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

Okay. Thanks. So we'll keep going here. We're going to get into the world of seeds and crop cans. So next up is a fireside chat with Corteva who is, of course, a leading ag chem producer, very strong seed and trade portfolio and a very large crop protection producer in pipeline as well. So please welcome the company's CFO, Dave Anderson; and the CTO, Sam Eathington. So just so you know, again, like submit questions on the app, and you can raise your hand. We'll be halfway through the fireside, I'll ask for questions in the room.

Why don't we start off? Why don't you guys give a brief overview of what's going on in Corteva on the outlook?

Sure. So first of all, Joel, thanks for hosting us. Obviously, for Sam and I, this is a repeat. We had a great forum last year, a great turnout. So we appreciate the opportunity to be part of the conference again this year. So the themes for Corteva, I think, are pretty well known. I mean first of all, and thus, the importance of Sam being with us, it's obviously for the program, is technology because at our roots, we're a technology company. So just to demonstrate that in 2024, we'll be introducing over 300 new seed hybrids and varieties. And that's a continuation of, again, a legacy, a track record that we've developed, and that's really enabling us in terms of strength in the marketplace and something we'll talk about a little bit is this price for value strategy that really is driving a lot of the financial engine, if you will, of Corteva. Also on the Crop Protection side, I think it's Sam, over the last 2 years, 320 new products and formulations, so 150 approximately this year in 2024 being introduced into the marketplace, that's making a difference as well. The other thing about Corteva, of course, is the -- speaking of financial performance is what we've been building in terms of a performance track record. If you go back to when we became a public company, 2019 and just go from that point to 2023, EBITDA margins are up over 500 basis points. We had 14.4% EBITDA margin in 2019, again, our "birth" year. By the way, a fifth year anniversary for Corteva this year as a public company.

What medal is that?

Exactly. Exactly. 19.6% in 2023. So that's impressive in terms of what we've been able to deliver. Looking at 2024, and this is the themes of the things we talked about on May 2 at our first quarter earnings release in communication is, first of all, the ag fundamentals remain overall, I'd say, Joel, constructive. What we've seen is continued strong demand for seed, for fuel, for grains, all the things that are really underpinning in terms of the strength of the marketplace and our performance. We have seen continued imbalance. We've talked about that in the Crop Protection business. There's some residual destocking, some weather-related issues also that are impacting that business and that was reflected in our first quarter results. We reaffirmed our full year guide. You'll recall that guide is for EBITDA to be in the range of $3.5 billion to $3.7 billion, $3.6 billion at the midpoint. And again, related to that, we talked about and we can get more into that, Joel, the distribution of our earnings first half to second half and importantly said, this is going to be a little different year for a variety of reasons, but it's going to be more like 80% EBITDA in the first half, 20% in the second half. 80% applied to the midpoint of our EBITDA guide would imply mathematically an EBITDA performance for the first half that would be slightly below 2023's actual. Cash flow, very good performance in the first quarter. Our cash was a little better than our internal plan, $700 million better than prior year, and it reinforces the confidence we have in our full year free cash flow guide which would be -- we guided $1.5 billion to $2 billion, call it $1.75 billion at the midpoint, which is a 50% conversion if you use EBITDA as the denominator and it's about a 90% conversion if you use operating earnings as a denominator. So a quick overview from the CFO. Sam, do you want to give some perspectives?

Yes, maybe just a few comments, building off of what you did there, Dave. Thanks, Joel, for the opportunity to be here again. So on the germplasm and seed side, right, we're probably seeing the strongest performance in our corn and soybean live that Pioneer's seen in probably 2 decades to be honest with you. So that continual strength in those 3 other products we launch every year gives us that price to value, that pricing opportunity. And we continue to see that momentum growing. We know our royalty reduction strategy, which we've talked about being essentially kind of neutral in royalty payments by the end of the decade so what we pay and what we bring in as income sort of balance out is driven by how we're deploying our own biotech traits. So in [indiscernible] and soybeans, we think that will probably hit 60% or so of the market this year in the U.S. PowerCore in corn given us aboveground insight control and then one we don't talk a lot about, but our Optimum GLY canola product in Canada, we've launched, which gives us a different herbicide opportunity there. So that strategy is working. And those combinations of germplasm and traits gives us a lot of opportunities as we think about expanding into the market licensing opportunities into the marketplace, so really continue to see strength there. And a couple of exciting things. I'm sure we can talk about more. We see our reduced stature corn continue to progress nicely. This is a year of more testing and more evaluations we're doing. Our biofuels collaboration with winter canola was off to a great start. We went and had a chance to look at some of that and the product looks good out in the field. Farmers are happy. And our gene editing strategy looks to be progressing in line with regulatory approvals. So we feel really good about how the seed short, mid, long term is playing out in the innovation space. And in CP, just real quick, we continue to focus on creating differentiated products that really matter to customers. We're trying to drive that percentage to about 60% of our portfolio. We've got new launches with Adavelt. Reklemel is an example that we're expanding around the world and the biologics integration and strategy is off to a great start. We've got some neat things we can talk about there. So I'll turn it back.

It's a good high-level view. Let's talk up, let's major down some of the specifics, so maybe you can submit your questions on the app. So let's just stay closer to 2024. It seems like mostly a volume growth year if you drill it down to like the major drivers here. And then very back-end loaded, maybe talk about that.

Sure. So the volume growth really is...

Relatively back-end loaded is what you meant to say.

Sure. Sure. And let's chat about that. In the volume growth that Joel mentioned and that second half performance outlook, that really go hand-in-hand, just explain a little bit about that. So first of all, just to kind of recap again and repeat for the group here, this 80-20 phenomena, 80% of our EBITDA in the first half, 20% in the second half would compare to -- historically, if you looked at the average of '21, '22 and '23, it would be more like 88-12. So it's -- these are important numbers when you get into the $3.5 billion kind of range. It's really attributable to a couple of things. Number one, you'll recall that the first quarter of the year, we are lapping a much stronger first quarter of 2023 for the Crop Protection business. So as I mentioned, the issue of the, call it, residual destocking, some of the imbalance that still exists in the marketplace, some of the weather-related impacts, et cetera. Those are influencing significantly the first half for that business. Seed, on the other hand, very strong start to the year and for the variety of reasons in terms of North America, in terms of the planting, the new hybrids, the success that we've had in the marketplace are price for value, all of those things. And by the way, we had in the first quarter, and you recall from the release, we had 6% increase in global seed pricing. That's going to reduce a little bit, but still be positive in the second quarter for the first half. Turning to the second half. There's a couple of factors that are going to influence that performance. Number one, we're going to see some recovery, some improvement in Latin America, specifically in both seed as well as crop protection. In seed, what we're anticipating is recovery in the safrinha planted area. You recall for the '23-'24 season, and I noticed [ Konav ] just came out -- and Joel, you probably saw that, some updated numbers. They're saying something like in the 7% down in the '23, '24 season compared to the prior year. Our number is more like 8%. We'll see where that shakes out. We're in the same zip code. Our anticipation is we're going to see a fairly significant recovery in that market. So for the '24, '25 season so could be up 8%, so approximately. That's our view. That's sort of our judgment in terms of farmer surveys and other work in that market. What that translates to is very attractive growth for our seed business for the second half in terms of volume growth. There will be some pricing pressures in that marketplace on the seed business. In Crop Protection, there's really 3 things that are driving the volume improvement. Number one, again, the anticipation of some recovery and an improvement in the Brazil market. And that's really attributable to the fact that what we're seeing is while inventory levels have come down from year-end 2023. So it's improved there still is a ways to go. So we don't see the improvement really in that marketplace really occurring in any meaningful way until the second half of the year. Second, as Sam said, and we talked about is the importance of new products, the number of new products we have in the marketplace as well as the strength of our Spinosyns franchise and finally, biologicals because biologicals is really weighted to the second half. You'll recall the Stoller acquisition, Stoller and Symborg, but prominently the Stoller acquisition that we closed on in March of 2023, that business is doing quite well. It performed very well despite some of the headwinds and some of the challenges in the marketplace in '23. We're going to see continued growth in that business in the second half of the year. It's very much Brazil focused and very much second half focused and weighted. So those 3 factors are really influencing the performance in the second half. The other thing really, just as a quick reminder, if you look at the makeup of our cost, our productivity. We've got very good productivity delivery. That's going to continue. We'll continue to see the strength of that and cost actions in the second half of the year. But importantly, in the Crop Protection business, we'll also have the benefit of ingredient or input deflation. Joel, you recall, our guidance was about -- for about $100 million for the year for Crop Protection deflation, again, input and ingredient cost period-over-period. That's mostly occurring, in fact, exclusively occurring in the second half of the year, about $150 million against $50 million of some residual inflation just associated with timing of inventory flow-through. So we'll pick up that $150 million benefit in the second half as well. So that's what's really contributing to those numbers, that 80-20 that I talked about.

Okay. Amid that earnings view this year, let me talk about grower sentiment, okay? So are you seeing any changes in practices, personal behaviors, products. Have we seen destocking in cans, but I mean, just in general and maybe you can contact -- compare and contrast between the U.S. and Latin America?

Sure. And Sam, maybe I'll just say a few words and then you can add to this. I mean, first of all, I think what we're seeing is at the farm gate at the farm level, continued demand for top technology. There's still -- it's very much obviously the focus on production, productivity, both yield, yield enhancement and yield-yield protection. So that's steady as she goes. There are some phenomena that are related to, obviously, market-specific factors, some weather-related factors, notably in Europe. And I think that's a theme you've heard from others here at the conference and others over the course of the last few weeks. Europe has really been impacted, particularly in Northern Europe, that would include U.K. and Northern Europe. That's influencing and impacting our Crop Protection business and some of that timing, that first half, second half timing associated with that business. But in terms of just overall behaviors, I'd say, more of a shift to just in time. We're seeing that in North America, in other words, purchase decisions closer to actual application, actual need in the same way in sort of the pushout of some of those purchase decisions that we're seeing in Latin America and Brazil. Sam, anything you want to add to that?

Yes, I think you hit it well. The just in time, it's pretty clear. We're seeing that in the markets. And then look, in the U.S., we know there might be a little bit of a shift that was already planned in corn and soybean acres. If you look at the 5-year trends, we're slightly behind on corn, but it's in the States we can make up a lot of corn planting like Illinois, Iowa, for example. So still feel pretty confident about what's going to happen there. And trade technology mix, we haven't seen any shifts going on there.

I asked this question earlier today. But the 90 million U.S. planted -- U.S. corn -- can't speak to it. U.S. planted corn, a forecast. No one seems to believe that number. Do you believe that number?

I'll let you chat about it. I don't know that.

I'm not sure.

Yes, I have a view, but he's got a more informed view.

I always wait until it's in the ground then you really know what happened. You would say there's a lot of interest in those corn acres out there and a lot of farmers went ahead and put it in for corn, but we'll see. And like I said, we're a little bit behind the 5-year planning right now on corn and soybeans, but we should be able to make that up pretty quick. It's been wet across part of the -- I live in Iowa, it's been wet in Iowa. It's a good thing. We were coming out of a drought. So it's actually not a bad thing, so we'll see. But I think our order books are quite strong. So if the acres bump a little bit, it wouldn't surprise me. And if not, again, our books look really good.

Northern Plains probably is another thing to point out, right, in terms of just weather, it's just the amount of cold and wet.

It's been cold and wet, yes.

So not worried yet about a late season shift in corn so -- when do we get [indiscernible], a couple more weeks?

Couple more weeks because we still got to get through crop insurance dates. A lot of these are -- and no one likes pre event plan if you're a farmer, this is not a good thing.

Staying with seeds. So we've kind of had like low single digit price mix lifts this year, low to mid or low. And I mean it's early, but we're getting into Brazil, seed price card season, we're not that far away from -- a few months away from North America. Do you think going forward -- look, we had many years of really, really tough seed price mix looks like maybe 1% a year. We've obviously better performance and better corn prices. Do you think there's a reason why going forward we might be better than 1%, like a little bit higher than that? Or any reason to think or in a world of current corn prices, sub-$5 corn, can we do better than 1% sort of going forward on a run rate basis?

Maybe I'll just start with just a refresh of the numbers for 2024. I said this earlier, but maybe just elaborate a little bit and Sam, maybe you could comment in terms of kind of that overall price for value in which you envision. So first of all, as I mentioned, 6% overall seed pricing for the first quarter, stronger than that on corn, obviously, a more competitive situation in terms of soybean. So 6%, we're anticipating continued good pricing in the second quarter, finishing the half probably somewhere in the neighborhood of 4% to 5%, Joel, I think it's realistic in terms of the first half. More pricing pressure in the second half. And again, that's Brazil related. We've got a lower contribution margin business in Brazil in the second half. We've also got some flow-through, importantly, of inventory, and this is more on the COGS side or the contribution side. We've got some flow-through of some higher cost inventory that's actually going to help position us for 2025. We're going to have newer technology and better cost position going into 2025. So that's built into our guidance and that's important. Sam, do you want to talk a little bit about kind of how you view the path going forward?

Yes, it's hard to predict. I mean if you look around the world right now, like Argentina is going to have a lower crop then if you look at what happened down there with corn stunt. So they've taken about 20% off their corn yields. That's going to play out in the marketplace at some point. We know genetic gain continues to deliver on our products in the U.S. was a record corn yield. We hadn't seen that for a while, but we actually did hit a record there on bushels per acre production. And so historically, farmers have always been willing to share that increased value if we can deliver it and prove it. And we're continuing to see that in our genetics and our technology. So we'll see what the numbers turn out to be, but I would say it's quite strong that we'll continue to be able to do decent pricing in going forward.

I just wanted to -- we're halfway through our fireside. Any questions in the room want to raise your hand. Just wait for the microphone. Thank you.

Can you provide some more information on what happened to the Argentinian crop -- like what was the corn insect or whatever that has cut like yields down there.

In Argentina? Yes. So there's a disease called corn stunt, and it's really a combination of a couple of viruses and spiroplasms. There's 3 different organisms that cause that part. And it's all transmitted by a leaf hopper. And this is a problem we've dealt with in Brazil for a long time and farmers know how to manage it. You spray insecticides to knock down the leaf hoppers and we have genetic resistance for the virus. Historically, it's not been a problem in Argentina because the pathogen, the leaf hopper cannot over winter in Argentina. They had a very mild winter, and that pathogen actually did over winter coming out of Brazil into the northern part of Argentina, and it was able to start spreading the virus as you go south in the country. So the farmers weren't used to it. They didn't know how to see it and predict it. They didn't know how to manage it and take care of it. There was a number of insecticides that weren't approved. There's now been, I think, 3 different insecticides get emergency use approval in Argentina, one of them being our Isoclast molecule. So it gives farmers tools. And then we're working on the genetic piece for the virus. What to be determined is what will be their winter again. If they go back to a cold winter again, leaf hoppers are going to not over winter and it's probably not going to be much of a problem. If the winter stay more mild, this is a problem we have to solve for a farmer in their production in Argentina.

And I. think, Sam, it's maybe just to tag on a little bit comment on this is I think it's a little early for us to predict what the implications might be for the '24 crop too early.

Too early to tell.

In terms of being able to determine that. I think from our perspective, on the, call it, the seed production side, we're okay because of mostly the southern as opposed to the northern territory of the corn-growing areas of Argentina. So it's really to be determined. It's later in the year and really kind of to be determined in terms of what the impact is going to be.

Any questions in the room? Okay. Staying on seeds and maybe talking about traits a bit. Obviously, you've been reducing your royalty outflow over the last couple of years. Maybe talk about the cadence of that. And you stated the goal for many years to want to get to royalty neutrality, maybe by the end of the decade? What do you have to get there?