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

Good afternoon, and welcome back. My name is Dave Begleiter of Deutsche Bank's U.S. Equity Research, Chemicals and Agriculture Team. Again, welcome to our 2021 Global Basic Materials Conference. With us today is Jim Collins, CEO of Corteva. This is a fireside chat format. If you like to ask some questions, you can enter them via the chat box on the left-hand side of the screen. With that, we'll get going. So Jim, welcome, and how are you?

Dave, I'm great. Great to be here with you again. We always enjoy doing the conference. So looking forward to the time today.

Thank you, Jim. So again, obviously, ag fundamentals are very strong. We have corn and bean prices almost at 7-year highs. Now what are the reasons for this? And how long do you think the strength is sustainable?

Yes. No, I think it's a great question. If maybe I could just take 1 second to maybe frame just a couple of overall comments, will take me a minute or 2, and then I'll jump right into your answer. I've been -- spent a lot of time with investors since earnings. And I've really mentioned 3 key points. I believe there are the things that folks need to really know about Corteva right now. And the first point is around momentum. We finished 2020 strong. We've been able to really carry that momentum forward into start for 2021. And it was really evident in our first quarter results. The second point I've been making is, we've got a team that's just out there laser-focused right now on execution. I used a term on the call, I called it kind of that heads down focus. And I don't believe you can overstate just how important that is right now in face of all the things we're seeing globally the kind of uneven recovery that's going on with the pandemic, the supply chain pressures that we're feeling, raw material costs, some inflation that we're seeing out there in the market. So that laser focus is really helping us. And then finally, I've used the term that I believe we're on track to deliver our commitments. And that is a product of continuing to execute on the strategic plan that we certainly have been out there talking about. And then capitalizing on the strength of this ag market fundamentals that you just mentioned. And when I mention strategy, it's important to understand that the main components of that strategy are top line growth, both our Crop Protection pipeline and portfolio as well as our Seeds business. It's margin enhancement as we're driving better margins and seeds through trade and royalty avoidance, but also a richer mix of products in our Crop Protection lineup. And then finally, very disciplined capital allocation. So that's, I think, a nice simple summary of our strategy. So we're making progress in all those. And I believe as market conditions really continue to evolve, I'm increasingly confident we're well positioned to create value for shareholders this year. So let's -- so your first question. Exactly. The fundamentals are strong. Prices are off their highs. What does that mean kind of for us, and will that continue? So I would say that the current grain outlook suggests that it would be very difficult in just this year or maybe even next year to rebuild global supplies of grains and oil seeds. And we're starting to hear a little bit more about drought in Latin America, which will also probably prevent us from having substantial improvements in the grain deficit. And this year, it's early, it's just starting out. But no reason even to believe that if we were -- if we did really well this year in North America above trend line yields that you would, in 1 year, replenish these stocks. So I think we're into a multiyear cycle here with stronger than where we've been the last few years on grain prices. And what's driving those fundamentals is a little bit of this drought. But more importantly, it's been purchases. It's been grain demand. So China is a part of that. They've been one of the largest purchasers here over the last few months, probably won't continue at this rate as we finish out '21 and into '22. But as China starts to stabilize, then global GDP begins to pick up. And whether it's either fuel demand as folks return back and we're consuming more biofuels more ethanol, driving corn or even biodiesel demand for soybeans or whether it's just demand for animal protein as folks are going back to restaurants and the world kind of starting to return a little bit to normal. So anyway, I would say it's more than just a 1-year phenomenon. We're probably into a couple of 2-, 3-year type of cycle.

So given that bullish view, how are you going to think about normalized price levels for corn and beans today?

Yes. Kind of, as I said, given the strong fundamentals that we just talked about, led by those purchases out of China and just overall supply tightness, probably won't be sitting here at $7 corn and kind of this $14, $15 beans. It will ease as we go into '22 as some of the production in '21 comes off and takes the edge off of it. Then probably ease again. So whether it's low 6s in '22 and mid-5s in '23. But even those rates are still at very constructive levels. And clearly, it will help to stabilize net farm income as growers take maximum advantage of those prices as they market their crops.

And probably pretty obvious, but how do farmer purchasing decisions change in response to these higher prices?

Well, clearly, this backdrop will help their net income. And as their net income continues to come up, they will continue to look for opportunities to make investments. So seed is just a really great start to the season. They really don't view seed as a commodity, but they think of it as a really important first investment. They will go after yield. They will continue to look for the best-performing products in the market. On top of that, they will probably be more aggressive when it comes to their Crop Protection applications. They'll maybe be a little more aggressive on their burn down, they might even put out some fall apply chemistry to help themselves as they get into the start of the '22 season, where there's either a fungicide or an insecticide opportunity to drive that incremental last few bushels. That incremental bushel is 100% profit for them because their fixed costs are pretty much already invested in that crop. So we're going to be well prepared to make sure that we've got a first-class lineup of seed out there as well as making sure that we're set up in the Crop Protection business as well.

And Jim, the [ U.S. season ] is almost done, I think it's a little bit beans left and planned very little. But how does it end up? Any surprises that you saw in the last month or so?

Well, I would say we think we could still expect to see that 5 million to 8 million more [ acres ] that we talked about in first quarter coming back into production, a little bit in corn, probably more of that in soybeans. So we've always called it about 182 million total acres. USDA was a little bit at the low end of that range. I'd say if I had to parse that out a little bit, it's probably closer to 92 million in corn and 90 million in soybeans. Although you're right, the season unfolded so well with the start is we got all those corn acres in pretty efficiently this year. And so we started watching whether if the season was going to go a little longer, would we pick up more corn acres, I think we're pretty much done with any corn. If you hadn't put fertilizer out there to set up that land, fertilizer prices were kind of spiking just about the time a grower might have made a decision to go put another small farm or some acres into corn. So we would believe right now that they probably defaulted and added maybe a few more bean acres. So -- but it's not millions. It's going to be hundreds of thousands. We're really going to be pretty well saturated at 182 million total corn and bean acres, there are not a lot of additional acres out there that would find their way into this productive production. Folks aren't going to be back in out a [ week ] right now. Certainly, the land deeper in the south is more cotton available, it's not going to be real constructive. So I'd say we're essentially done with maybe some slight creepage right here at the end on some additional soy acres that might have gone in.

Great. Just quickly mention the drought in Latin America, Brazil, what do you expect from down there in the back half of the year?

Yes. I think we're -- right now, growers are -- safrinha is -- we'll be starting to harvest here and essentially done so their really eyes are all focused on the future now, getting the soybean crop in the ground and then getting ready for that next safrinha season. Our order book is doing really well because growers down there have cash. And we're seeing an earlier and earlier order book in Brazil, very similar to what we actually see in North America where growers in the fall, kind of September, October time frame, they want to really lock in to know that they've got a bag of seed on reserve and that we're going to deliver that at the right time lines. I think COVID has probably had a little bit to do with this as people get worried about supplies, so whether it's Crop Protection shipments or deliveries or even just making sure that we're getting seed out. They just want to kind of know earlier that their plan for the next planting season is pretty well locked in. So I'd say we're in good shape. The other thing is exchange rates and growers just kind of want the certainty of all of that. They want to negotiate their contract. They want to lock in a price, they want to lock in an exchange rate and then just kind of go get focused on getting the seed in the ground. So yes.

Got it. Switching to seeds, first on Enlist. Can you discuss the progress you made on Enlist this year?

Yes. Dave, we continue to be extremely excited about the momentum we're seeing in the marketplace for Enlist. Growers are really looking to value the simplicity of the technology. And the fact that it can be used the right way, a total post application, really getting at those tough, tough weeds that you're going to need -- we need these other modes of actions just to help growers make sure they're getting really clean field. So feedback from growers has been great. And the way our sales shaped up, it was pretty much everything we expected it to be. You'll remember the assumptions that we would expect Enlist to be on 30% of the soybean acres. And that's a combination of our branded sales, but also other partners that are out there. They're selling the Enlist system along with us, and that's up from 20%. And all our indications are is that things happened exactly like we thought. Then the second thing we're driving is our own conversion, how many of our own bags of seed out there are we converting from extend to Enlist? And we expected to have about 35% of our lineup, that was up from 17% last year. And everything we can tell is that performed pretty much like that. The other indicator that we have is on the herbicide side. Our previous target was to have greater than $300 million of revenue of sales of the Enlist herbicide by 2023. And the way we're seeing sprays and the way things set up in the fall, we could be real close to that $300 million of sales by this year. And I think it's just a great testament that this is demand for the system. It's not just a seed or the trade, it's that herbicide spray as well. So it's all gone just like we'd hoped, Dave.

I mean it sounds great. And it almost makes me think that your mid- to late decade targets could be conservative, [ 15% ] market share, $4 million applicable to earnings? Is that...

Yes. I mean, clearly, the -- we knew the system would be successful. It's early in the adoption. We know that 70% of whatever acres out there to get planted within Enlist seed are going to get the Enlist herbicide spray. Could that be a little low? Could it be more like 75%? Absolutely. We'll kind of let the dust settle from the 2021 season and see where we came in. As you said, at peak, we believe Enlist seeds would be on 50% of the acres. Is that likely a conservative estimate where we sit here today? Possibly. But again, we have 1 or 2 more seasons to go to get our revenue penetrated. But then we have a couple of seasons to go to get the trade introgressed into our germplasm. And so that's where the real margin opportunity for us. So we're going to stay focused on doing that first. And then where total market share goes after that, when we have our best germplasm with that trait fully introgressed. We'll see where it goes. We feel good that we have a set of estimates out there and that we're on track to at least meet those, if not beat them.

Sounds good. Switching to Qrome, also have been very successful, a little bit further ahead in its time line than Enlist. How much -- again, I think you said sales this year just about $800 million. Again, could your longer-term targets of $1.1 billion of peak sales be conservative?

You're right. You have those numbers right. About $800 million of sales in '21, and we had a potential target out there of $1.1 billion in peak sales. And so Qrome is our leading product now in that Triple segment. Now what range bounds that is only about 35% of the corn acres are kind of in that Triple segment. So we're going to have 80% of our units in the Triple segment are going to be converted over to Qrome, but you won't get a whole lot bigger than that. So as we said, we're on track for that $1.1 billion. And given insect pressure and just kind of the way the market is shaping up, I believe that's a really solid number, and we'll continue to evaluate what other parts of the Midwest really require a Triple and try to position Qrome to take advantage of that. But right now, we're sort of sticking with those estimates.

Got it. You launched Brevant this year, how is it being received? And how does it coexist for the Pioneer brand?

Yes, this is another area that we're really pleased about. The launch of the Brevant brand is going really well. And it's -- this is really that first full year of operating in that channel with Brevant. And we had some important goals. First, it was to build credibility with the retail channel. And we believe we have done that. We've established a brand that we know farmers want. We went out with some very broad field trials, some side-by-side trials, and growers got really excited about the technology and how it performs. And so we believe we're going to hit our volume targets for this year, and that was really about kind of swapping out the brand share that we had in retail through some of the legacy brands that came in from the merge. We feel good that we'll kind of swap that out and be sitting at that same kind of foundational level going into 2022. But it's also been about improving the quality of our retail business then from a margin perspective because those older products just really didn't have the margin, Brevant was positioned in there with better margins. So we're replacing our current share in retail, but at a better margin. And over the long term, we're looking at that retail channel, and we ask ourselves what could our penetration be there? And we've set an internal target that we've shared to be 20% market share in that. And at 20% market share, with the kind of margin performance we're going to have on Brevant, that represents about a $200 million incremental earnings opportunity for that. And I think the other thing folks also maybe forget a little bit about is Brevant just isn't a one-shot here in North America. We've launched it in Brazil, Argentina. We've launched it in Europe and in a number of places in Asia. So we have a lot of experience with how to manage the positioning and the segmentation of these 2 brands, as you were talking about, how do they work together. And so we've got over 6 million units of Brevant branded products sold outside of the U.S. and a really good history of performance of how we can segment customers and then coexist with the Pioneer brand.

And just on pricing and seeds this past year, first in beans, has it been less competitive than usual in beans, given how successful Enlist has been?

Yes, it's always a competitive market, especially in soybeans with the technology transformation that's going on here. So we're always going to expect a lot of dynamics. As we demonstrated in 2020, we really focused on a pricing for value approach. We've got -- we had great germplasm, good performance. We got -- we had good agronomics out there. And rather than go chase a bunch of low-value acres, we just stayed focused, and our track record in 2020, I think, speaks for itself. There were others out there that expected some really, really terrible declines in that space, and we navigated through it, I think, low single digits. And that was back when commodity prices were pretty low. And farm income were really struggling. We still demonstrated our ability to extract value for the marketplace even in those tough times.

And look a little bit ahead, I know price costs come out in the next few months. And I know you can't say much, but how do you think about pricing in this environment? Or is it just about new products and mix or can you get real pricing on certain products?

Well, you talked about the current market fundamentals a minute ago. We're very encouraged about the overall backdrop and the fundamentals that we're seeing as demand for grain what we believe continue to support and drive commodity prices. So when we think about pricing on a look forward basis, there are always a number of elements that are really important to consider. So first, we look at the profitability of our customers. Second, we're going to make sure and understand the value that our technology is delivering, whether it's germplasm yield or the incremental value associated with, say, trade technology that we're bringing. We always take a look at what is our cost position, right? What do we come into this market from a seed production cost basis? And then as you just mentioned, we always take competition into account and make sure we understand just the competitive dynamics that are going on. But look, it's still very early. But if I stop and think about '22 for a moment, we would expect, overall, globally, our pricing in seed net-net of all of the costs that are kind of coming at us to be an improvement, a net improvement to earnings for 2022. Now it's still early, and we're still evaluating all of those moving pieces that I just mentioned. But this is kind of our planning, our mindset going into to our planning processes as we look forward to next year.

And to be clear, is that a mix improvement? Or is that a real price improvement?

Yes. There'll be a little mix in there, as there always is, a few more bags of Qrome in there, a little better conversion of the Enlist from introgressing the trait into our germplasm and backing out of the licenses to others. But there's some real opportunity, I think, with the things we just talked about, market backdrop. And a pass-through of our costs and making sure that when you consider that overall on a kind of a net-net basis, it will be an earnings improvement opportunity for us.

So when you look forward, and if I'm a grower, I'm being told to take a price increase due to your higher input cost this year in a tight market. When a commodity price come off in 2, 3 years, do you get that pricing back? Would you have to get that pricing back?

So it is part of our -- kind of our mindset here is we take a long-term view of that, we try to find a line through this where we're passing through some of our costs and making sure that we're pricing for the value that we're delivering, but we're also mindful that our customers face these roller coasters as well. So our goal is always to just maintain a consistent line through that. But every year is a little bit different, and we take all those factors into account.

Very clear. Crop Protection, can you discuss some of the progress you've made this year on your newer Crop Protection products?

Yes. Absolutely. That Crop Protection pipeline continues to deliver and a few of the notable ones are things like Arylex, which was a new cereal herbicide that we launched in Europe, Rinskor, a new rice herbicide that we launched both in Asia, a little bit in the U.S. and then Zorvec, which is a new fungicide that we've had out for a couple of years, but it continues to grow. What I like about what we're seeing right now in our Crop Protection portfolio is the diversity of molecules across these different indications, the diversity of crops that they're going into and the diversity of geographies. So for 2021, we have 3 active ingredients, many of those that I just mentioned, they'll hit the $300 million mark in net sales. And I've been around a long time to have 1 of those is good, to have 2 of them is even better, but to have 3 of your new horses really starting to deliver above that $300 million mark is just outstanding. And it's really helping us demonstrate that we're on track to deliver the new Crop Protection product sales of about $1.3 billion from that pipeline. And if you just look at first quarter 2021, it really shows, we were $120 million of increases in new product sales from the same period the previous year. So we dialed about $300 million in of incremental sales growth from that new pipeline in 2021, and I'd say we're right on track to deliver that.

And Jim, what are you seeing this year in terms of insect pressure, weed pressure, fungicide, disease pressure in North America?

I'd say, first of all, it's been a very strong soybean herbicide market as we've seen some shortages of glyphosate. There have been a couple of other molecules that have been on tight supply. And we've had the Enlist program to launch, and it's really filled the gap there. So it's been very strong. Other than that, it's been a pretty normal year, especially in Asia, as I think about our insecticide sales, and it's been a fantastic closeout to the Latin America season on Asian soybean rust. We've got the #1, the #2 and the #3 best Asian soybean rust Crop Protection molecules. And so even when maybe things get tough and you get a little bit of drought in that soybean market, you don't need the 5, 6 or 7 sprays that go on for rust, you're for sure going to get the first 3, and we're the first 3 in that lineup. So I wouldn't say it's been extraordinarily good or bad anywhere else in the world other than maybe soybean herbicides in the U.S.

Got it. And I know you buy a host of different chemicals here, we've seen some inflation pressures from commodities. I assume you raising prices [ offset ] these inflation headwinds?

Yes. Sure. Glyphosate is probably the best example of that as we saw some really intense run-up in the cost of glyphosate globally, and we were adjusting prices pretty much as we went along. In the first quarter, we talked about across the board price increase that we drove that was helping us cover things like incremental freight, some of these key raw materials, things like metals catalysts that are out there that are showing up. And so yes, I feel really good about the way the team is reacting. But we'll still have some of those costs coming at us in the second half of the year, primarily in seed production costs that will show up in Brazil as well as some global challenges in terms of supply chains. We're very dual and even in some cases, triple source for a lot of our products. So we're getting the materials that we need to meet demand. But in some cases, it's costing us a little more as we -- maybe air freight some material in here rather than rely on the ocean system right now, which has had some challenges. But yes, overall, the costs are there, but the offsetting actions are also there, whether it's pricing or additional productivity that we're loading into our systems to help cover that.

You had forecasted a $50 million net productivity and cost headwind in '21 at the Q1 call. Is that number still good? Or is it a little [ biased ] the upside given the further up in commodity prices?

Yes. I think that's a really good question. We saw most of the $200 million more in headwind that was coming from this increase in raw material. We had good visibility of that in the fourth quarter. So when we adjusted kind of all the moving parts, higher costs coming through, a little bit better pricing to offset some of that, more productivity actions, maybe even a little of the currency benefit flowing through, it really put us at that kind of net $50 million headwind for the year. As we sit here today now 2 or 3 more months into the season, we don't see that getting much worse. The visibility that we have of what was coming at us has been about what we expected. And now we're just working on additional productivity actions and pricing actions to do what we can to offset that additional headwind. And we still have a big chunk of the year left to go. So no, I don't -- I think we've seen the peak of the flow-through. And now it's just continuing to navigate as we go through. And I think when you step back from all of that, it was really important -- it was a really important takeaway from our first quarter that despite all of those new costs, we were able to maintain our EBITDA guidance for the year, which says we've got a lot of confidence that we've got the systems and the actions in place and the visibility that those costs are probably as bad as they're going to get and probably don't get too much worse as we finish out this year.

Jim, on margins, your seed and crop chemical margins are below your peers. On seeds, that's due in large part to our royalty costs, which you've addressed at [ dozen of time ], $800 million being, hopefully reduced to net 0 by year -- by end of the decade. Well, why your margin so much lower than some of your other peers in crop chemicals? Is this just a matter of your patent didn't differentiate products not being as larger of a platform as they have?

Yes. Clearly, as we are launching our new product -- innovation plays an important role here. As we launch that pipeline, those new products, the profitability for those new products are going to help improve the overall mix. So that's certainly 1 piece of why we believe we can move to begin to catch all of those competitors on Crop Protection. We've just got this better pipeline with a number of new products. Now you'll remember, it takes a couple or 2 or 3 years from the day you launch it before you start to see the real benefit of that. But we're starting to get into that now. So that's part one. Part 2 is all about portfolio management. So we had some older off patented chemistry that was still part of our lineup, and we made some tough decisions to phase a few of those products out. And that will have a margin enhancement. So even though we took out about $300 million of revenue, it had a really small impact on our earnings. So that will help margin. And then finally, we probably had more of a bias after merge of having manufacturing of a lot of our active ingredients in our own hands at some fairly expensive manufacturing sites. So we saw this and immediately put footprint consolidation projects in place. Since merger, we've shut down 9 manufacturing assets and have begun to establish a much lower cost supply chain. So you add all of that up, the mix of new products, the strong portfolio management actions we've taken and then these footprint consolidations, I feel really good that our CP margins will be in line with some of the other averages that you talked about.

No, very clear. And just on these royalty costs and seeds, you've [ talked, cut down half ] by mid decade, you can get the net 0 by end of decade. Off of an $800 million base. Any potential to accelerate those targets or time frames?

Well, a lot of those -- the first half of that is really all about trade avoidance because we're going to start launching our new technology. And you're a little bit at the mercy of mother nature, right? It's just how fast can you convert out of older breeding and other traits and convert into ours. So I feel good about that mid- decade is kind of the milestone for -- we've offset half. And then by the end of the decade, you got to get that engine running of offsetting it with other royalty income. And other players in the industry need time to introgress your trait. And you really don't start collecting that royalty income until they go out and sell a bag of seed. So I still think that's about right, and it's about the right way to think about it.

Jim, a few minutes left here. Just on Chlorpyrifos. You're shipping in a range bound since this litigation concern was raised. You mentioned before that you don't think it's a big threat to Corteva. Again, why is that? And how do you put the genie back in the bottle, so to speak, here on for Chlorpyrifos?

So great, Dave. Thanks for asking the question. The comparisons that were made between Chlorpyrifos and some of the other chemistries that are out there. First, you just have to look at how this chemistry is used. It is a -- used by very professional applicators in high-value specialty crops. And there are a number of companies that sell branded versions of Chlorpyrifos. As a matter of fact, we're actually a very small player. We were a very small player now in the total global use. And even if you look at it on a global basis, the U.S. use of it was actually quite small. So the amount of chemistry, the amount of exposure and the types of applications. The connection to others out there, we just thought was totally inappropriate. So we -- as we go forward, we'll clearly continue to try to clarify and make sure folks really understand those key comparisons.

Got it. Last couple of things. M&A. How does M&A fit into your growth strategy here at Corteva?

Well, when we think about M&A right now on a kind of an incremental or a bolt-on or kind of a tuck-in opportunity, if you will, looking for things that can help us advance our strategy forward. Those are things like biologicals, the opportunity to in-license or maybe acquire some small products that could help us round out that program as we're getting started. Second, we look at our digital platform, and we ask, are there some small bolt-ons there. And then we think about the diversity of what we sell and whether it's things like vegetable seeds or other high-protein row crops that would support some of the products that are out there like other lagoons and those things, those will all be nice opportunities for us. But think of them that way, as more of an opportunistic or bolt-on opportunity to diversify either our geographic footprint or the products that we have to sell.

And Jim, last question on your pension liability, are there options to optimize this liability going forward? What are you looking at with your new CFO?

Yes. As of the end of the year 2020, our U.S. pension plan was 84% funded. So actually, its funded status was in really good shape. And we continue to be confident that we're not going to have a required contribution for the pension. Now we remain flexible in terms of what are the other proactive contributions that we might make. The Board is taking a very long term, say, 10-year approach to looking at managing that and either getting it to a fully funded status and thinking about ways to look at that from an alternative perspective. But look, I feel really good about the way the teams have been managing it. And the fund performance has actually been quite good.

Good. Good. Excellent. Jim, our time is up. As always, I thank you for your time and coming to the conference. Good luck through rest of the quarter, and we'll talk soon.

Absolutely, Dave. Great spending time with you. Thanks again for the questions.

Thank you.