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

All right. Next, we'll stay in seeds and chems and we're going to go to Corteva. Of course, one of the leading ag chem producers in the world. That's a very promising multiyear growth and margin opportunities, very robust seeding traits portfolio and attractive Crop Protection pipeline, all good things. Please welcome. We've got the CFO, Dave Anderson. We have CTO, Sam Eathington. So Sam, I think you're just first going to present a few minutes and highlights then we're going to dive into Q&A with Dave and Sam. And if you please, you have a great questions in last couple of sessions. Please submit your questions via the app or raise your hand. We'd love to integrate them.

Great. Well, good morning, everybody. And Joel, thank you for the opportunity to be here. And Dave and I are happy to take some questions and talk to you a little bit more about Corteva. I'll just be real brief, but just a couple of things to set up. One is, as a company last year, we really started on a journey of looking at our strategy and focusing on what our portfolio should look like. And so we did a lot of simplification of our portfolio in both seed, like where to play, what countries, what crops, Crop Protection, what active, specialty actives that had low margin opportunities for us. And we're on a journey really to shift away from that to deliver sort of a higher quality earnings and margin improvement, and we're starting to see that already showing up in the business. The other real big journey we're on is in the biotech trait platform where, as a company, we have historically in-license a lot of biotechnology and pay a lot of royalties on those traits. And we're really in a transition now where we're starting to see some of our own biotechnology traits or some co-development traits and list soybeans being a really great example of that, where it's -- we expect it will be on about 50% or more of the market in North America. And sort of can cast a similar sort of platform in Brazil. But this is really shifting us to reducing our trade royalty structure. This year, it will be about $100 million of reduction to the company. And I think that grows to almost $250 million in the next year or 2 after that for total, but it also unlocks out-licensing opportunities for us. So as we start to get our own traits. We can create our own sort of stacking strategies and directions. So now all of a sudden, we're out licensing, and that's another growth opportunity for us as a company. On the Crop Protection side, we're on a journey of how do we continue to create. We're patented, differentiated products out of the pipeline that really have a favorable sustainability profile. And so we set some very aggressive goals about sustainability criteria and characteristics. And we're now 100% of our Crop Protection pipeline achieves those sustainability criteria. But it's also driving new product sales, which this year will be about $300 million of this new differentiated material. And by about 2025, we'll look quite different. About 2/3 of our portfolio would be patented differentiated crop protection material. And then the last area just to kind of hit on is we had an innovation update just -- I guess it was just last week, as time goes. But it was a build off of what we did in September really is about how we are an ag technology company. We rolled out some metrics about return on investment of our R&D program. I think it was the first time we've showed some of those metrics, and we look quite good relative to the ag industry. But we also framed up that to achieve our 2025 financial goals and targets, we've already invented those products. We still got to deliver a little bit to our commercial team, but those products are there we're launching things like PowerCore, Vorceed, we have Optimum GLY and canola. We've got new products in our Crop Protection platform that we launched like Adavelt. So we are -- we've got the material to deliver that. We focus on 2035, which is this journey about biotech trait royalties and CP differentiation, as I just mentioned. And then we also opened up that -- look, there's a lot of opportunities in emerging tech like gene editing or new frontier markets with energy, renewable energy shifts that are occurring, what we see in specialty proteins and of course, the biologics space for us. These are all other fabulous growth opportunities for us as a company. So overall, the company looks quite good, and we feel quite confident about our '25. Our pipeline out to 2035 and new opportunities on that. So with that, I'll turn it over to Dave and Joel.

Great. And maybe you can send us questions or raise your hand. Okay. So let's start short term we'll kind of move out. It's long term, some of the great things in the pipeline. So 2023, talk about 2023, sort of what are the drivers and some of the headwinds and tailwinds that are sort of setting up for the outlook that's here?

Sure. Well, just as a reminder, and as Sam said, we did raise our guidance, Joel, as you know, for 2023 when we released earnings week before last. So we're now looking at 7% in terms of top line growth year-over-year at the midpoint of our new guidance. So $18.75 billion midpoint of that guide. That's impressive. And we're looking at EBITDA growth of 13% on a year-over-year basis. Two things that really contributed to that guide raise, and then we can come back and talk a little bit about what's new, what's different, some of the things that we're seeing over the course of 2023. But 2 things. Number one, as you'll recall, as Sam stated, the close on our acquisitions. So March 1, we closed on Stoller and Symborg. Stoller is significant for us in '23. It will add about $450 million of revenues, about $90 million is our forecast of EBITDA contribution. So these are real businesses, right? These are really creating for us, I'll call it, critical mass in terms of our positioning in the biologics segment of the Crop Protection market, which we think is going to be a fast grower as well as a significant value contributor to us, to our customer franchise. The second component of the guide, increasing, by the way on the EBITDA, we went from $3.5 billion at the midpoint of our prior guide for this year, up from $3.2 billion last year, 18.5% EBITDA margin last year. We took our guide up to $3.65 billion, $150 million increase. $90 million of that's the biologicals acquisitions. The rest of it is improved operating performance. We had an overdrive in the first quarter. Some of that is translating into full year benefit. 2023 is shaping up to be another good year for the company, but a little different than we anticipated on the front end. Number one, we've got less corn production in Europe as a result of the Russia-Ukraine war. Reduction in acreage planted, as you know, as well as a shift to sunflower out of corn. And then, of course, in Latin America, specifically Argentina and Southern Brazil in terms of drought conditions and the impact there. But we're looking at increased acreage, as you know, in the U.S., our forecast consistent with USDA it's 92 million acres for corn, which is a positive, obviously, for us. We're also seeing now in this season to start good planning, and I'd say, Sam, consistent with 5-year average in terms of row crops in the U.S. and North America. The other thing is we're seeing a bit of a change now in order patterns, the term we've used is normalization. And this is particularly we're seeing this in Latin America, specifically Brazil. And what that's doing is it's causing a shift in timing from 1H to 2H in some of that order pattern and therefore, some of the revenue, more like historic because '22 was a bit anomalous in terms of what we saw in terms of the demand pull. We forecast in terms of inflation, continued high, obviously, commodity cost impact on seed. We're more than offsetting that in terms of pricing. We saw nice margin growth in seed as well as crop in the first quarter. The forecast is to continue for that for the full year. On the Crop Protection side, you're going to see a lowering of the rate of inflation over the course of the year to a significant reduction in the back half of the year or the fourth quarter. And also, what you're going to see is a pricing standpoint, pricing is going to more normalize as well in the Crop Protection business, but still good revenue growth. Good margin growth on a year-over-year basis. So that's what's embedded in our numbers.

Okay. And you and Chuck and the team put in a pretty good cost optimization program. We're taking a good look at the business. We work in rationalize the business just the first year, we were starting to see, how much of -- how much fruits of your labor are you seeing this year? How much more do you have to go? And anything this year you discover that maybe you've got some more dry powder on that program?

Well, what we're seeing is more favorable. You saw that when we finished 2022, I mentioned the $3.2 billion of EBITDA. We have a very strong finish to 2022, not just on the revenue side or on the commercial side, but we saw very good translation of top line to bottom line. So good operating leverage. And the operating leverage of Corteva continues to improve. You saw that again in the first quarter. One of the things, Joel, to your point in terms of cost management that we highlighted was improvement in SG&A, not just as a percent of sales but on a nominal basis, on a year-over-year basis, we're basically flat when adjusted for the inclusion of the Stoller acquisition that brought in some G&A, obviously, together with the revenues that we saw in the first quarter. On a full year basis, the outlook continues to be positive. The actions that we took in 2022, and you may recall, we took a restructuring in 2022, and we said the majority of that would be completed by the second quarter of 2023. That's translating to over $100 million of improvement on a year-over-year basis, which combined with other productivity actions is about a $300 million contribution to our P&L in '23. That's going to continue. We've got very good line of sight in terms of managing, if you will, our overheads. So as we grow revenue, as we enrich the product mix, the portfolio simplification and the exits that Sam talked about, over 20% of our active ingredients on the Crop Protection side, selective geographies in terms of our participation, 30 to 40 countries we've decided to exit. The combination of those, new technology, new products, combined with this improved mix, combined with the overhead management means gross margin expansion translating to EBITDA margin growth. This year, our latest guide, 19.5% EBITDA margin for 2023 compares to 18.5% last year. And by the way, up about 400 basis points over the last 4 years in terms of margin growth. And our 2025 guide is for a 22% midpoint operating margin, $4.4 billion of EBITDA in 2025. So we're on track to that. We feel very good about that. We think '23 is going to be another important installment towards that.

Okay. Let's talk about seeds. Seed pricing has been very strong. You're gaining share in being paid for your royalties as you grow your list trade programs portfolio. Talk about how seed pricing? How is it fair this year versus your expectations, say, 6 months ago?

Obviously, Seed pricing is pretty much on track, maybe some upside to what we originally told the forecast. We're going to see and we've guided to in the high single to low double digits for Seed pricing increase this year. And that's a global number. Obviously, you're going to see differences by crop, by region, by specific market. But I would say we feel very good about that. We're more than offsetting, obviously, commodity costs, other costs, freight, logistics, other costs as a result of that pricing. So we'll see margin expansion again for the seed business. This year, you saw a nice performance in the Seed business in the first quarter. Sam, anything you'd want to add to that?

Yes, I would just say part of our first quarter was driven by Brevant where we're adding to our retail market. That's a market we hadn't historically played in. It's about 30% of North American farmers buying in that space. And we're seeing a nice steady growth as we've launched that brand and brought traits and technology into it. And then Q2 really leans into more of our pioneer agents and reps that driving the Pioneer brand and corn in this way.

Remember in the Innovation Day last week, I asked the question. I said, Chuck, I said the word Brevant never came up in the presentation. And here you, hey, don't forget Brevant. So maybe talk about that? Like is it sort of forgotten as the opportunity? Or is this kind of a small opportunity? It's nice, but it's not one of the biggest drivers?

Yes. So we're new, right? So you got to remember kind of put our history as the companies came together, there was a Seed brand that was in retail by one of the heritage companies. It was down. It wasn't really viewed as a very competitive brand and performance. So we've retooled that. And we launched Brevant. We had launched it in Latin America. We launched it in North America. We brought Pioneer level of genetics and performance to it, which gives those farmers about 1/3 of the market, different choices than they've historically had. And so we're small, right? We don't want to mislead that. We're still a small player. But we think there's opportunity for us to have steady growth in that market over time as we bring our technologies to that market.

Fair enough. Just a little bit on crop cans. So the markets since gone to more leaner supply chains. How is that changing your business, working capital?

It's really changing the -- I kind of mentioned that earlier, but good -- very good to expand on that a bit. So in the Crop Protection business, what we're seeing is demand patterns are definitely going to more of a historic norm. '22 was really anomalous. It was a scarce -- was scarcity value real concerns in terms of supply availability. We had force majeure as an industry, obviously, special chem broadly. So second half of '21 into '22 and through most of '22, that was -- that really characterize the marketplace. We're seeing now, Joel, much more of a normalization. We spoke to that in the first quarter. And it influences our guide. So just talk about that just for a moment and then maybe come back a little bit to specifically the crop. But when you look at our guide that I referenced earlier, what we shared was if you look at our first half to second half revenue distribution, that doesn't change too much, but our EBITDA distribution does. And partly as it's a result of the change that we're seeing in crop. Some of it is related to crop protection, somewhat related to just dynamics in Latin America broadly. And specifically, what we've shared with the group is that in 2022, 85% of our EBITDA generated in the first half, 15% second half. It's going to be closer to 80-20, not precisely, obviously, but closer to 80-20 this year, still very much on track in terms of achieving our full year targets. And by the way, a constructive setup, we think, for 2024 as well. Now in crop, what that's meant is we are carrying a little more inventory because that seasonal pattern now or that sales pattern rather than being as much as we had originally planned in the first half, a little more in the second half. Let's also see that just in terms of some receivables. But in terms of the overall volume, we're looking at market in the mid-single digits in terms of growth for the Crop Protection business, and we're looking at Corteva in terms of performance basically being in line with that.

Earnings the first half and second half, some of the feedback I've heard from investors is no way you guys are too conservative, that Q2 is way too conservative. Dave?

Well, there's -- we'd like to have numbers that obviously that we can achieve.

Like some softballs?

We like to have numbers that we can achieve. But let me give you some good talking points here, some reality. Number one, is this change in terms of LatAm and specifically Brazil. Brazil is going to be much more like on a revenue distribution this year, probably more like 20-80, 20% first half, 80% second half compared to 30-70 last year. I mean that's meaningful for us in terms of that business. That's number one. Number two, as I mentioned, on crop because of this change in order patterns, some of that's related to Brazil, but more broadly, Europe and other markets, we're going to see by virtue of that. We're going to see a stronger second half on a relative basis compared to 2022. And then finally, we had -- I would almost call it a pull forward of our European business in the first quarter. You saw the strength of Europe. And last year, Europe was affected back to supply and challenges there. Europe was affected because, frankly, the product was challenged in terms of availability and therefore, being able to fulfill on time to customer requests. This year, we had the supply, we were able to do it. So when you look at the comps, we had a much stronger first quarter compared to the second quarter. All of those things are sort of in the mix relative to what we think 2Q. We're still going to have revenue growth. We're still going to have EBITDA growth but it's going to be more muted against the averages that we're going to see for 1H and 2H.

We have Sam here. So let's get into some more innovation. So Enlist has been phenomenal and your competitor in that space. I talked about now we've had a steady state of market share between Enlist and I don't know, Xtend and XtendFlex. How do you feel like that? Have you hit steady state or you've got more to go?

Yes. If you look at the Enlist soybean platform in North America, right, we launched that in 2019. We hit over 45% of the acres last year. We think that will be north of 50% this year. And we still believe that's a 60% product out in the marketplace in North America. So we continue to see farmers excited about it. We continue to see adoption growing on it. And for us, it's what the big shift has been in the last year or 2 as we switched over to essentially pioneer genetics and most of that. And so we see great performance in that lineup. So we think there's a little bit more left there.

And when you try to push more like at some point in some regions, you probably start hitting kind of limits. Is that limit because -- I don't know, is it that the Dicamba performs better here? And is it getting to some of the nuances like that?