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

Good morning, everyone. It's Vincent Andrews, Morgan Stanley's chemicals and agriculture analyst. I want to welcome you to the 2020 Morgan Stanley Global Chemicals, Agriculture and Paper and Packaging Conference. You can probably see that I'm not at the Four Seasons Hotel in Boston, where we are used to be for this event where we've been for a number of years now. I'm actually at Morgan Stanley headquarters in Times Square in New York back in the office, which feels great. And we're obviously doing the conference virtually. And hopefully, based on yesterday's news, this will be -- we won't be doing it virtually next year. I very much hope for all of us that's not going to be the case that we'll be back in Boston at the Four Seasons. And our first speaker or presenter or a fireside chat, normally, we have a very nice dinner with the -- night before the conference with investors and have a nice stake and nice bottle of wine. We didn't have to do that this year. So I very much hope that we also get to do that next year. Before we kick this off, I'm going to do 2 things. I am going to read some disclosures. I'm going to ask you to please see the Morgan Stanley Research Disclosure website at www.morganstanley.com\researcdisclosures (sic) [ www.morganstanley.com/researcdisclosures ]. And if you have any questions, please reach out to your Morgan Stanley sales representative, and I'm also going to remind you that if you want to ask Q&A, because we will have Q&A from the audience at the end of the fireside chat, you can go ahead and enter those questions into the web browser, or you can e-mail me directly. We'll ask all the questions anonymously as we typically do in this type of format. So however you prefer, but please try to get them in earlier rather than later because sometimes there will be a delay with the web. And with that, we're going to get started this morning with Corteva. We've got Jim Collins, Megan Britt is in the background from Investor Relations. And we're going to do a fireside chat, but Jim wanted to just give a few minutes of comments. So Jim, I'm going to turn it over to you.

Great. Good morning, everyone, and thank you, Vincent. It's a real pleasure to participate again in the Morgan Stanley conference. And you're right, I miss the dinner and the glass of wine, but I look forward to hopefully, returning to that stance very, very quickly. Before we start, just a quick reminder, expectations of the future given today are forward-looking statements and aren't guarantees of future performance. Certain risks, including those outlined in our SEC filings, could cause our results to differ materially. And reconciliations of non-GAAP measures mentioned today to GAAP may be found on our website. So Vincent, as you know, last week, we reported third quarter results, delivering sales and earnings growth despite the challenging operating environment that we continue to face due to this pandemic. We reported organic sales up 6% year-to-date with volume and price growth in both of our segments, Seed and Crop Protection. And for the guidance, we expect to deliver 5% to 6% organic net sales growth for the full year. And given the operational challenges that we faced as a result of the pandemic, delivering organic net sales growth in line with our midterm commitments, demonstrates that this team is just laser-focused on execution, and I believe it's a testament to our operational agility and our resilience as we manage through this whole crisis. So underpinning our results is a strong performance now in every region. We've delivered above-market performance in both Europe and Asia across both segments year-to-date. And in Latin America, what a heck of a quarter, volumes were up 25% relative to last year in the third quarter. And our momentum in that region is setting the stage for a strong finish to the year, no doubt about it. We also launched our 2021 sales season in North America, as we always do this time of year, and we're seeing some very strong build in our Seed order book, especially due to customer's high demand for our Enlist E3 soybean system. And I'm sure you'll want to talk more about that. Looking at growth on a segment basis, Seed has delivered very solid results with 6% organic sales growth year-to-date. This supports our result in Seed over our strong year-over-year price improvement actions that I've talked about in both corn and soybeans, both up low single digits, and I think this was quite contrary to what some folks predicted as we rolled into 2020. This was driven by new technologies, notably Qrome and Enlist E3 soybeans. So volume in seed up 4%, supported by strong market share gains in Europe, in India, in Brazil and North America soybeans. So those share gains, really great to have. Looking at our results in Crop Protection, I think there was some concern at the end of second quarter about that segment. Organic sales increased 7%, supported by continued growth in new products and double-digit organic growth in our Spinosyns insecticides, partially offset by some strategic decisions, especially the phaseout of Chlorpyrifos and the ramp down and a few other selected low-margin third-party products. The overall Crop Protection results reflects the balance and the diversity of our new product portfolio. So overall, we expect organic growth of 7% to 8% for Crop Protection for the full year. And this is due to the benefit of new product sales, which are disproportionately weighted into the second half and we're already seeing continued really strong performance in Latin America, where continued technology adoption drove Crop Protection organic sales up 43% in third quarter versus the prior year. And we anticipate a particularly strong fourth quarter for Enlist herbicides in North America, given the exceptional market demand for that product. So if we finish out talking about EBITDA, we delivered a 14% improvement for the third quarter and a 5% improvement year-to-date. In our full year guidance, we're currently expecting to be slightly down to flat year-over-year on operating EBITDA. Currency headwinds are expected to lower our operating EBITDA results by $400 million for the full year. So considering this currency, a 20% earnings headwinds from currency expected for the full year. You can see we're seeing tremendous momentum in our underlying business and alignment with our midterm goals. So if I look ahead for 2021, we provided a strategy update to the market that affirmed our expectation to deliver year-over-year net sales and operating EBITDA growth that is in line with the midterm targets that we've discussed previously. In the context of our future expectations, we continue to observe how key markets are recovering from the downturn, driven by the pandemic and are closely monitoring market conditions for next year, including commodity demand, acreage levels and foreign currency exchange rates. Now we're seeing commodity demand stabilize in several markets as well as very constructive actions from China regarding the pace and size of corn and soybean purchases from the U.S. Improved commodity demand conditions and tightening stock levels are constructive indicators for overall commodity prices, with corn and soybean prices now trading above their pre-COVID levels. Higher prices are leading to an improved outlook for farm income. Government stimulus payments in the U.S. are also supporting farm income improvements. So taking all of that together, the overall market backdrop and our strong operating results, support a very constructive view or a solid finish to 2020 and a strong 2021 growth. So as I think about the path ahead, Vincent, we've talked a lot about this. We have the products. We have the route to market, we have the manufacturing strategies in place to deliver our future. We also have the productivity mindset to transform our cost structure and to create meaningful margin expansion. Through disciplined and focused execution, we will realize the full operating leverage available from the organic growth that we expect in the marketplace, and I'm confident in our ability to deliver on those midterm commitments. So Vincent, I'll turn it back to you. I'm ready to take some questions.

All right. Well, look, Jim, thank you. Thank you for getting us started. I think maybe just to cross the tea here a little bit. 6 months ago, the market was worried about corn breaking $3, now it's broken $4 in the right direction. You sort of laid out that we're improving, we got some tailwinds behind us. As we think about where we are today and getting to that all important spring planting season in the U.S., what are the things you're watching on both the plus side and the minus side to help you determine sort of how to manage the book between here and there? What are the signposts we should be looking for?

Yes. Great. So it does start with that market backdrop, no doubt. And you mentioned commodity prices, very encouraging to see those moves. And those were really moving because of yield in North America. We had a little bit of drought that's set in right at the tail end of the season, which is a crucial time for years setting up those -- that final kind of top end of yield in corn. And then you had this horrible derecho event this win that went across the heart and soul of corn and soybean production in Iowa, 14 million acres, I think, in total were affected by it. So the drought took the top off the yield and the derecho took another chunk out of it. And then on the other side of that equation is demand. China has been buying, and they bought more corn this year than they bought in the last almost decade. Their soybean purchases are really ramping up. And I read articles the other day that we're actually exporting soybeans now from the U.S. to Brazil because Brazil has so oversold their soybean stocks that we're making up for some of that domestic soybean demand. So the demand is strong and it's driving those commodity prices. The other thing we look at is we model net farm income for farmer economics. And if you couple those prices and the government payments, farm income levels are probably the highest they've been since probably 2013. And so it gives you a good backdrop as we start to drive the business into '21. Growers have money to spend, and you're feeling it in their investments that they're making in their crop for '21. So they always view that seed purchase as an investment. So I think acres are going to be up, whether you maybe call it, $5 million in total, corn and soybean overall. A little hard right now to call the split. It probably dramatically favors or a strong bias towards soybeans as we sit here today. But I'd say we're not going to take anything away from corn. Corn will probably hold flattish, and that increase will come in soy. So we'll be back up to some strong levels. You mentioned risks. I think we still worry about the demand downside from COVID. We could -- if this country decides to really slam itself closed again to try to stem the rise in cases that we've seen, we could see it show up again in ethanol demand, which will affect corn a little bit. And then I always worry about current events that you know and the real or the euro move. But right now, where we sit, it looks -- it appears that we're stabilizing a little bit in those. So we'll watch trade as well, but the risks are there, but they are on a much lower scale than probably what we were watching a year ago.

And the planting progress in Brazil, in particular, for their crop, they seem to have caught up. Maybe if we were talking 2 or the weeks ago, probably a different level of concern. But right now, you're concerned about getting this first crop in the ground as well as the premium crop doesn't seem like there's any too much risk there at this point.

Yes. They had been behind about 2 to 3 weeks, but there's a lot of steel down there -- a lot of big steel that can move -- put a lot of acres in the ground very, very quickly. And you're right, you see it. They got a little bit of moisture, they caught up very quickly. And our order book on safrinha is right on track with what we would expect. So I -- just got to count the days and nights to get that soybean crop out, but it looks like we're in good shape.

Okay. So just -- from a high level, we're starting now with the supportive backdrop on the commodity prices. And so let's just sort of now think about as we walk into 2021, you have a lot of things that are within your control going into next year. Not unlike prior years, hopefully, this year, the FX won't come and take away some of what you're working on. But maybe help us remind us of what's left going into 2021 in the merger cost savings? Why don't we start there?

Yes. Well, let me maybe -- let me just back up 1 step. So currency will probably be -- just a year-over-year translational will probably be a little bit of a headwind for us, just pure currency. That first quarter of 2020, we'll lap that now at these higher rates. But we've got the pricing momentum now behind us. So I think the combination of currency and price offset probably is, like you said, pretty well neutralized, maybe a slight a tailwind for us. And then we talked about the planted area. So yes, we will deliver from a synergies and productivity perspective. We'll deliver that final tranche of the $200 million of merger-related synergies. A big chunk of that, $150 million or so of that will show up in crop protection and manufacturing-related to clock cogs flow through. And then on top of that $200 million, we've got about $50 million of productivity kind of future projects. I call it Execute to Win in the past, it's really beginning to gain more and more traction on those. So that's 1 big lever in our control. And then the other levers are in new offerings. So Brevant comes to mind. We've had a very historical low market share in that retail channel. A little bit -- 5% to a little bit less percent. And we'd expect to grow that by 20%, 25% next year with Brevant coming in. So when we look like-for-like, same basis, same genetics, we're coming into that market at a premium now. So we've got some pricing benefit there, and we should have some share benefit with Brevant. And then pricing overall, we're going to, once again, I can now say it with confidence of having 2 seasons behind us of a track record, to go get low single-digit price improvements. And we did those previous 2 years is some pretty tough market environments and now in a slightly improving environment, we feel good about our pricing momentum. And then finally, new products. We've talked about that Crop Protection line up, still continuing to deliver another year. And then we're going to be bringing another 10% of capacity online for our Spinosyns. And so we're selling out of just about everything we can produce. We had some markets that we were never really able to address mainly Brazil with our Spinosyns franchise. This will give us extra volumes to really go get after some of those markets. So those are still pretty high-margin opportunities for us.

Okay. And then maybe the other piece of it is where do you think things will be on a raw material and in an active ingredient perspective in the crop chemical?

Yes. We're not seeing a lot of big headwinds that are greater than kind of what we've already felt. We've had a couple of good years where we've digested some shifts that occurred in China where in that '18, '19 time frame, we really spiked up. We've sort of lapped all of those. We've closed a few facilities over these last few years and have a few more yet to come. And every time we do that, it allows us to tap into some lower-cost, third-party production opportunities. So that's helping create a little bit of tailwind in that space. And we faced some pretty strong catalyst pressure as we came into the crisis. Some of the mines that bring some of these high-value platinum, palladium, rhodium catalysts that we utilize. We've sort of lapped all those as well. And I think as the COVID crisis starts to wane, we'll get back to some more usual commodity prices for some of those products as well. So not seeing much in the chemical side from a raw materials headwind.

Okay. So to sum up, we've got a supportive fundamental backdrop with the commodity prices and tailwinds there. Some volume growth likely from greater planted acreage in the U.S. leaning more maybe towards soybean and corn at this point. You'll get mix benefits from Qrome, from Enlist, Brevant, Arylex, Enlist herbicide and a few other products and then probably also maybe some price/mix lift just from the environment. FX a little bit of a headwind. Raw mats being largely neutral. But all of that combined gives you confidence, plus your cost savings initiatives that you're going to get to growth within that algorithm that you've laid out.

Absolutely.

Okay. Let's talk a little bit more then on the Seed side of the equation. And 2 things I think that we really want to dig into are your A-Series soybeans, the momentum you have there and then the Enlist platform, how you're bringing that in to the portfolio? Where that's going to be in terms of total market share this year versus last year? And what your plan is with Enlist as we move through the next couple of years?

Right. So starting with A-Series, just no doubt now after 3 executive seasons of -- successive seasons of ramping up A-Series with the Xtend trade. This this lineup of germplasm is the yield king in soybeans in North America. We talked about the pricing environment in 2020 as we went into that market. And really we were so worried about soybean pricing. We're going to have other brands of list out there discounting. We had others out there with technology that had some issues or some problems, and they were pricing for that. And here, we were trying to navigate through that environment. We held, if not grew price all the way through it. And the whole sole reason for it, is the performance. It's the technology that is on board that allows us to go price for the value that we're delivering in the marketplace. And that extra yield these past years has just been huge for growers. So we'll still have A-Series fully in the Xtend lineup that we will be offering, and we'll be just supportive of that lineup that we have. But the real story for Corteva now in 2021 will be our conversion to Enlist. You know we talked in 2020 about we thought that 10% of our units could be converted over. And we were real happy that we closed out that year at about 17%. So it shows the intensity that the organization is carrying. We'd expect that more than 20% of the overall soybean acres in the United States in 2020 were in the Enlist lineup. And so where we start is how many acres will be out there with Enlist in '21. So we'd expect that to grow by about 50%. That puts Enlist on about 1/3 of all U.S. soybean acres. And so in that backdrop, we believe that at Corteva, we can double our units. And so originally, I thought that would have been around 35-or-so percent. But we got our teams very aggressive in the Seed production kind of contracting work in the season. And we've probably got another 8 million to 10 million units of Enlist that we're going to push through our quality testing processes to get them into a bag of seed. And if that all goes well, I think we could be 40% of our lineup in '21. So as we ramp that up, obviously, we'll be managing Xtend. We're happy to see the die cam of company registration that'll allow growers to get full utilization out of the Xtend offering as well. So then the final part of this story is what is the penetration in Corteva germplasm into the Enlist system? As you know, early on, we had to license in some previously converted products just so we had some units to sell while we get the Corteva breeding machine up and running. Well, that's in full swing now, and we're utilizing Southern and Puerto Rico production nurseries to really scale that. So we were about 10% of our germplasm last year. We're going to probably be around -- right around 25% of our germplasm Corteva units. And we'll drive the heck out of that going into 2022 as well. So that's the story on Enlist. You -- maybe I'll just close this out and see if you got any follow-ups. You mentioned Qrome. I'll just highlight Qrome 1 more time. This -- we're going to be probably 25% of our corn lineup in 2021 is going to be Qrome background. And it's an impressive molecular stack that has created substantial yield benefits in every product that it goes into. So we're 7- to 10-bushel an acre yield advantage. And that just showed up all across the Midwest. So that was another significant driver of our pricing performance and certainly, something that growers are investing in to drive yield. So those are -- that's the lineup in Seed for 2021.

Sure. So when I think about your Seed business and I think about sort of the price/mix capabilities, I think there are 3 factors. We talked about 2 of them already. One is sort of the commodity price environment. Two, the mix benefit that you're getting from your innovation. And the third thing that we've talked a little bit about over the last year or so is just the analytics that you're bringing, particularly to the Corteva sales force and what you're doing with all the data you have from all these years of all these folks selling Seed to your customers. So maybe just give us a little bit of insight into how that's helping you drive a little the price/mix on the margin?

Absolutely. Overall, our strategy is unchanged. We're going to price for the value that we deliver and capture kind of that year-over-year improvement as these offerings just drive superior performance. So it starts there. You add to that a market backdrop that's relatively constructive now for pricing. And as I mentioned, 2020 was a great example of -- our track record is pretty solid in being able to do that. But that third element, you add to it is this analytics capability of putting control towers in place so we can really watch and understand that the discounting that goes on between gross price and net price and really work with our reps to make sure we're putting the best value package together for each customer that they work with. And we saw some real benefits of those tools that we put in place in 2020. So overall, it lines up pretty positively for that whole price/mix discount opportunity that we had.

And where do you think you are with those analytical tools? And sometimes companies start working with them, and it takes a few years to really get the algorithms and everything sort of in full swing. And at first, they -- you only want to take so much risk when you're working with one of these tools. And initially, where do you guys think you are on the adaptation curve?

Yes. I think we're in pretty good shape. We saw immediate benefits just in year 1 with the implementation. So we'll keep mining that space looking for opportunities while making sure we're responding to our customers' needs and giving them the right kind of choices that kind of matches up with their specific farm operation, whether it's timing of when they want to take seed deliveries or financing versus cash, all of those kind of work their way into a customized offering for every single grower based on where they are, where they happen to be. When 1 year a grower that has a lot of cash wants to be an early take cash buyer. And then other years, it might be a little bit strapped and that same grower will take advantage of some pretty attractive financing. So we'll work with every grower every year to put together the best mix of all of the different tools we have.

Okay. And maybe just to close out the Seed discussion. You referenced in your prepared comments, order books shaping up well. It doesn't sound like you're seeing some of the promotional or competitive skirmishes that we've seen in recent years. It's obviously a bit early, but we're coming up on that Thanksgiving, typically, I think, usually first kind of deadline for the Seed book. But it sounds like the competitive environment is okay, and farmers are enthusiastic and looking for -- get their whole quality orders in and a little less price sensitive. Is that a fair approximation?

Yes. This season shaped up from an agronomic implanting and harvest time line. It just shaped up perfectly. It broke early. It went in great time line wise. Other than that little bit of drought we had right at the end, it's been an almost perfect year. So harvest has come off fast. You'll see the numbers from USDA, just how well ahead of last year, we are -- I mean, last year, you remember, was so, so late. So we're probably a couple of weeks ahead of our trend line average on our Seed order book, and we're way ahead of last year. So it's -- yes, all shaping up to be pretty well for us as middle into next year.