Mark Douglas: Yes, Laurent. I’ll let Andrew give you some details on the working capital side. My view is when we think about restructuring the company, we’re not only talking about our cost base but we’re absolutely talking about the other metrics that we look at the performance of the company. Working capital be one of them. The different elements of working capital move at different speeds. Obviously, payables are a lot lower than it should be given the fact that we’re not manufacturing a lot right now so therefore we’re not buying a lot. That will change inventory. We are working our way through inventory right now. Obviously, selling out of inventory reduces inventory and then we’ll collect the receivables at the normal rate. I expect the metrics to get back in line through ‘24 and ‘25 in terms of as a percent of revenue, how much working capital do we carry. But Andrew, if you want to give any more details on that.
Andrew Sandifer: Yes, certainly, Laurent, I think you’re on to the right theme which is we do expect normalization of working capital over the next 12 to 18 months. I do think it’s important to remember in the ag input space that working capital cycles different than other chemical or materials businesses. Now we buy on reasonable terms, industrial terms from our suppliers. Then we hold manufacturer product hold an inventory for to meet seasonal demand. Then have inventory ready when needed when pest pressure shows up. Then we sell often on crop terms or longer terms certainly than what we pay for materials we purchase. So it’s a bit of a long cash cycle that’s becoming elongated particularly as inventory levels have gotten out of line with the go forward sales pace.
So I think right now the focus is really on, as I mentioned in my prepared comments, on taking inventory, converting it to sales, converting it to receivable and collecting it. But there can be a good six to 12 month lag in that process due to the seasonal nature of the business to be able to really clear through that inventory and turn it to a good to receivable and collect it. So certainly a good reference point, looking back a couple of years where trade working capital in 2021 at 9/30 was about $700 million lighter than where we are today. That’s not a bad dimension. And certainly we would think that those working capital metrics would come back in line that to more historical norms. It’s just going to take 12 to 18 months to really adjust to all of the whiplash we’ve had in the supply chain with both the rapid growth in 2022 and now the rapid deceleration in 2023.
But I think my fundamental message to you is, yes, we fully anticipate a robust working capital release in 2024 and bleeding into 2025.
Laurent Favre: Thank you. And the second question, having seen sharp normalization of pricing in LATAM, what makes you think that prices are not going to be sharply down in the northern hemisphere when you start the ‘24 season?
Mark Douglas: Yes, I wouldn’t describe what we’ve seen in Latin America is sharp. And also, Laurent, it’s not broad pricing. It’s more a reflection of how we account for customer inventory and how we’re managing price with customer inventory going forward. It shows up in price. Obviously, our customers, some of our customers are holding higher cost inventory. We’re working that through as we go through this season. So it’s not broad based price pressure. And as we indicated in the other three regions of the world, we actually had price increases over the year, over the period. We will continue to look at price increases next year. People should not forget there is still inflationary pressures moving through many economies and certainly companies like us. We have labor cost increases as many companies do. So we will not be shy from raising prices as we go through the next 12 months cycle.
Operator: Our next question today comes from Aleksey Yefremov of KeyBanc.
Aleksey Yefremov: Thanks and good morning. Continuing on the working capital theme, could you give us some idea how your working capital would strengthen the next few quarters? I mean, typically you’ll have a build-in if you want, but given the current situation, would you expect maybe no build and release of working capital in the first quarter or something else perhaps?
Andrew Sandifer: Sure. Hey, I’ll take, this as Andrew. Look, I think the traditional working capital build you see in Q1 should be significantly lower. From an inventory perspective, we’re already sitting on a substantial inventory, so our traditional end of year, beginning of year inventory builds in advance of the Northern Hemisphere seasons will be much less subdued, if at all. I think from a receivables perspective because we do have significant advance payments in Q4 against sales in Q1. You don’t see as much relief on the receivable side in Q1. And then the question mark is going to be how rapidly we start ramping back up production. We significantly reduced production levels, step down in Q3 and further step down in Q4.
So our payables are quite depressed. How quickly we rebuild those payables in the first half of next year will have a lot of impact on it. But certainly I would say the biggest factor that should limit the traditional big working capital pump in Q1 is there is no need to build up a significant pool of inventory going into the new year.
Aleksey Yefremov: Thanks, Andrew. And sticking with working capital, your inventory is an absolute dollar basis. I mean, they decline sequentially, but given that you’ve shut down many of your production lines, maybe you would have expected a bigger drop. Could you just talk about that? Am I wrong here? And what’s going on with inventory? Would you expect that number to come down more sharply in Q4 and Q1?
Mark Douglas: Yes, Alek, let me just make a comment up front and then Andrew can give you some other details. You’ve got to think carefully about how the inventory is and where it is. We have a lot of work in progress. From the moment we place an order with either outdoor manufacturers or our own facilities, it can take six months for those products to hit the warehouses to sell to customers. So once you start slowing that engine down, it takes a while for that to actually stop dead. We’re out of that period now. So we do expect that inventories in Q4 will come down considerably. But Andrew, do you want to make any comments?
Andrew Sandifer: Yes, I think just building on that in Q3, look, sales were $250 million lower than what we’d expected in the quarter. And that’s directly a big chunk of inventory reduction that we would have expected to achieve in Q3. And I think as Mark has commented, you can’t stop a super tanker in one quarter, it does take time to slow things down. You should expect to see a more substantial drop in inventory from 9/30/23 to 12/31/23.
Operator: Our next question comes from Kevin McCarthy of Vertical Research Partners.
Kevin McCarthy: Yes, good morning. Andrew, it sounds like you’ve had at least some preliminary discussions with the banks regarding your covenants. Can you walk us through the path of deleveraging that you would foresee over the next several quarters and maybe talk through some of the more salient covenants and costs to amend those? Will be the first part of the question. And then, longer term, I think you’ve been running the balance sheet with a goal of about 2.5x leverage. Are you tempted to reduce that goal on a structural basis given the volatility that we’ve seen in the market.
