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

Excellent. Let's get started. Good morning, everyone, for the North America-based folks. Good afternoon, everyone else. My name is Gunther Zechmann. I'm senior analyst covering chemicals at Bernstein. And I'm delighted to have C-suite of Corteva with us this morning. So I'm joined on this call today by Jim Collins, Chief Executive Officer at Corteva. He was previously COO for the Ag division at DowDuPont. And before that, he was EVP for DuPont, responsible for the agricultural segment. Jim has also led the legacy DuPont and Dow agricultural business, leading to the ultimate spin of Corteva a couple of years ago. We also are joined here today by a more recent addition, Dave Anderson, EVP and Chief Financial Officer of Corteva. Gentlemen, welcome to our conference. And we also have Jeff Rudolph from Investor Relations on this call. The format we'd like to run for the next 50 minutes is that I'll pass it over to Jim in just a moment to give a couple of minutes of introduction, and then we'll open it up to a fireside chat through the live Q&A. You have the ability as an investor -- and thank you and welcome to this call. Thank you for joining us. You have the ability to submit your questions. It's really easy. You click on the live Q&A link that's in the calendar invite. You can then type your question. You can see it on the screen, and you can also vote on the questions that others have submitted. And I will then include those questions in the Q&A. So with that, I would like to hand you over to Jim.

Great. Great. Thank you, Gunther, for the introduction and thanks, everybody, for joining today. We're always very excited to participate in the Strategic Decisions Conference. And we're excited to be with you, Gunther, under a new host. So we're -- we appreciate the time and the effort that you guys have invested in this. Maybe just a few opening comments. I want to start with kind of the latest news is since we reported our first quarter results really just a few weeks ago, we've really spent a great amount of time with investors. So we've been out on a number of one-on-ones, and we're going to continue to do so the remainder of the day today. And through those discussions, I've really tried to distill our message down into 3 things that I think you need to know about Corteva right now. So first, we're carrying just tremendous momentum. We finished 2020 really strong, and that momentum really carried us right into the start of 2021. You saw it in a lot of the financials. And I think there were a lot of questions about, "Wow, finished really strong at the end of the year. Can they continue to carry that?" And I think we answered a lot of those questions here just recently. So then second, our team is just laser-focused on execution. I used the term on the earnings call that folks have asked me about a few times. I kind of called it this heads-down focus. And it just means that we are really intently focused on not only delivering on the underlying business, but really monitoring all of the dynamics that are going on in the market. I just think it can't overstate the importance of that right now. We've got the uneven recovery that's going on from the global pandemic. We've got supply chain pressures as we're trying to keep our supply channels open. We've got raw material costs that are coming at us. And with all of those kind of in play, keeping this team really focused on making sure that we're pulling all the levers that we can pull to try to manage and offset those things coming at us. So that leads to the third point that I've made is that we're firmly on track to deliver on the commitments that we made at the beginning of the year. And I think that's a product of that execution that I just talked about, but it's also a product of the fact that we've got a really strong strategic plan. And while, yes, we think about this thing quarter-over-quarter and year-over-year, that strategic plan that we launched back at spin has really been the guiding force for us. It's been that North Star. And it's allowed us to execute in some of these tough windows, 2019, 2020, but it's also allowing us now to capitalize as we're likely seeing a strengthening ag market fundamentals here as we go forward. So maybe the -- for just a moment, I want to elaborate on that third point around our strategy. We've talked a lot about some of the tactical areas, but I just want to maybe pull us back for a second and make sure it's clear to everyone today, what are the main components of that strategy. So it's top line growth. It's margin enhancement. And then its disciplined capital allocation. So let's start with growth for a minute. Our pipeline is at the absolute core driver of our sales growth. We've got new seed products like Qrome, are increasingly being recognized for just tremendous yields that they offer farmers, 7 bushels per acre yield advantage. It's a key part of our pricing strategy as we're out executing there. On Crop Protection, we've got a very balanced and very diverse pipeline of new crop protection products, and we drove more than $120 million of new product sales from that pipeline just in the first quarter so far this year. So pipeline, big core part of that growth driver. But equally important in that growth driver is our channel strategies, a very unmatched multichannel, multi-brand approach to the market. We've always prided ourselves on being able to get the farmers kind of what they need, when they need it and however they prefer to buy it, whatever channel they prefer. So in just 1 year since we last spoke at this conference, we couldn't be more pleased about the launch of Brevant in the U.S. retail channel and how that has progressed. So those are kind of the frame for the drivers of where is the growth going to come from. So the second element of strategy then is margin expansion. And our R&D engine, our innovation engine plays a role here as well as it allows us to shift our portfolio, the mix of products towards higher-margin products and allows us to also chart a path towards what I've called trait independence, where we can begin to move away from licensing traits from others and start to utilize our own technology as well as license those traits to others. So our Enlist system is at the center of that. We've estimated that as much as $400 million of incremental earnings can come from that at peak. And it is the first major step in reducing those royalty payments over time. By mid-decade, we would have expected to have halved those royalty outflows. And by the end of the decade, we believe we can fully offset those royalty payments. So partly by elimination and partly by new income that will offset that half. So also as part of margin expansion, we're continuing to make progress on our cost and productivity initiatives. We're on track to deliver about $200 million in gross cost savings this year from those productivity programs. And gosh, that's really helping us manage through these market-driven cost headwinds that we've been seeing and experiencing. So the final element of strategy then around capital allocation, obviously, a healthy balance sheet is just foundational to that. And then the next priority is making sure we're funding our growth and reinvestments into the pipeline and those route to markets, that we're giving all of those growth strategies the right resourcing, the right focus so that they can be successful. And then we're always going to be on the lookout for some opportunistic M&A. These are not going to be big deals. These are small bolt-on, tuck-in acquisitions that can help us diversify our product categories, maybe expand into some new geographies or add to our digital backbone. And then of course, we're always committed to returning excess cash to shareholders either through a competitive dividend or our share repurchase program. And we'd expect to complete the currently authorized repurchase program, majority of it, here by midyear. So look, we're making great progress on all of the elements of those strategies. I hit on a number of proof points. And then you now lay on the top of that a market that is now continuing to maybe improve and evolve. We are just increasingly confident that we're well positioned to create value for shareholders, kind of even beyond the '22 market guide that we've given. So momentum, execution, delivering on our commitments have been those 3 points that we look to build on. And we'll talk, I'm sure, more about those as we go through today. Now one thing, Gunther, I want to do is I want to use this opportunity today to add now a fourth key point to that list when it comes to kind of that strategic piece of that. And it has to do with what happened yesterday. Yesterday was the second anniversary of the formation of Corteva when we spun in June of 2019. So we call it Corteva Day, and it was our second birthday. And we used that opportunity to release our inaugural sustainability report. It reflects the strength of our product portfolio, the advancements around environmental sustainability, a number of special topics in areas like inclusion, diversity and equity and how we're continuing now to fold all of that into our business operations. A year ago, we announced a set of goals around sustainability. But this inaugural report now starts to begin the process of reporting out to all of you on how we're doing against those goals. So we've made sustainability at the absolute heart of everything we do at Corteva. And we recognized our responsibilities to our farmer customers and obviously, to the planet. And so we've articulated these measurable goals over the next 10-year horizons and the standards that we believe support the sustainability of our future business, both all around the globe and certainly in the communities we operate in. And then the final part of this strategy, we recently committed then to setting Science Based Targets for our own greenhouse gas emissions. I'm a firm believer that as we talk about sustainability with everyone else globally and we work with our customers, you first got to take care of the home front. So those targets were a reduction of scope 1 and 2 emissions of 65%, kind of intensity based, and a 20% reduction for the scope 3 emissions by 2030. So this commitment has been formalized with Science Based Targets, and those are reflected in that report. So it was a very exciting day yesterday as we used our second anniversary to take that next big step and issue that report and begin to give our shareholders and others a real tangible readout on how we're doing on that 10-year journey to 2030. So doing our part to provide a safe and sustainable and secure food supply, supporting our customers and driving our business objectives is right there at the core of our ultimate goals. So as you did in the beginning, you introduced Dave. We're really excited to have Dave join our team here. We're now into our second month together. And maybe, Dave, since you're new to Corteva, maybe I'll throw it to you for a second to say a couple of words. And then we'll start to take some questions.

Sure. Thanks, Jim, and thanks, Gunther, for the opportunity to participate today at today's conference. I think a couple of things, just very quickly. One is, obviously, what a great time to join the company. And the backdrop, as Jim outlined and as you know, is very attractive for the industry for Corteva. We think, number two, obviously, we're very well positioned, we'll get into that in more detail in the Q&A here in the session. But it really underscores the strength of the opportunity for Corteva, as Jim outlined also in his opening remarks. And I think number three, just personally, it's a great opportunity for what I call CFO skill set. We're still -- it's a 2-year-old company. I mean it's got all these tremendous legacy assets that have come together, and the leadership team is obviously building now a great enterprise with Corteva. It's a great opportunity for me to come in and help realize that potential going forward. So thanks for the opportunity again to be part of it. Jim, thanks for the opportunity to do that introduction.

Great. So Gunther, let's jump into your questions.

Great. Let's do that. And just as a reminder for investors as well, please submit your questions via the live Q&A. And I'll then include them in the fireside chat. But just to kick us off, Jim, you mentioned it's the second birthday of Corteva. What's -- where is the company today versus where you expected it to be at the time of spinout?

Yes. Great, Gunther. When I take a step back, it was a fun day yesterday, I have to admit. And with everything the organization has been through the last 2 years, to take a step back and think about what are those things that we're really, really proud of and it helped get us to where we are today. I think that first, it has to start with culture. We've really built a unique culture here at Corteva. We blended really and truly the best of what came in from the legacy organizations. And we've really put the farmer at the absolute center of everything we do. There's no conflict inside Corteva globally as to who the customer is. At the same time, we've added a set of values that say consumers are really critical here and making sure that we're being very transparent and very willing to talk about the things that we're doing to really not only take care of our farmer customers but enhance and deliver on consumers' demands. So that sustainability report is actually going to be a really big part of that. The second thing I would say I'm proud of during the journey is the resiliency, and I've used terms like grit and persistence as well to talk about it. You look at that 2019 ag year, it was the worst ag year in the Northern Hemisphere in 154 years of recorded data. And this team navigated through that. We didn't grow earnings a lot during that phase, but we didn't decline either, and we covered it. And I mean we look forward to a brighter 2020. In agriculture, you always think the next year is going to be a better year, and we got hit with COVID in 2020. And through all of that, we didn't miss a grower shipment. We kept our supply chains open fully. We kept our people safe and productive, and we moved rapidly to a new way of working. So that resiliency piece is really deeply ingrained. And I think it just makes us stronger as we look now forward. I mentioned the pipeline in my opening comments. That pipeline is every bit as good as we thought it was the day we started talking about merging with Dow, and you can see it delivering. And then the productivity work that we talked about, the $250 million of productivity in 2021 is a result of instilling kind of a mindset within the organization of all being owners and being very, very responsible around all of the spending and constantly looking for ways of doing things better and cheaper. And we've projectized all of those programs to kind of keep track of everything. And then finally, I would say I'm really proud of the investments we've made to drive growth. The Spinosyns is a great example, an insecticide that had been underinvested in the previous years. And -- but the day the merger closed, and we were in charge of that capital budget, we knew there was upside in that market. So we're almost going to double the revenue from our Spinosyns franchise from where we were at merge to where we are today. So those are things I'd be the proudest of.

Thanks, Jim. And if we look forward now 3 to 5 years, what would you say are the biggest opportunities? And if you could highlight the biggest risks as well that lie ahead for Corteva.

Sure. I did talk about momentum, and I think that momentum is helping us. But from an opportunities perspective, the things I'm excited about, Enlist, we talked about the royalty progression now that will continue to unfold through the -- through mid-decade, really helping us to cut those royalty costs in half on a net basis. Continuing to roll out Brevant, we're just getting started there. We could see as much as 20% market share in that retail channel over the decade. That shift in the Crop Protection portfolio that I talked about through where we are today. We're really just getting started as we're moving to much more patented and differentiated products versus some of those off-patent and more challenged products. So teams have already taken some good steps today, but there's still more work to do there. And then in the productivity area, like I mentioned, it's just an everyday thing. We're coming up with new ideas. As Dave's come in, he's really had some great visibility on our indirects, our purchasing and helping us think through how can we be more efficient with the buy that we have. But the second part of your question, if I think about the challenges that are always out there, clearly, there are some -- the big macros that we face every year. There's always a weather challenge that could have a big impact. As I mentioned, in 2019, we haven't seen a big drought in any of the major markets anywhere in the world. You saw a little of that at the edge of 2020, but we clearly watched that. Currency is another one. We're hopeful that we're into a more stable currency environment for the next few years, but you just never know what can happen. And then competition is clearly a force to be understood. There's a big period of transition going on in terms of technology, especially in the soybean markets in North America. And then finally, headwinds and just risks that we worry about is around regulatory. Regulatory pressure is something that just isn't going away anytime soon. We feel like we're well positioned with the products that we have and the technology that we're launching. Even you'll see it in the sustainability report, a more sustainable portfolio. But you've always just got to make sure that we're out ahead of that. So really then, all of that kind of speaks to how do we continue to grow margin over this planning horizon, that's the real opportunity that sits out there through the mid-decade for Corteva.

Sure. And if we move to the market outlook, how sustainable do you think are corn and soya prices where they are today, please?

Yes. I've gotten that question a lot over the last few weeks as we're all watching corn and soybeans one day up the limit in the markets, the next day down the limit. So clearly, there's a lot of volatility going on. But we would say, in general, the outlook for ag is improving, and we think that is more than just a 2021 phenomenon. It's -- and it's improving for the right reasons. It's led by record grain purchases, mostly demand out of China on the front end of this time frame. But as you go forward, we're not going to -- as the outlook suggests, as you start to look at market pricing for futures, it's going to be difficult to rebuild the deficit that we see in the global supplies of grains and oilseeds this year. So that trend probably continues into 2022. North America and South America, big parts of that resupply. But we think it will take multiyears. And then I would add, the overlay of this, I'd add global GDP. China's demand is going to stabilize. It will go back to a more normal -- but just about the time that's going to happen, we're going to be coming out of the pandemic in some bigger markets in Latin America and in Asia, and that will be a driver of demand for protein, and at higher levels of protein, which is always a strong driver for grain demand. And then we're going to continue to watch biofuels. As we went into the pandemic in North America, it really put biofuels on its back, ethanol and biodiesel. It's a little early to make a call on that, but we just know starting this summer, people are going to get back to more of a normal kind of a vacation mode. That means they're going to be driving more, and we're going to both burn more gasoline. So there was a -- what's kind of making markets a little choppy right now is we're all still trying to understand what's going on in Brazil with their weather and dryness and are we going to see a little more drought before this crop -- before the crop comes off. And so that's supporting commodity prices. But then every other day, someone says, oh, China stops buying and we go down the limit. But these are going to be short day variations. We think this trend for the next 2 or 3 years is going to continue. Barring any other global big weather event, we think it will be pretty stable for the next 2 or 3 years.

You mentioned China a few times there. How much of China's demand for imports and imports do you think is a structural shift?

Yes. The more we dig into it, clearly, China, as they were dealing with the African swine fever pandemic that went through their pork industry, and they slaughtered a large amount of that herd, it was about 1/3. And I think people sometimes underestimate that number. 1/3 of China's pork production is about equal to the rest of the world's pork production. So it was a really big number. They used it as an opportunity, we believe, to more centralize and pull out of the countryside that production when they replaced it and more professionally run very clean, disinfected facility so that now they can keep this disease in check and not go back to those large calls that they've had to do in the past. Well, that structural change means that those animals are going to be fed a different diet, not in the countryside. They're going to be fed a strong grain diet, corn and beans. And I think that's at a little bit the core here of what we're seeing. So there's a replace and get them up to the new level. But then ongoing, it could mean a slight structural shift into a more predictable and slightly larger demand for grain in the future.

Great. And one of the questions that's coming through on live Q&A, and that's a good reminder for our investors that you can submit your questions there as well, please, is that given the rise in crop prices, how much do you expect seed production costs to increase in 2022? Do you expect to fully offset this with higher seed prices?

Yes. Clearly, a question we've gotten a lot here recently as well. So there is no doubt that higher commodity prices will have an influence on our cost of goods into the seed business. We traditionally go out and rent an acre from a grower to have them produce our seed on it. And the rental rate for that acre is tied to their yields, their baseline yield that they would normally get off of an acre, and whatever commodity price that they would be marketing their crop at. So the answer to the question, though, is still a little bit unknown because there are a lot of variables that still have not been determined yet. So at what rate does that grower lock in that acre that we've borrowed for seed production? They have an entire year to market that crop. So we're just beginning. What the -- so the average of that will be one number. We always sell seed in the next season, blended with seed that we produced for the previous 2 years. So there are some 20% or so that's a carryover. So that cost of goods kind of works its way in as an average. And then we have hedging programs where we hedge our seed production costs, and we've not fully locked in all of those hedges yet. So you take all 3 of those things into account, that will help us determine what our cost of goods are going to be, and we won't know that until the September time frame. But that piece of data in mind, along with the market backdrop, along with how our technology is performing, will allow us then to do what we do best, and that's price for the value that we're going to deliver into the marketplace. And if a bushel was worth more, then that extra yield that we're able to deliver on board of a Qrome, for example, that's worth 7 bushels more an acre, our opportunity to go share some of that value is out there. But the answer to that question is sort of a stay tuned. As we get into that September time frame, we'll have much more clarity about our strategies -- around what our pricing strategies look like.

Sure. If we can jump into the segments then, starting with seeds and systems. You mentioned Enlist earlier already. It's a large earnings opportunity for Corteva. You just confirmed the $400 million in earnings at peak on a group EBITDA today of $2.1 billion. Can you talk us through what kind of assumptions you make for adoptions of the system, please?

Yes. Great. We are -- as you know, we continue to be very excited. I mentioned in my opening comments, but the momentum that we're seeing in the marketplace for Enlist, growers are looking to simplify their operations, and Enlist just brings a simplicity in its deployment of technology there. So we're on track, we believe, based on the commitments that we've made to -- that Enlist could be on about 30% of U.S. soybean acres. And that's up, if you remember, from 20% or so last year. And then you kind of look at just our lineup. We expect it to be better than 35% of our total overall volumes. So this is building on the great progress we made last year. We're accelerating the ramp-up of our own germplasm in technology versus having to in-license some material from others. And we could have converted 17% of that 35% -- could have the -- that overall germplasm base. So on the herbicide side, it's just -- it's not just a trait play. On the herbicide side, we have that opportunity now to go out and spray all of those acres that have been in the ground. And we know we saw a very strong demand in the fall of -- in the fourth quarter of 2020 as we were filling bulk tanks in the countryside in anticipation of the revenue from the herbicide. So we'd always expected that about 70% of those acres are going to get treated. And we still feel that, that's about right. But that $400 million opportunity that you kind of mentioned in the opening part of the question, just a reminder, that's an overall earnings opportunity kind of at peak for Enlist. And it involves all 3 of the components. It involves the royalty avoidance on the seed sales that we have. It involves the margin from the herbicide that we're going to spray out there on all of the acres that are Enlist takers. And it involves the licensing revenue that we will pick up as we license that Enlist trait to others.

Great. And can you talk how long you expect until you will be fully penetrated in Enlist?

Yes. We're -- we've been talking about it as kind of mid-decade time frame. The ramp-up rate clearly will be dependent on the competition in the marketplace, our availability of germplasm and traits. But if you kind of go back and look at what -- as we penetrated the Xtend trait into our lineup when we made that migration, it's going to look a lot like that in terms of an adoption curve.

Great. And can you talk about pricing as well? How do you price Xtend today? And will that change going forward?

Well, clearly, there's -- first of all, it's always a competitive marketplace in the soybean market. And then you throw in a technology conversion that's going on. And you throw in -- you've got a lot of players now. You've got us in there with Enlist, and there are several licensees that also have Enlist, and they're playing a market penetration game. And then the other competing system, Xtend, is obviously -- there's some share loss going on there. And so they're operating very aggressively to minimize that. And we still have a large portion of our portfolio that's in the Xtend trait. So we're working hard to do our job to manage the value that, that overall system really delivers. So all I can say is it's a very competitive marketplace, and we're going to price for the value that we bring in the backdrop of what's going on around us.

Can I just pick you up on that? As you know, after the undoubted pleasure of covering Bayer, as surely everyone here would agree, but what makes you so confident that you can take share from the Xtend system?

Well, one thing we're hearing is that there are a lot of growers that are out there looking at the value, but also the simplicity in the technology. And we've worked with the Xtend technology. It can be used safely and appropriately. But there are some requirements that you have to have. You've got to have buffer strips, you've got to have wind restrictions. You got to make sure the temperature profiles are right. And I just think one of the opportunities the Enlist system brings, it's just easy to use. A lot of those restrictions really go away. I think the second driver here is there just hasn't been choices out there in the market. And as Enlist comes along, it really does present growers with another choice. And now they can go out and make a value decision on which system they prefer. So those are the reasons.

Right. And if we move over to corn, then you expect $1.1 billion in peak sales from the Qrome technology. When do you expect to achieve this? And what yield advantage does this technology bring compared to competitors, please?

Yes. Qrome is just an incredible product. It is our leading product now in the triple segment. And you'll remember, the segment that really needs to triple is about 35% of U.S. corn acres. And so as we continue to drive that penetration, right now, it's about -- 80% of our units that go into that 35% of the market are converted over to Qrome. And so we've talked about in the past, we expect just under -- you shared the $1.1 billion peak. We're going to be just under $800 million or so in 2021, and it will take us a few more years to get to peak. But we're -- with that $800 million, you can tell, we're well on track to get there. So a couple more years and we'll hit that.

And on the earnings side, how do you quantify peak earnings rather than just peak sales?

Yes. Qrome is also a part of that overall margin expansion as we're able to price for that -- those extra bushels overall in the marketplace. So in 2020, we saw about $40 million of margin that went into that and, in total, could be a couple of hundred million dollars for us of additional margin from the Qrome lineup.

Okay. That's great. And one question, just jumping back to soy, that's coming through on the live Q&A is whether you think that Bayer will need to be more competitive in the next 3 to 4 years until the next-generation soy seeds is released in order not to lose market share.

Well, it's a little hard for me to kind of comment on others' strategies. What I can say is we're really excited about Enlist offering a 3 mode of action construct here. It's got glyphosate, it's got the glufosinate on board, and it has the 2,4-D trait. So those multiple modes of action give us a lot of tools to help manage resistance. And recently, others have just started to also have a 3 mode of action construct. So clearly, these will be 2 systems that will be in the marketplace for another year, and we're all working on now next versions and next generations of that. And from the time lines perspective, I think we're all on about the same time line. So again, we're just excited to be able to offer growers choices. And not only just a choice of a system, but 3 choices in the kinds of chemistry that they can use to control some really tough weeds that are emerging to be very resistant to just glyphosate. You're going to need these kind of systemic approaches to allow growers to stay productive and manage some tough challenges they're facing.