be, of course, over the coming years. In the meantime, of course, I think the growth of our CP sales into sugar cane is evidenced 37% growth year-on-year talks a lot to the ability of the sugar cane growers to understand how integrated technology can drive yield there. So it's -- that continues to be one of the really exciting growth opportunities in the strategic crop of [indiscernible].

Operator, I think that concludes our presentation this morning. And ladies and gentlemen, thank you again for joining the 2012 full year results. Jennifer and Lars, of course, of Investor Relations are happy to answer any additional questions that you have. And with that, wishing you a pleasant day. Thank you very much.

Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.

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