Corteva, Inc. (CTVA) Earnings Call Transcript & Summary

So entirely coincidentally, next up, we have Corteva, global leader across multiple substrates within the agricultural products in the spectrum, including germplasm, biotech and traits and crop protection chemicals. And I have the sense we'll be hearing more about their precision agriculture and gene editing, among many of their innovative arenas alike in the future. Today, I'm very pleased to have with me the CEO, Jim Collins. Jim, thank you very much for joining us. Today, we're going to be doing a quick intro and then a fireside chat format, but please feel free to e-mail me or Bloomberg me with any questions. My e-mail is christopher.parkinson@csg.com. And with that, Jim, please.

Great. Thanks, Chris, and thanks for the opportunity. It's a real pleasure to participate virtually at the Credit Suisse conference again this year. As we always do, before we start, just a quick reminder, expectations for the future that I'm giving here today are forward-looking statements and are not guarantees of future performance. Certain risks, including those outlined in our SEC filings, could cause our actual results to differ materially. And reconciliations of some of the non-GAAP measures that will be mentioned in the remarks may be found on our website. So I appreciate the opportunity to open. I want to share a recap on some of our recent performance and provide an update on what I believe is very strong operational momentum. The timing of this conference really coincides with the launch of our North American sales season. So we can talk a little bit about our perspective on the setup for next year as we begin that launch in addition to sharing our perspective on our progress to really finish 2020 very strong. I can also give you an update on several of the strategic actions that we've been taking to really enhance our resiliency as we emerge from this whole COVID crisis. And these actions really do underpin our confidence in being able to deliver both the operational and the financial results that are consistent with those midterm targets that you and I have talked about before. So starting first with just maybe a brief recap on our recent performance through the first half. Our organic net sales were up 5% versus last year, and we're now guiding to a 5% to 6% organic net sales growth for the full year. So to achieve that, we're going to have a second half that's in that 6% to 7% range from a price volume perspective. So really strong building momentum as we close out the year. Now we've had a number of operational challenges that we've seen. We've got the global pandemic and the ensuing economic outturn that came from that. We had some horrible flooding up at our Midland Michigan facility. And then obviously, we've all seen the weather-related issues in North America with the derecho. So delivering organic sales in line with our midterm commitments, I believe, is a real testament to the operational agility and the resiliency that this organization is demonstrating. So let's maybe look at growth on a segment basis. Seed's delivered very solid results with 8% organic sales growth through the first half of 2020 and supporting our results there in Seed is a strong year-over-year price improvement in both corn and soybeans. Now these were both up low single digits, and this price improvement was driven by new technology, whether it's our background germplasm that's really delivering, also notably chrome in corn and, of course, I'm sure we'll talk more about it is Enlist E3 in soybeans. If we look at Crop Protection segment, though, we only delivered 1% growth through the first half of the year, our results really do demonstrate some strong double-digit growth that we're seeing in our Spinosyn insecticides. This was offset by some strategic decisions that we've made to phase out of a few products, most notably the production of chlorpyrifos here by the end of the year. Now the overall Crop Protection result in the first half envelops really strong performance in Europe. They were up 6% and also very strong performance in Asia Pacific. They were up 8% in the first half. So this is where 2 regions that are really demonstrating the benefit of our new product launches for products like Arylex and Rinskor and Pyraxalt. So if we look at Crop Protection, though, on a full year 2020 basis, the guide that we've given, we would expect to finish with growth of about -- organic growth of about 8%. And that's also got some benefit from our new products that we talked about. And those new products are kind of disproportionately weighted into the second half of the year. So also in the second half, we're expecting very strong performance in Latin America. Vessarya, we had the returns of Vessarya that we didn't have in the first half and obviously, the sharp devaluation of the real really impacted those first half results. But we can already see those Vessarya sales in the second half, along with our Seed business, much stronger. And clearly, we've put some work in place around hedging to minimize any additional volatility associated with the real. We also anticipate a particularly strong fourth quarter for Enlist herbicides in North America, and this is ahead of the 2021 launch, full commercial expansion now of the trade, and we know we're going to have some tremendous demand for the herbicide. So our fourth quarter will get us set up for that. Now shifting to operating EBITDA. We delivered 3% improvement overall for the first half. In our updated full year guidance, we are currently expecting to be slightly down to maybe flat on EBITDA. But as I noted on the earnings call, currency headwinds are lowering that operating EBITDA result by about $400 million for the full year. So Chris, when I pull the currency impacts out of our 2020 full year guide, we're going to see tremendous momentum in our underlying business. And earnings would be up high teens percent. Based on that updated guidance, excluding currency. So if we look ahead to 2021, we recently provided a strategy update to the market that affirmed our expectations to deliver year-over-year net sales and operating EBITDA growth in line with our previously disclosed midterm targets. In the context of future expectations, clearly, we continue to monitor how key markets are recovering from this downturn. That was driven by this pandemic. We're closely monitoring potential headwinds for next year, including commodity demand levels and acreage levels and, as always, foreign currency exchange rates. We are seeing commodity demand and foreign currency rates stabilize in several key markets, and we're seeing some constructive actions from China regarding the pace and the size of their corn and soybean purchases from the U.S. On the supply side of commodities, that derecho event, and clearly, the drought that we're seeing in kind of that core midwest of the U.S. have spurred some increases in commodity levels. And I -- you look at the September largely reported, really affirmed that we're going to see some lower yields and lower ending stocks compared to some of the earlier expectations that were out there. So those are really helping to support commodity prices kind of at these new levels, which will be good for our customers. So against that kind of firming market backdrop, we just launched our sales season in North America, and we're seeing just some tremendous customer response to our new seed technologies. And that starts with chrome and then also the response on Enlist E3 soybeans. So I have received a lot of questions, as I've been out talking about our business, about our pricing approach for 2021. And on our recent update, we highlighted that we expect to deliver another year of positive year-over-year price improvement in both corn and beans as a result of our ability to price for the value that these new seed technologies create for our customers. I can confirm that we released our price cards last week, and our positioning in the marketplace will support our ability to continue to capture that year-over-year value for the superior performance despite what is always a very competitive marketplace. We're also launching Brevant, our retail brand in North America. We've talked a little bit about that in the past. And I'll tell you, our initial discussions with retailers just continue to be very, very positive. New and differentiated crop protection products are also delivering, and we're on track to deliver $250 million in growth in sales for new products in 2020 and expect that even to double the year-over-year sales increase from new crop protection products into 2021. We still have close to $1 billion in cost savings and productivity still to go, and we expect to have $200 million in incremental merger cost synergies in 2021 as well as the additional productivity improvement from the new program that we talked about, which we're currently sizing at greater than $50 million right now. The -- this global pandemic and certainly the economic downturn have really driven every company to look at the durability of their strategies, to really understand where their growth is going to come from under these many different scenarios. And so with the persistent kind of market volatility, scenario planning is actually becoming a pretty dynamic process. We're updating those outlooks almost weekly. And it allows us to also continuously identify the levers that we have in our control that we can use to dampen any of those negative effects to our results and really smooth out our transition as we kind of manage through this market turbulence. So as a result of our actions, we've been able to affirm our midterm targets, which we set last August. We are managing the business to deliver those targets, and our recent operational results, I think, are a testament to our disciplined and focused execution through the challenging conditions that ensue here in the first half of 2020. In that first half, we were able to respond with agility and disciplined execution to deliver those solid organic results that are in line with our midterm commitments that I talked about earlier. We've also acted to reinforce our already strong balance sheet position, which will support our ongoing capital allocation priorities, including investing in our business and also returning capital to shareholders. So let me close out my remarks with a couple of statements, there's a statement that I've made here pretty regularly, is we don't have to go out and invent our future. We're already the global leader in corn seed technologies. We're already a global leader in Green Chemistry solutions. We have a phenomenal insecticide offering with our Spinosyns and we're already investing to bring more Spinosyn capacity online and that's starting to show up. So clearly, this is going to be our decade in soybean seed technology. And this is also the opening of a new era in terms of our presence in the retail channel. So we don't have to go out and invent that future. It's here, and it's right now. We do have the products, now the route to market, the production assets to deliver that future. We have this productivity mindset to ensure that our efforts to modernize and transform our cost structure will really trace right down to the bottom line. And as a result, meeting our commitments will largely be a function of just disciplined and focused execution. It's true. We faced a number of inordinate challenges as a new public company, and we've used these challenges to make our organization stronger, and I'm really confident that we have what it takes to deliver. So with that, Chris, I'll turn it back to you, and I look forward to taking your questions.

Jim, thank you very much for your preliminary remarks. I think just before we get into the details, there have been a lot of moving parts this year. I mean, back in the second quarter, there were a lot of concerns about ethanol, feed, U.S.-China trade relations. In terms of the -- and I think on the first quarter call, you had some comments that were given in the context of where the market was then as well as on the second quarter call. Just where do you stand? We're on, what is it, September 17. Where do you stand right here right now? It's very clear that things are getting better, especially on new crop futures. What are you hearing from the field? No pun intended.

Great. I agree. We're encouraged right now by some of the recent moves that I mentioned earlier in commodity prices. And mostly, that's related to the expected lower yields. This derecho event that went through the Midwest, we think it's close to 14 million acres that were affected by those winds, both beans and corn. And then you add to it this drought situation that we're seeing. I think 32%, a number I heard the other day, of the current crop is now exposed to some pretty severe drought conditions. And that's -- thinking back, I think that's compared to about 18% back in August. So what that's doing is dampening the supply side of this. And then we've got China out there. They are buying -- they made one of the largest corn seed -- corn purchases that they've ever made, and their soybean purchases continue to kind of measure up to their commitments during their Phase 1 trade negotiations. So we're obviously watching all of those things as we think about 2021, and it's still a pretty fluid situation. It's changing. We still have to get this crop in North America out of the field and really see what those yields come in at. We've got a complete summer, and then we've got the Safrinha season to go in Brazil before U.S. growers really put another crop in the ground. And then we've got to see how this trade situation continues to unfold, how China continues to live through it, what happens to ethanol demand, which is -- which will be a big driver of the take-up of that 2021 corn crop and as people start to get back to normal post COVID and start driving again. So look, maybe the best way to summarize it is, it would appear right now that we're probably a little more optimistic at this point than I would have been a month or so ago on 2021, but we're going to continue to monitor that whole situation. And I don't see a really nasty headwind out there at this point, especially when I think about kind of where we are on planted acres. It could be about flattish with where we are this year. So that's how we read it sitting here today.

That's very helpful. You mentioned you still expect a positive price on corn seed, which I'm sure is obviously getting some attention this morning with recent investor meetings and so on and so forth. There are a few moving parts there. You've got the traditional just apples-to-apples pricing on some of your top-tier hybrids. You have chrome, which continues to ramp, which seems like it's going quite well. And then also, you have the, let's say, initial, like, full implementation of the Brevant strategy and enhancing everything in retail. Can you just quickly comment on those 3 factors on how they funnel into your overall view about U.S. corn seed price?

Yes. Great. If I think about this season, our strategy, first of all, is really unchanged, right? We price for the value and we capture that value, the year-over-year improvements that we're making in germplasm and the superior performance as we bring out new trades. So I think the market backdrop that we just talked about is helping us a little bit. It's constructive to our overall pricing approach. And this pricing is also clearly a global strategy. And so while the U.S. does matter and it's right out of the box here, something that we're looking at, we're going to continue to drive price in the rest of the world. And I think I mentioned to you, as I looked at our first half results, we had really strong price growth in Latin America, I think by 9%; and 8% in Asia; and 4% in Europe. So it's going to be a source of pricing strength for us as well. But if I do kind of look at corn in North America, we're going to penetrate -- continue to drive chrome in our triple lineup. For 2020, chrome was about 20% of our offering, and we think we could get that closer to 25% next year, and that product has a price premium completely. And when you compare it to other triples in the market or the rest of our previous lineup, more penetration of chrome would naturally provide a mix benefit kind of from a year-over-year pricing. So we'll see some benefit there. And then we're pricing for the fact that this thing -- this trade in our germplasm is yielding 7 to 10 bushel per acre yield advantage. So it's a very visible performance as well. So our -- you'll remember, we've talked about pricing cards in the past. And we published price cards right down to almost to zip code level. And so there are significant differences in the value of our offering and the value of those price cards based on those different areas, whether it's a conventional area or more of a triple area or high irrigated or high organic soils. So as always, I caution folks to be careful extrapolating, having one card and extrapolating that data kind of out across the total company. In the past, others have come to some false conclusions based on that. So -- and the other thing that I always remind folks when it comes to pricing is, remember that there is a gross price and then there is always a net price and that is a functionality of the different discounts. So growers qualify for early pay discounts. There are loyalty discounts. There are early delivery opportunities for growers to really maximize their value. So it comes down to our route to market and the fact that we put really strong, disciplined controls and procedures in place that enabled us to really get some good discipline on all of our products. And so that advantaged route to market where we have tremendous visibility of that value capture all the way right down to the planter literally is the reason we're able to feel pretty confident that we've got that price opportunity out there. So I'll leave it there.

Just a very quick question just because, clearly, there's a point of clarification in terms of how we should interpret seed price cards. Can you just quickly remind us plus or minus how many price cards you launched within the United States?

Yes. Think about those price cards can literally go down to the county level. So there are hundreds and each of our reps has a customized set of cards based on the technologies that they're launching. So again, it's -- I caution folks to -- you get one card, it is almost impossible to extrapolate that data across an entire market.

Very helpful. And a similar set of questions for soybeans. Clearly, as far as one of your competitors is concerned, there is a little bit of uncertainty. We've had Nutrien present a few days ago. We just had Bayer present. No one really knows exactly the timing on the Dicamba registration. However, you're making some comments yourselves. We're already well positioned with E3. It's a great technology. You already have a tremendous amount of momentum. How should we be thinking about the similar characteristics in the soy market in terms of the -- let's say, the ongoing momentum of E3, how the competitive dynamic fits into that? And is there anything new, just probably as a substrate in terms of AYT technologies or anything else on the germplasm front?

Yes. Great question, Chris, clearly, out there in the forefront. We're working hard to position E3 for the value that it creates in the market and there's a confidence angle here and there's a performance element. And so internally, we're working hard to drive that, and then also the other part of Enlist for us is a licensing opportunity that we haven't had before. So we've also got a whole bunch of other folks that are out there, not just us, but they're talking about and ramping up their own use of the technology. So kind of nice to have a new set of choices out there. What growers are telling us is they want some certainty in the technology that they can leverage in their production. And so our plan is to drive as many units of Enlist E3 in the market as we possibly can for 2021 and that will be something that growers can have a lot of confidence about. And the fact that there's some uncertainty around Dicamba allows us to really drive hard. We do expect Dicamba to be available in 2021. 60% or so of our lineup is still going to be in the Roundup Ready 2 Xtend technology and I think that registration will come. The data looks very solid. We know that system can be used responsibly. We, through our grower network, had very few complaints these past few years. So we know the system in the right hands can be used properly. That said, the Enlist E3 provides just another level of protection. And it also allows a grower to use that technology fully the way it was designed. So it's showing head-to-head versus grower practices that the Enlist E3 system is giving better weed control. And then things like clean out and other management practices that a grower does, this system is just easier to use. So while we do expect to see Dicamba in the market in 2021, and we'll fully support the technology on the balance of our offering, we're excited about the potential and the opportunity for Enlist E3 and where it's headed. So...

So just sticking with that front for just one last question. You clearly are ramping E3 across your entire germplasm portfolio, which naturally takes a few years, but it seems like it seems as though you're well on track. What are you hearing in terms of the outlook, just a little bit longer, '22, '23, and weighing in '24. What are you hearing from some of the licensee partners on this? Clearly, you've had a strong product. You're already there with dozens of them. What are you hearing from them over that time frame? And then does the -- does Bayer's HT4 trait in any way, shape or form really come into that conversation? Or is that still too far out to really be part of the conversation in 2020?