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

Okay. Welcome back. Next up is Corteva and we are pleased to have Chuck Magro with us, CEO, as well as Dave Anderson and Kim Booth in Investor Relations. Before we get started, I think Chuck has got some prepared remarks for us. I'm just going to read these important disclosures and ask you to please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you do have any questions after reviewing those disclosures, please reach out to your Morgan Stanley sales representative. And with that, Chuck, thank you for joining us.

Yes. Thanks, Vince. And good to see you. First time back in a while. Good to be back in Boston. Nice to see you all. So we -- I've only got a couple minutes of prepared remarks. We announced our earnings, our Q3 earnings last week, so I'll be really brief. Let me just remind you about Corteva. So we're an agricultural technology company. One of the things that we're highly focused on, of course, is providing differentiated unique solutions to farmers. We're sort of tilting our R&D portfolio and really focusing on bringing products and solutions to help with food security, climate change and the energy transition. I think we've got a great story to tell. And certainly, when you think about the company, we're one of the few publicly traded pure-play ag companies in the world. So we love our positioning and I think we have a great story. A little bit about Q3. So last week, we announced the Q3 results. It was the first time in our history that we had a positive EBITDA in Q3. It's a relatively small quarter but certainly an important milestone for us. That had to do with some movement of earnings from Q4 into Q3, just early demand. But also, there's been some really nice structural changes as part of the cost structure. So really good to see that. And we continue the theme throughout 2022, where we've had all of our tools, so pricing, mix, driving productivity and cost reductions. And that is more than offsetting the inflationary pressures that we're facing, and we're starting to see good EBITDA but also EBITDA margin growth, which we like to see. Our new CP products, the revenue was up 50% compared to last year. So continued really excellent growth in sort of our new product portfolio. And then our Enlist soybean technology, now expected to be on over 45% of planted acres in the U.S. and next year, over 50%. So just continued strong performance and penetration of the Enlist platform. We do expect to finish 2022 very strong. We actually raised the bottom end of our EBITDA guidance. And now we're expecting somewhere between $3 billion and $3.1 billion for the full year of 2022. At the midpoint, that would be an 18% EBITDA growth and about 110 basis points of margin improvement. So good 2022. When we start thinking about the outlook, and Vince, I know we're going to talk a lot about this, we said last week, we remain very constructive on the ag fundamentals for 2023, and we've got a really nice strategic plan. And just to set the stage on that, so what we said at our Investor Day in September is that by 2025, we would grow our EBITDA by about $1.4 billion. So today, nominally $3 billion up to $4.4 billion and 100 to 150 basis points of margin improvement every year for '23, '24 and '25. And I think that, that's a -- it's a great new story, and we can talk more about those details. And with that, I'm going to leave it there, and we can talk about whatever you have on your mind, Vince.

Yes. Thanks, Chuck. And again, thank you for coming. I guess I just would like to start with sort of how do you see 2023 shaping up? And it seemed quite of a bullish outlook at the Investor Day back in September. Obviously, the markets are moving around, but how do you put that together and think about '23 at this point?

Yes. So look, if we talk about 2022, we knew 2022 is going to be a very strong year because we've got supply constraints when we look at the overall supply-demand balances for grains and oilseeds. All the things we've talked about, right? So you've got the conflict with Russia and Ukraine. We've got climate change issues, and we had that COVID hangover in terms of the supply chain, all of that tightened both crop inputs and crop outputs. One difference is by the time we got to this point in the year, we thought that there'd be a restocking happening in the grain and oilseeds markets. And now what we see, the harvest is almost complete. We know that's not going to happen now. And so the setup for 2023, but it's even beyond 2023, I think now that this is going to go into 2024 and perhaps even further. We need to see at least two consecutive years of trend yields, we need to see the rebalancing of stocks and so the setup for 2023 is low inventories. We've got relatively high crop prices, and we have very healthy farmers globally. Their margins are strong. This year, 2022 will be the second best year they've ever had. Next year, we expect margins to be strong again, and they've got great balance sheets and strong liquidity. So the setup for 2023 from an ag economy perspective is quite robust. I think what we were trying to call out last week was there's also the macro economy, and we need to keep an eye on continued pressure from inflation. And of course, you can see the volatility swings when it comes to currency. And because we're denominated in U.S. dollars, there's some headwinds there. But when you look at it all, when you put it all together, we are very comfortable with the objectives we set out at our Investor Day to deliver on pretty significant performance improvement.

Maybe we could touch on the inflation piece first, just because it's a big theme at the conference this year. Pretty much every company has had -- whatever you do, you've had significant inflation over the last 2 years. And we're starting to see some of that abate a little bit and maybe most of that's in the upstream commodity chemical arena, which doesn't immediately impact you. But maybe you could talk about sort of what you've had to absorb over the last 2 years. Are you starting to see it at least peak out? And what signposts would we need to see to actually see some improvement in your raw material costs? And obviously, it's different in crop chem versus seeds. So maybe we just start in crop chem and then we can talk about seeds.

Yes, sure. So overall, we said it last week, we're seeing inflation in 2022 at around 10%. That's an all-in number. In CP, it was sort of in that 8% to 10% area. And as I said though, the combination of pricing of improving and shifting our mix and driving a pretty aggressive productivity improvements, we've been out able to more than offset that. And just one call-out on sort of our SG&A. If you look at our SG&A year-over-year, on an absolute dollar basis, it's flat. But that's pretty remarkable given the inflationary pressures that we've all seen and had to face. So as we look at 2023, nobody has a crystal ball. I'm not smart enough or brave enough to call out a peak. But what we do think will happen is that we'll continue to see inflationary pressure, but it will be at a rate much less than this year. That's our expectation. That's our planning basis. And we would say approximately half of what we've seen this year. For us to get really comfortable with sort of this theory of deflation, we would need to see in the CP world lower pricing for oil and natural gas because those are the building blocks for a lot of our molecules. And the question that you rightly posed is, is that going to happen in '23? Or could that take to 2024 to work through all the production and value chains to be determined? In seed, it's a little different. In seed, we saw a similar pricing inflationary pressures. We were able to kind of price for that. But our cost structure is quite well known by this point. So 60% to 70% of the cost of our seed is the commodities itself. We know what that looks like now because our seed production is finished for the season. And we've been able then to move that into our pricing assumptions for the 2023 year. So again, to wrap all this up, we think that there is a reduced rate of inflationary pressure, which I think is going to be helpful for everyone. We think that we can use the tools we use to effectively pricing and mix and productivity to keep performance up. And as we look to 2023 and then into 2024, the deflationary flags for me will be just watching sort of the basics of oil and natural gas.

Maybe another thing to do as we think about bridging '22 out to '25 with the Investor Day goals, obviously, there's some stuff that's not within your control. We just talked about a lot of it in terms of raws and I guess you can throw foreign exchange in there as well. But there's a lot of it that is within your control, whether it's royalties, new capacity, cost-out. So maybe you want to remind us what you have within your control? And how much of that we might see in '23?

So this is the exciting part of the -- I think, the Corteva story is the plan that we put out, a lot of it is in our control, and it's with our understanding that we're in a macro and ag environment that looks, I would say, quite positive, especially when it comes to agriculture. So we called out four sort of key catalysts or drivers. One is this, the portfolio simplification. So when we looked at our portfolio, obviously, when we brought the two companies together, there was some opportunity there. So we looked at it through a lens of profitability, of differentiation and of growth. And what we decided is that we would reduce or eliminate 20% of our AI portfolio and really focus on six core crops where we have, I think, a leading advantage when it comes to germplasm and traits and the markets will pay for that technology. So those decisions are happening now. We called out that we're exiting the commodity glyphosate business as well as the methanol insecticide business outside of Brazil. So these are important decisions, and we'll make more of those decisions in 2023, but portfolio optimization is key. The other is our mix. We want to tilt our product mix to have more differentiation in it. And today, we're sitting in our CP portfolio, about 50% of our products would be classified as unique or differentiated. We're going to move that to about 65%, 67% by the year 2025. That allow us to have higher margins, higher-value products in the mix that should drive performance. The other area is royalty neutrality. We've talked about this for years around Enlist and with our soybean technology where we're going to pay a lot less in the next few years of royalties out the door, and that will really drop to the bottom line. Next year, we expect $100 million of royalty reduction. And by 2025, that number goes to $250 million. So that's really significant value creation. And then the final bucket is just good old operational excellence, driving productivity, taking costs out. Once we right-size the portfolio and we have less areas to focus on as well as we're going to exit about 34 countries, we'll be able to right-size the SG&A and the infrastructure of the company. When you put all that together, it's about $1.4 billion of EBITDA, as I mentioned, and 100 to 150 basis points per year. So a pretty sizable value creation. We feel a lot of that is under our control, Vincent.

Okay. Great. If we switch to sort of the seed business, here we are. Harvest well underway. So a couple of things going on. One, you're starting to get your field trial results out. Maybe you could talk about how the different parts of the portfolio have been performing and in particular, how you're doing not just in corn with the Pioneer brand, but also in Brevant, how those hybrids are performing. And then in soy, you've been gaining share in Enlist. You're starting to move more. You already talked about the license revenue coming -- or license fees coming off as you move more of your own proprietary germplasm in there. What are you seeing this year with your elite soybean germplasm in terms of yields? And is that giving you a lot of confidence about that royalty reduction into next year?

Right. So you're exactly right. We continue to be very pleased with the performance of both our corn and soybean portfolio, especially kind of the A-Series, the top genetics that we have out in the marketplace. It's very clear to us when we look at the data that they continue to be strong performers and in many areas are leading. So there's no areas where we're overly concerned. Pioneer, I know you said focus in other areas, but Pioneer is so important to us. And it's got a great market share today. We believe that, that market share will grow modestly this year based on what we've seen. And it's because it continues to be a top performer in almost all the markets that we perform in. So that's Pioneer. Brevant is new for us. We've only been in the Brevant channel for a couple of years. For those that aren't familiar, Brevant is our seed technology that goes through the agricultural retail channel. So in the U.S., about 1/3 of farmers buy from retailers. And that was a channel that was very underrepresented by Corteva prior to bringing out the Brevant technology. In fact, our market share was quite de minimis. And what we've seen now is we've made a strong commitment to retailers that we're going to bring them the best technology we have. We branded that as Brevant. And now we're -- our market share is about mid-single digits of that 1/3 of the marketplace, which has been very good growth for us. And we think that, that will continue to grow for many years in the future. But we're not really focused on growth. We want to make sure that we have the seed quality and performance so that retailers have choice. What retailers have told us, and look, I have a background in agriculture retail, retailers always wanted choice for farmers. And farmers want choice. And they want choice at that top shelf, the very best technology to drive yield. And so we want to make sure we get this one right. Slow and steady is going to win the race in my opinion. And the performance we've seen has been remarkable. In fact, we've had so much demand in 2022, we couldn't fill it all, and we expect a similar journey in 2023. Enlist soybean performance, the data is sort of coming off hot off the presses. I'll make sure that we dot the Is and cross all the Ts before I give you specifics, but the early data that I've seen, it's very clear that our germplasm in the Enlist bags will have a performance improvement for farmers. And that gives us a lot of confidence to do what we did last week, which was to say, look, I think we're going to see over 50% market penetration. And next year will be the first meaningful year where more than north of 50% of those bags will have our germplasm. So we've taken our time. We've got the germplasm right. And what we can see in the market is that it is outperforming almost everything. So all in all, when we put it together, I think the areas where we consider to be our core and the areas that are our must-win, I'm very pleased with what I've seen in terms of the performance of those markets.

Okay. And is that starting to manifest itself in your order book? I know usually, Thanksgiving is sort of the first check-in point. But what are you seeing in the order book so far?

Yes. So the order book, it's a little early. Our order book is full for safrinha in Brazil. It should be, and it is. So that's really good news. I think what we're starting to see kind of early indications are we're going to have another solid season when it comes to orders for both corn and soybeans. As we said in last week's call, we're expecting more planted acres in corn, which I think is good for Corteva. That's our most profitable crop. And certainly, the market is calling out a need for more corn-planted acres. I think right now, where we're at is obviously, production is done. We've got very good supply for the United States. And that seed now is moving into the channel going to the Pioneer dealership channel. And in Brevant, it's going into the retail channel and the order pattern looks healthy. So all this to say is it's early, lots can happen, but the setup for 2023 for us is as expected and what we would figure, and we're excited for another pretty successful 2023.

Great. Thinking about Brazil, and the other thing you -- one of the things you talked about at the Analyst Day was the Conkesta product. And you set out a target to have 35% market share there with that product by 2020 -- by 2030, excuse me. So I kind of want to understand better how you're going to get there, the value proposition to the farmer, the competitive dynamics and sort of the upside/downside risks of those dynamics.

Yes. So Conkesta, for those that are not familiar with that brand, that's the Enlist technology for Brazil and it has certain insecticide traits that are really important. So it's the herbicide trait resistance but also insecticide trait resistance, really important for the Brazilian market. And this is not a value creator in the time period that we laid out at our Investor Day to 2025. So this is a second half decade value creator because what we're doing right now, of course, is in order to have that -- to get to 35% or approximately 1/3 of the soybean market in Brazil, it's going to take us a long time to do the production to get the seed. And so that's the years that we're in right now. We're in the prebuilding, the planting, the growing and, of course, the multiplying of the seed, which is a whole journey in Brazil. But so far, early performance on the acres are quite strong. There seems to be a lot of interest for, again, more choice in Brazil with this new technology. And that's something that we will start to talk a lot more about as we get through this current 3-year plan. And in the second half of the decade, Conkesta has the potential to add a lot of incremental value for our stakeholders.

And then another area where you're adding capacity is the spinosyns insecticide product where you've had a lot of capacity constraints there. It seems like we're finally going to sort of unlock the potential of that product in the market. So maybe you can help us understand the inflection that we might see over the next few years.

Right. So this is one of our portfolios that will cross $1 billion of revenue, most likely next year. I think it's -- we don't talk enough about it, and it's a bit underrated, but it is one of these product lines. So spinosyns technology is a nature-based insecticide. So think about the macro trends, societal issues around the world. This product has got a long runway ahead of it because what farmers need and from a regulatory perspective, these products are a little more environmentally friendly. But they still have the efficacy that farmers demand to make sure that we're solving these really important issues. Spinosyns is also used on a variety of crops, everything from fruit and vegetables to broad acre. And it's used broadly around the world, the biggest market being Brazil, and that's growing quite rapidly. So we love this product line and what -- we've been sold out for quite some time, many, many years. And we commissioned a capacity expansion back in the 2018, 2019 time line. And that capacity now, the expansion is complete, and we're going to be into ramp-up for 2023. So the capacity expansion was about 50%. So it was a pretty significant expansion. And we should see about 20% of that 50% into the market in 2023 as we ramp up production and the sale of the product. So it's a great franchise. I think the world is asking for more nature-based biological solutions. This is one of them. And it's also quite a solid moneymaker. It has very high margins for us. So to me, this is one of these win-win-win products and we're excited to have the new capacity because we've been -- our customers have been asking for this for several years.

And so when you say 20% of the 50% increase in capacity is available next year, is that because the plant needs to ramp and you can only get so much productivity out of it on an annualized basis?

Yes, it's a fermentation process because it's a microbial solution, so they're actual living things. And so we need to ramp that up, and that takes some time to get the breeding right.

Okay. And sticking in crop chems, from a portfolio perspective, you did announce that you're going to exit the 5% of sales, maybe that's across corn -- sorry, across [ TG ] and crop chem. It seems like it's largely crop chem. You did announce the glyphosate exit and I think 1 or 2 other things more recently. What is the 5% number? Why is it 5%? Why isn't it a bit more? Why isn't it a bit less? Is it sort of you're just getting started, looking at what you could or should exit? Or is this the hard number?

Yes. So look, we've learned a lot over the last year. We're always going to keep looking at optimizing our portfolio, but we feel this is the right number for the time being. And what we did is, look, every company's product line, I call it a tail. Every company's product line has a tail. And the trick is to understand where do you cut off the tail. And we used a very sophisticated analysis. And I should also say we did this without consultants. So this was Corteva led by our experts in our company that know our markets, know our customers. So there's a lot of ownership in these decisions, even though some of these decisions are obviously going to -- they're sometimes often tough to make. What we looked at, profitability of the molecules, we looked at the growth potential, and we looked at the uniqueness and the competitive advantage that these products may or may not have. And where we landed was about 5% revenue based on last year's numbers, so 2021 revenue. So say, just around $700 million, $800 million of revenue, less than 1% EBITDA though, so that should say something about the products. And over time, when we prune the portfolio and we restructure the infrastructure of the company, we'll be able to drive some margin efficiency from those decisions. Last week, we called out the commodity glyphosate exit. We also exited the methanol insecticide business. And we would like to, in 2023, make 70% to 80% of that portfolio decisions in next year. So we're trying to move as quickly as we can but being respectful that our customers will have to find alternatives, and we have to communicate these things properly. But that gets a lot of this behind us quickly and that allows us then to reallocate resources into our R&D portfolio and our commercial organization to really sell products that move the needle.

And I think that obviously is sort of the starting point of getting your product portfolio more differentiated, right, because obviously what you're getting out of is not differentiated at all. But what are the other sort of steps on the road to get from the 50% differentiated position to a 65% position?

Yes. So that journey is going to be -- if you think about our new products, and I mentioned our new -- our CP new products were up 50% year-over-year. So those products still have room to run. So there's going to be significant growth in those eight products there that have not reached their peak sales yet. So that will be part of this journey from 50% to 65%. We have two new products that are coming into the market in the next 3 years. So that's going to be exciting. And so those products will contribute to this increase in differentiation. We have the spinosyns capacity. Obviously, if we sell more of that, that tilts the portfolio. And then we have the optimization, the reduction, if you will, of the 20% of the AI portfolio. When you put all that together, there's going to be some things that will fall off the definition of new. And so when we put it all together, the net-net is about a 15% increase in our overall differentiated portfolio, which is pretty significant. And that is one of the key drivers of our CP margin improvement enhancement.

And what about on royalties? You talked a little bit already about sort of royalty reduction, but part of the plan is also to start generating some royalty revenue. So where are we going to see that take place?

Yes. That's another really important point. So our overall journey here is to become royalty neutral. And obviously, the $100 million next year, $250 million in 2025, that's big steps towards that. The next journey for us will be -- we're always going to have to license some technology. There's lots of competition out there. Other companies invent really important technology, and we will need access for our customer base. So it's not like we're going to go to 0 from what we in-licensed. But where we get royalty neutrality is we believe that we have a phenomenal portfolio, Enlist is a great example of that. Some of these new 8 to 10 new products, we're getting requests to license that technology. So we will start to out-license our technology. And when we add that all up, that will be healthy for margins. And hopefully, certainly, when we get past 2025 and towards 2030, we'll be at that place where we would consider to be royalty neutral. And that's the path that we're on. We've modified the organizational structure inside of Corteva to do a few different things. But the one area is now we have separate organizations that are responsible for out-licensing in both seed and CP. And they're getting started now, and they've got a great pipeline of products to take to market.

And then on the cost side of the equation, at the Investor Day, you outlined sort of an incremental $400 million of savings. So what is it going to take for you to execute that over the coming years?

Right. So this is a little bit of leftover from the merger. There's really kind of a three-step process the way we think about productivity and just cost out of the organization. One is to get the portfolio right-sized, which we've talked a lot about in terms of 20% AIs, focusing on six core crops. Once -- that will, in itself, reduce some cost. The other then is the infrastructure, the corporate infrastructure, the SG&A of the company. We'll be able to then right-size that because we have a smaller, more streamlined product portfolio. So that takes more cost out. And then the last remaining piece, which we're just getting started in this area, is really in the manufacturing look and the footprint that we have. So because Corteva is a product of a merger, a lot of this work was done quickly and we put together the two manufacturing organizations from Dow and DuPont. I think the previous management did a very nice job with that, and they achieved a lot of synergies. The next step now is that next level of optimization, which we still think there's a lot of value here in terms of what products should we produce inside the organization, which one should we partner with, where should they be produced. And our general thinking there is that in the CP world, we really want to sit where we can produce on a low-cost basis, whether that's in North America, in India, in China. We're making those decisions and analysis right now. And then our -- that's for the AI. Then our formulation, we want to formulate in-market. So we've had a really good look at where future demand is. And we're now starting to look at our formulation capability and making sure that we have our formulation capability close to the marketplace. And we're doing a similar thing in seed. And the example I'll give you, Vincent, is we also called out last week that we're going to close our sunflower production in California. That plant was exclusively producing for Europe. We now have enough capacity in Europe. We don't need to do that. And you can imagine the cost savings that we have from a supply chain perspective. And so these are the -- some of the decisions that we're making is just to get more customer responsive, making sure we're close to the customer. But also, supply chains today, one thing we've learned over the last 3 years, they're very expensive, they're quite volatile. And so a shorter, more local supply chain where we can, that's quite important to us.

Okay. And then maybe let's talk about the balance sheet a little bit. I think that it sounds like the Board's priority over the last year has really been looking at the structure and the strategy of the company. And maybe the next phase is to think about what optimal capital structure is. But do you have any sort of incremental thoughts for us on where you think a leverage ratio should be? And I'd be curious to get an update on the pension liability. It's kind of an interesting year with rising rates, but very challenging equity and debt markets. So how is the thought process on that shaping up?

Right. So you can imagine when we had a look at everything, we needed to start with strategy. We then looked at structure. Obviously, talent, talent management, culture is all part of that. And now we're turning our attention to the allocation of capital. And Dave has done a wonderful job with kind of getting this right-sized, and these are active discussions with the Board of Directors. And I think we've got a lot of that right, by the way, over the last 3 years, certainly in what I can see. I think from an overall capital allocation, if you just look at what we've been able to do, we have a very clean balance sheet. We certainly want to maintain our investment-grade rating. That is very important. That provides us with financial flexibility. Especially in these markets, I think that's going to afford Corteva to be able to move quickly in certain opportunities that others would not be able to. So investment-grade rating, that we have a lot of capacity on the balance sheet to be able to move. If you look at the return of capital to shareholders, that's been a very prominent theme since Corteva spun out. And it's been there for a reason. We strongly feel that we have a balance sheet, we have good liquidity, strong free cash flow. So we returned $3.3 billion since spin to shareholders through buybacks. Our dividend is up about 15%. And you can expect a similar thought process in terms of we want to grow the company, but we also want to return capital to shareholders, and we think we can do both. Now when it comes to growing the company, we just made an acquisition in Europe, a small company called Symborg. They're a microbial biological company, got very interesting technology from sort of nitrogen fixation. So that -- with nitrogen prices as high as they are, that technology is in high, high demand, you can imagine. And we think that there's some other inorganic opportunities to use our capital to accelerate our R&D portfolio to get new differentiated products to market. So M&A will probably be a bit more prominent than it has been. I'd call them bolt-ons, and then the return of capital to shareholders on a similar theme that you've seen prior to certainly 2023, 2022. From a pension perspective, lots of moving parts, but overall, we're in a really good spot with our pension. Total liabilities are coming down, which I think is good. Our funded ratio is still in excess of 90%. And we don't see a need to inject any capital certainly in the next few years. So I think, again, a lot of heavy lifting has been done on that in the early days. We're in a good shape. And when I look at the balance sheet and the cash that we're generating, I think that we'll be able to deploy it for long-term value creation, which is really Dave and my's objective is to really -- where is the best dollar to be invested to drive long-term value creation. I think a lot of that will be returning to shareholders with a little bit more inorganic M&A activity than we historically have done.

Okay. Are there any questions from the audience? Don't be offended. No one's asked a question all day. All right. With that, we'll leave it there. Thank you, guys.

Yes. Thank you.