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

Okay. Welcome back. It's a pleasure for me to kick off this session with Corteva and, in particular, these 2 guys up here that I've known for a really long time. They didn't have Corteva on their coats back when I first met them. Sam Eathington, I met him probably 20 years ago when he was doing some breeding work in Ankeny, Iowa. And I met Chuck Magro well over 10 years ago up in Calgary in his old Agrium days. So I have a lot of respect for these 2 guys, and it's a testament to the new Corteva team. So it's a pleasure to have them up here. And feel free to jump in here with some questions with me. I got a couple of thousands of them ready to go. But I'd like to hear your outlook here, Chuck, on where Corteva is heading from here.

Yes. Thanks, Steve. Hi, everyone. First of all, it's just fantastic to be here again face-to-face in Florida. This is a marquee conference, and we're delighted to be here. So I have Sam with me, our Chief Technology Officer. He's going to talk to you a little bit about what we have in the technology pipeline, how we're investing and what we think sort of the future of our products and services look like. I actually have Dave Anderson as well, our CFO here. So we're well positioned. What I thought I'd do quickly, I'll only take a couple of minutes, I just want to talk a little bit about the market conditions that we're seeing. Right now, it's very volatile, as you all know. And then just a little bit about Corteva if I can, just to set the stage. So when you look at the fundamentals of the ag industry, man, things are really robust. The fundamentals are quite strong. And 2021 was a very, very good year. We're certainly expecting another good year in 2022. And we're even getting a bit bolder now to say, most likely, it's going to take a few more years of really good production to really rebalance inventories. Because that's exactly what we're seeing, it's very, very strong demand. Now supply. Supply basically for all of our products is extremely tight. We've got supply chain issues. We're seeing cost inflation. And if you step back and you look at the drivers for that, it's things that you've all been watching for some time. Obviously, with COVID, the supply chains were disrupted in the agricultural world but also almost everywhere else. The zero COVID policies that some countries have are continuing to cause some disruption in the supply chains. And then with China rebuilding their swine herd from African swine fever, that's causing a lot of demand for grains and oilseeds. When you layer, on top of that, some dry conditions in Latin America, so less production of soybeans we expect. And then you lay on now the Russian and Ukraine situation, you can just see the volatility that we've seen in global crop pricing. So that's the situation that we see it. For us, what we're trying to do as a company is we're trying to produce and get our products and services to our customers, put it in their hands as quickly as possible, so that we can get these crops around the world into the ground. So the market conditions, robust. I'd say that volatility is going to be with us for some time. And we're really focused on our supply chain, driving cost and efficiencies out of our system, and trying to get products and services in the hands of farmers around the world. When you think about Corteva then, if you step back and you look at it, and I've been now with the company for 4 months, and I continue to be very impressed with our customer orientation and the technology pipeline. And in essence, if you step back and you think about our company, that's what we are. We're an agricultural technology company. And we're trying to bring value to farmers around the world so they can increase their productivity, produce nutritious and healthy food, and drive sustainability on their farms. And we have a full set of solutions for that, which Sam will get into in just a minute. In February, we laid out our guidance for 2022. We gave a range of $2.8 billion to $3 billion. That would be -- the midpoint of that would be a 13% growth from 2021. And that number also, we articulated, had $200 million of currency headwinds in it, really because of a strengthening U.S. dollar. That was our expectation at the time. If you think about now the situation we have in Eastern Europe, the Russia-Ukraine business for Corteva is about 5% of revenues, so about $500 million. Obviously, that wasn't contemplated in the guidance range when we provided it in February. We're working to mitigate as much as we can. But that business is primarily a Seed business, so it will have a heavy weighting for the first half of the year. So hopefully, that gives you a little bit of sort of context on how to think about the current situation that the world is facing with Russia and Ukraine. We've got several catalysts for growth. So just to lay these out for you very quickly, and then I know Steve will ask questions. We've got our new CP portfolio. We're just seeing tremendous growth and opportunity there. Last year, we did $1.4 billion of revenue. We expect that to be closer to $1.7 billion. We've got a Spinosyns -- our Spinosyns insecticide business. We're doing a capacity expansion. We're going to actually increase capacity by 50% by 2025. Great product line for us. It's about a $1 billion portfolio for us right now and growing. We've got our Enlist franchise, which we're really pleased with. It's taking a really good market share up, and farmers are really seeing the value of that technology. And that will, over time, allow us to reduce our royalty payments. And then we're looking at efficiencies, cost reductions, trying to battle the inflationary pressures that we've got. So beyond that, just quickly on capital allocation, I'd say -- what I'd say is, last year, we finished the year with $3.5 billion in net cash. So a very strong balance sheet. Dave and I consider the balance sheet to be a strategic asset. We're going to put it to work to drive long-term shareholder value. And this year, what we said is that we most likely will return somewhere between $1 billion and $1.5 billion in the form of dividends and share buybacks. So I'll leave it there and quickly turn it over to Sam.

Great. Well, good morning, everybody. And Steve, thank you. It's a pleasure to be here. It's great to be back talking with you. As mentioned, Sam Eathington, I joined Corteva about a year ago. And so I've had a chance now to really understand the R&D pipeline, our process, how we do innovation, more importantly, our people and the talent that we have. And I can tell you, I'm extremely impressed, and I'm extremely excited about the future for Corteva and our ability to bring new value to farmers around the world. We're going to do probably in Q3 an Investor Day. And hopefully, we still got some details work out. But it'd be an opportunity for you to come and see the pipeline, really kind of touch it, go out and look at it in the field or labs and really understand it in detail. But what I thought I'd do is just leave you 4 points of how we think about what we do in the R&D program. First, it starts with our germplasm base. We've got 100-plus years of plant breeding in our heritage company. And that really turns into incremental value to a farmer every year because we deliver new products that have higher and higher productivity. And we continue to see a real advantage in our pipeline relative to our competition. And recently, we went into the retail channel with our Brevant brand, and we're seeing great performance there on those products in that first year. We stack then on top of that from our biotech and our gene editing pipelines really incremental value-added traits, whether it's insect, herbicide, disease tolerance, you name it. And as Chuck mentioned, our Enlist soybeans E3 system is really just the beginning of how we see the ability to shape and change agriculture and give growers a lot of choice about what they want to do in their farming system. We build on top of that with our crop protection platform, and we have, again, a lot of heritage of delivering innovative, differentiated products. We continue to launch new products that solve problems but have better margins for us. And we build that on a base of green chemistry history. And every one of our products now have sustainability criteria, and we evaluate again. So really focused on bringing new innovation but bringing it in a more sustainable way to farmers. And then finally, I've had a chance to now the last couple of months to dig into our digital program. And what I can tell you is we have all the framework and the components to really use digital as a way to bring things together and deliver more value to our farmers. So I'm quite excited about our future and quite excited about where we're headed.

I got a question really for both of you, and that is, you're both relatively new to the organization. The roots of it are legacy DuPont, legacy Dow Ag, a lot of technology there. And now that's together as Corteva, how do the 2 of you see opportunities to accelerate growth? And I have visited the 2 research facilities many times over the years with Indy and Johnston. And how do you drive productivity? And where do you put R&D for each of the different verticals? How do you see growth going from here?

Yes. Relative to the sites, so you're right, we have our facility at Johnston, Iowa and the one, Indianapolis. They are from heritage companies. They are our 2 largest R&D facilities. They're very unique in that Indy historically was more crop protection focused. Johnston was more seed focused. But what we've done is we've integrated the teams. There's no separate R&D operations or programs. My leadership team spans both sites. And we cross-leverage capability. So for example, chemist in Indy, who is maybe working on new active, they might want to use sequence data to identify what our targets. And so that sequencing information would be done in our Johnston facility where we have all that expertise, and vice versa. So we leverage them against both platforms depending on where their skill sets are at, and they really work as one organization.

Yes. I think Sam said it really well. So what we do is we don't really think about the company out. We think about what the farmer needs, and we work backwards. And so we look at full solutions to drive productivity and yield and to drive sustainable outcomes for farmers. And so our complete focus is just how do we make farmers more money and how do we keep the farm sustainable. And then we've tried to retooled the -- not only the commercial organization, so you're asking around technology, but even our commercial organization is centered around that as well. We don't have separate groups kind of trying to sell different product lines. We have specialists, of course. But we're trying to just drive total value for the farmer, and we've kind of retooled the organization to focus on that.

And then you've chosen the Indianapolis site for headquarters. Can you talk a little bit about why that site? And should we assume that's where this event will be in the third quarter?

Yes. So we're going to keep you in surprise for the third quarter. We've got so many great assets to show you, but we're still debating that. But yes, so we decided to change the headquarters to Indy. And really, it's the next evolution of the company's journey. I think there was a time and place for us to stay in Wilmington, and I think that served us well. But after kind of a pretty extensive analysis, it really came down to 3 things. We wanted to be closer to our customers, to the technology and our operations. And so we've put up -- placed it in Johnston. There was no issue in terms of Johnston as well. But we just thought that there's a lot of growth opportunity right now in our CP portfolio. And that's an area where we're investing some capital for investment. And we're really trying to shift that portfolio to be more sustainable, use more green chemistry. And so that's where we thought that we could have the biggest impact. Now my direct reports, we call them the ELT, the executive leadership team, they're not all going to be in Indy. They need to be where their people are. And so we're still going to have executives in Johnston. For example, Sam is not going to move. He's going to stay in Johnston. And we're going to have senior leaders in Wilmington as well. But the one thing COVID has proven is that we can work in a distributed fashion pretty effectively. But certainly, from my perspective, I wanted to be a little closer to the operations.

And for many years, Chuck, you were Corteva's biggest customer. And I'd like to hear your view on perhaps the Brevant brand that Sam mentioned. Is that an effective brand to drive more shelf space? And do you see opportunities for Corteva to get more shelf space at that intermediary channel?

Right. Yes. So that's right. I was their largest customer, and it's really neat to come on the other side of it. And now when I talk to Nutrien, I have to deal with a whole different set of respect because they're a large customer of ours, but they're also a great customer. Look, Brevant, one of the things that retailers are really looking for is choice. It's so important. And it's not just choice from -- through the shelves that, at the highest level of technology, the most highest performing technology, that's where retailers want more choice. And Brevant was a significant investment on Corteva's behalf, and it has our top technology in it. And I think that's why we're seeing very strong demand through our retail channel partners for the Brevant technology. And farmers, if you look at the U.S. market, the U.S. market is one of the most sophisticated advanced ag markets in the world, as you know. But some farmers want to deal through our Pioneer dealership. And just so that I will say right up front, we have no plans to change that. The Pioneer dealership model is -- it's a really core strength for our company. We think it's a competitive advantage. And there's a subset of our farmer customers that love that channel. But there's a whole different set of customers out there that work with retailers, and there's a reason for that. The retail channel is highly effective with delivering product and services to farmers. And we wanted a high-technology brand for -- and Brevant will do that for us. When you think about that, coupled with, say, our new CP portfolio and what we've put into the investment in our CP portfolio, obviously, there's opportunities to grow the relationship with our retail channel now that we have a really good top-tier seed brand with the proprietary high-performing products that we have from a CP perspective. The relationship, I think, will evolve at the retail level, and that will be good for farmers, and it will be good for Corteva.

Do you think Brevant will help you drive more shelf space of CP through Corteva cash? And I know you don't like me to refer to it as bundling, but getting the farmers' wallet to not buy just your seed but also your crop chem.

Yes. I think the best way for us to get more shelf space from a CP perspective is to have top-tier technology that's differentiated on the farm. So it's solving problems, and it's unique. And if you think about our CP investments that we've made, we've got a significant amount of new products now, as I mentioned, $1.4 billion of revenue last year. That's growing pretty rapidly. We've got the new Spinosyns capacity coming online. So I think all of the investments that we've made over the years, and we still have more pipeline products to bring forward, I think that's the effort that we're going to see more shelf space at the retail level. I think what Brevant does is it shows the retail channel that we're committed to their long-term success. So it's -- I think it's really an important part of our offering. But I do see that our CP portfolio can stand on its own as well with retailers and farmers.

One of the areas that I wanted to ask you about, Sam, was just the soybean breeding operation and gene editing capabilities that you have. Do you see an opportunity to develop some varieties that have higher oil content for purposes of renewable fuel? It sure appears to us like there's going to be a squeeze on vegetable oil. And can you do that through gene editing? Can you raise that soybean oil content from 20% to 30% or something like that? Can you do that?

Yes.

Tomorrow.

Tomorrow, yes, right. That's my new boss. The -- so...

I think I just heard yes.

So a couple of things about that, right, is, one, you got to know what you're doing. And we have a lot of background and history in sort of modifying oils and proteins and a lot of crops. We've got a lot of base information that we can build off of, right? What's the pathways? What's the enzymes? How do you need to change them? We've got the gene editing capability. So we've got our own Cas enzymes. We also have a great position on Cas9 if we want to choose to use that route. And we got the base germplasm, right? So moving, say, from your 20% to 30% or whether it's 20% to 22% or 23%, right, you still got to have all the other characteristics that you need from a farmer standability, how you harvest it, disease tolerance, et cetera. So the answer is yes, gene editing would be a perfect tool to really help modify oil and proteins in a lot of crops. The 2 things that still have to be worked out, one is global regulatory, and it's not -- in the U.S., it's pretty easy. But if you start to move outside the U.S., either byproducts or some of the grain itself, we're still working on what Europe is going to do for an import requirements, what China is going to do on import requirements. Those are progressing in the right direction, but they're probably still a couple of years down the road before we have certainty on what they're going to do. And then the other part is making sure the value share back to the farmer really represents the value being created. But we think that's also solvable.

Chuck, you mentioned Enlist and the EPA letter from a month or 2 ago, at least, by the way, we read it. They're basically signaling pretty good chance that Dicamba won't be available for over-the-top use in 2023. I don't know if you interpret it that way. But if that were to happen, what does that do to your Enlist franchise?

Yes. So certainly, I'll let others interpret the words. I think we're really pleased with our Enlist performance. And I'll have Sam comment on it because he led the charge with the EPA. But look, that technology last year was on 35% of the acres. We said in February, we expect that to be on 40% or better this year. And look, our order book is sort of trending towards that or a little bit better. And it was the first technology that went through sort of the new process around endangered species. And in our interpretation of how it performed, this was exceptional. A 7-year extension really limited counties that we have some issues that we have to solve going forward. But maybe, Sam, why don't you take the group through it? Because I think it's really important to understand what we did there.

Yes. And so to reframe it, right, so the EPA, as you all know, gets sued quite frequently now about not following the process of doing an endangered species analysis on a new active or a new formulation. And so they switched their process and said, okay, we're going to start doing that. Enlist happened to be the first product to the door. So we've worked an awful lot with the EPA over the last 6 months. They asked for a lot of data, did a lot of analysis. And I think the good thing is that the Enlist system proved you can really use it in a safe way, that you can keep it in a field, you can manage any sort of potential runoff issues. That's why on our label, we have some mitigation things that are -- that farmer has a choice to do. And ultimately, got approval that, look, this is a safe system that farmers can use out in their environment to help them with controlling weed problems. The couple of counties, it's a small percentage that soybean acres that Chuck mentioned that we had to label off of. We -- that was really a data gap. We just didn't have data on a certain set of species that we needed to provide to the EPA. We've since done that. We've submitted that data. They've acknowledged it. They're working through evaluating it. And we're pretty confident that a lot of those counties will come back.

Does anybody want to jump in here with a question? [ Katelyn ] has got a mic, if you do. You mentioned Spinosyns, and there's a couple of categories of insecticides out there that are really getting scrutinized, and that seems to be a category that's likely to have maybe a potential acceleration in growth. Would you agree with that? And any particular regions or crops that you see opportunities with the Spinosyns? You mentioned your capacity expansion. What's driving that?

Yes. So I'll hit the capacity expansion, and then Sam can talk about some of the technical performance of the product line because we're really pleased with it. But we've been sold out for some time now. So we've put some capital to work. We're going to expand. I was actually at the site late last year. The project is going very well. We expect to start the facility up in the second half of the year. So we'll see a little bit of extra volume this year, but not a lot, and then ramp up '23 to '25. And I think that that's -- as I mentioned, that's a product line that's approaching $1 billion of revenue. So when you add that plus the rest of our new products from a CP perspective, we're hovering between $2 billion and $2.5 billion of differentiated. A lot of it is green chemistry. And so that's -- I think that's the wave of the future, certainly how Corteva is looking at our product lines. You want to talk about specifics?

Yes. I mean, if you don't know the history of Spinosyns, it's a great story to go back and read and understand how it was first discovered and was modified over the years. And so really being a natural product, and we've done some modifications on it over the years. So it's what we might call natural-inspired product now. And we still sell different versions of it. But that sort of acceptance socially about more of a natural-type product, we're seeing a big move in a lot of areas, especially in, say, Europe, for example, there's a lot of push in that direction. But this isn't the only product that way, right? We look at our fungicides. We've got -- what started with Adavelt, now Inatreq just got approved in Germany last week. It's a -- controls a number of the foliar diseases on wheat and cereal market. And we just launched or just announced in February another extension of that to Asian soybean rust with the product there. So we continue to take natural products and continue to modify them and improve them. Because what we're seeing is if it's, say, a natural or reduced risk type product, we're actually getting them through regulatory a little faster than if they're not. So it's a real advantage to do that, and we continue to play off that strategy as a company.

Question, in the last few weeks, we had -- after your fiscal year results, there was an announcement by Bayer and MS Tech. I wondered if you would have any comment regarding that. Certainly shows the success of the Enlist platform. But wondering if it changes your outlook on your side or point of view in regards to your expectations of share.

Yes. So thanks for the question. When we saw the same announcement, how we understand it is it's a distribution agreement. It's not a trait license agreement. And the short answer to your question is it doesn't change any of our plans. So from our growth perspective, we -- it actually will probably on the margins help us because we'll be able to sell a little bit more Enlist herbicide, which I think is great. So that helps us, I guess, on the margin. But the royalty reduction process that we've outlined, which has us saving around $250 million by, say, 2025, that's fully intact. And you're right. My interpretation -- obviously, I'm biased, but my interpretation is that this is a technology that I think a lot of farmers are asking for. In many ways, it is superior because of the things that Sam just described. And I think it's good to have it in as many channels as we can put it in.

Can you talk a little bit about the -- your outlook for Conkesta in South America? As I understand, old DuPont had 20-some percent market share of soybeans down in Brazil a decade or 2 ago, and that has been a bit eviscerated. Can you get that back with this product?

Yes, let's step back. So first of all, we're very pleased with our Brazilian business. If you look at last year, we had over 25% organic growth in Brazil. That's a combination of things. I'm very pleased with the CP growth in the country. And then, of course, our corn seed is -- has got a really good performance characteristics. And I think Brazilian farmers are loving the technology that we've put into the country. I think the next opportunity for us though is to grow our soybean business in Brazil. And Conkesta needs to be -- and the plan is for it to be a big part of that growth. Now so the answer, Steve, is we hope so, but it's going to take time. 2022 and even 2023 are years just to build up the commercial quantities to sell. So the way I look about at this product line right now is early results are generally good when it comes to the performance. So there's nothing there that we're -- obviously, we have to work on things every day. But so far, we like what we see. We're building up the commercial volumes. But I don't see this as being a significant value driver before 2025. So it's really an event that will happen sort of in the second half of the decade.

As you know, I was a bit concerned about a couple of trials that were going to happen this month, and they got closed. Is there anything you can share with us on what happened there in the outlook?

Yes. So you're talking about [ PFAS ].

I am.

Yes. So look, obviously, because of the situation and it's in front of the courts, we can't say a whole lot. We continue to believe that we're managing this, and it's being handled very well. I can confirm that, as you rightly point out, that there were a few cases that were settled. Can't really comment on anything beyond that, except to say that we continue to make decisions and work through the process in the best interest of shareholders. And there is some disclosure in our publicly filed documents if you want to kind of read through the background.

Anything in the pipeline you want to talk about, Sam, that is particularly exciting? Any new actives that are coming that you think could be really differentiated? And maybe also your view on biologicals.

Yes, absolutely. So again, Q3, we hope to have this investor event. It will be a great opportunity for all of you to come really to the field or labs and actually see a lot of the pipeline, the products. We talked about building off our natural products in CP. I mentioned Inatreq just getting approved in Germany. The new active that we've got for South America, we'll probably have that one ready to go in the marketplace in, let's call it, 3 to 4 or 5 years. That's right there at the end of the pipeline. Again, helps farmers with Asian soybean rust. If you look a little deeper in the pipeline, we have some new actives come in new modes of action on the herbicide front. So there's a lot of things there. On CP and biotech, we're quite excited to showcase and talk about. On the biologics side, our strategy has been really to date to really in-license and go source products that are closer to being finished and use those in the marketplace to -- selling those, using to complement our Crop Protection business today. And that's a way for us to get started into that business, learn what it takes to do it, learn what it takes to sell it, start building up some revenue. And then we're always looking for what are opportunities to bolt on to that, what might we do from a R&D innovation point of view or where we might go in the marketplace. So we're still early in the biologics space, but we see it as a nice tool that will complement synthetic chemistry, not really a true replacement, especially in the row crop market, but really a way to complement, think about how you might reduce an MRL a little bit, how you might give a farmer a slightly different choice. And there, it's going to be quite valuable.

Anybody else want to jump in here? We are out of time. So I want to thank you, fellows. I appreciate the time today.

Thank you.

Thank you.