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

Welcome back. It's a pleasure for me to host this next session with Corteva. I think this might be the 10th year in a row that I've hosted a fireside with Chuck. And for those 10 years, he's always been CEO. His name badges may have been a little different. But in my view, there's a few that have the perspective about agriculture that Chuck has. His tenure running a massive ag retail business through what was once Agrium and now Nutrien. And now he's probably that retail business' biggest supplier. So it's awesome to have you, Chuck, once again.

Thanks, Steve.

And also, we have David Johnson. He's relatively new CFO at Corteva. His bio says he's 35 years of finance background. I'm not sure how that's possible.

I started very young.

Okay. That's -- but it will be good to hear your perspective on this platform. There's a lot of things moving in the right direction for you, Chuck. Maybe give us a little bit of an update on your outlook for this year.

Yes. It's great to see you all. Thanks for having us, Steve. We really appreciate it. I think that our view of 2025 is certainly heading in the right direction versus the last couple of years. So for the last few years, we've seen record demand for crops almost across the board. We expect that to continue. So this hasn't been a demand issue at all. There's been a very strong demand. And what we're seeing now is we've got relatively tight inventories, especially on the major crops like corn. In fact, corn is as tight as we've seen it in about a decade. So that's probably going to lead to some pretty big planting areas around the world when it comes to corn. And then you've got crop pricing that are -- certainly healthier than 2024 and farmer margins. And for us, farmer margins are critical. We watch it very carefully around the world, and they're improving. They're not great yet, but they're much better than they have been certainly in 2024. And all of that is a good relative setup, I think, for what needs to happen, which we think is going to be a fairly constructive growing season, certainly in the first half of 2025.

You have this outlook for 100 basis point EBIT margin -- EBITDA margin gain per year for the next few years. What would you say are the primary drivers of being able to achieve that?

I probably can take that one. If you look at our initial guide or our total guide here for 2025, it's very much in line with that 3-year outlook that we gave at the Investor Day. So we're basically saying that we feel like our EBITDA midpoint is $3.7 billion, which would be up 10% over 2024 levels. And when you look at that, we've also guided that we think in 2025 that our EBITDA margins will grow between 100 and 150 basis points, again, very much in line with that 3-year outlook that we gave during the Investor Day. And just following up on probably the end of 2025 there, EPS growth about 10% to 11% at the midpoint. And when you look at our free cash flow, we're somewhere between 40% and 45%, Steve, probably a little bit lower than what we had this past year. But when you normalize for working capital over the last couple of years, it's pretty much in line with our last couple of years of performance.

And David, when you're new to the team, do you see anything that's kind of obvious to you as an opportunity to drive, say, productivity, not necessarily on the technology side or on the top line, but what about productivity? Anything that's obvious to you as a newcomer?

Yes. Certainly, coming from the -- I spent most of my time in the industrial world. So if you think about business systems of like a Danaher and what have you, very process oriented, what have you. I think Corteva does a really good job of that. You can see it in the controlling the controllables. The numbers that we have built in to generate that margin improvement, particularly in productivity and some cost pass-through through seed and crop protection. I think we can always do better. I think we can also do a little bit better at just making sure -- and Sam is spending a lot of time on this, too, just return on investment, making sure that not only our R&D dollars are spent wisely, our capital dollars are spent wisely and we're doing the work we can to make sure we're as efficient as possible.

What about you on this one, Chuck? Where do you -- what gives you the conviction that you can drive a 100 basis point margin for multiple years?

Yes. So first of all, we're never satisfied. There's always opportunity, and we're going to go after as much as we can. The way I look at it is when we laid out the 3-year trajectory for Corteva out to 2027, it's $1 billion of EBITDA growth. So it's like a 9% CAGR per year in a market that is growing far less than that. And the reason that we feel confident that we've got this wonderful pathway is most of these levers are in our control. And we've outlined growth platforms that we've invested in some cases, decades to build the technology pipeline. So for us, we're going to focus on growing the top and the bottom line. And there's three areas that we're really focused on for -- through 2027. And it's things we've talked about before. It's out-licensing a seed. So Sam covered a little bit of this earlier. But we've -- strategically, we've moved our seed business from having to in-license more technology than we out-license. And we now have the pipeline, which I think is as best as we've ever seen for Corteva, and we're out-licensing that technology. And essentially, that's pure margin. So -- and the out-licensing market is $4 billion between North America and South America. So think about that, and we access very little of it today. So there's only a few players in the world that have this capability to out-license broad acre crop seed genetics and traits, and we're one of them. So we're going to access that, and we're going to be fairly bold in our ambitions when it comes to accessing that market. The others is biologicals. We made a couple of acquisitions a few years ago. They're starting to hit their stride. We're seeing very good growth. And we're just bringing that technology now to Europe and to the U.S., and we're launching that into the U.S. now. So there's going to be very good growth, I think, outside of our core LatAm market. And then there's the CP new products. These products have already been designed. They've been tested. They're in the market. We have regulatory approval. And now they're starting to build momentum around the world. So those three are really going to be the catalyst for growth to drive some of this $1 billion over 3 years. The other part of that equation, though, is what David talked is there's still a large piece of cost reduction productivity and don't forget deflation because our seed, the way we sort of manage our hedging and 60% to 70% of our seed cost is the seed commodity that we have to pay farmers for. That is starting to flow through our P&L. It's in our inventory, a lot of it right now. And so we'll see the cost advantage, especially in our seed business in '25 and then again in '26 and even a little bit in '27. So some of this is cost and deflation and then the focus on the 3 growth platforms.

I think on day 1 of the creation of Corteva, the royalty expense was $800 million. Correct.

That's right.

And where is it now? And of this remaining portion, I think you're targeting to getting it to net zero, is how much of that will be from this out-licensing of either traits or germplasm?

Yes. So David can give you the specifics, but let's set the stage. So -- when we launched in 2019, we were in-licensing on a net basis, $800 million more. We set a goal at that time to be royalty neutral by 2030, and we're exceeding that. So in November, we said it's not going to be 2030, it's going to be 2028. And we've got about $200 million. So we've already sort of moved the $800 million down by $600 million, and there's $200 million left to cover between now and 2028. Most of that is still expense reduction, and it's less royalty income. And David, you can take it.

Yes. So last year, to Chuck's point, we were able to -- on a net basis between the reduction in the expense and the increase in the revenue is a net positive of about $150 million. This year, in our guide at the midpoint, we have a $50 million input improvement. We said over time that we're going to average around $100 million a year. So if you add the 2 years together, we're in about that $100 million range. And as Chuck said, we're right now at that net $200 million unfavorable, and we're looking to make that neutral by 2028.

Let's talk about Enlist and still no reregistration on dicamba out there. Is that $50 million still based on your view that there's not going to be an increase in the penetration of your Enlist trait this spring?

Yes. So Enlist has been a huge success story and part of this $600 million journey for sure. And it now is on 65 -- the technology is on 65% of all U.S. soybean acres, and it's the #1 selling technology in the U.S. And it has been a long time since we've been able to say that. So we're pretty proud and pleased with the performance. I'd say the other thing that is new for us is we just launched what we call our Z Series, and that's the next generation of genetics. It has a 3 bushel per acre advantage over our own market-leading A-Series. So this is going to really set the benchmark, I think, for the markets eventually globally, but certainly in the U.S. So we've seen gains in share, I think, because of the performance on the acre. Now to your question with dicamba, we need to really see if we get a label right now. And it's a little early still, but we need to understand the makeup of that label. We have gained market share in the South, which has been a traditional stronghold for dicamba. But it's hard for us to say it's because there is or is not uncertainty with the label or is it the performance of the genetics that we're putting into the market. It's uncertain at this point. But what I'd say is, look, practically speaking, if there is not a label, we will be one, but there will be others. We will be one of the beneficiaries. And to us, that's sort of upside because there's no way we can forecast or financially plan based on what the EPA may or may not do. Now the complexity here is even if we get the label, will they ask the registrant to go through the Endangered Species Act approvals. And we put Enlist through that years ago. We were, I think, one of the first technologies to do that. It's quite cumbersome. There's a lot to do there. So there's a lot to be -- still to be determined on access to dicamba. But for us, what we're focused on is putting the top Enlist technology into that marketplace, which we think we have quite a strong lead when it comes to the performance of the genetics in the U.S.

The -- you mentioned that you see more opportunity to reduce this $200 million expense more on the expense side and less so on the income side. But you do have an initiative to try to out-license -- that's your germplasm. When we tour the corn belt in the fall every year, we have toured the GDM facility a couple of times in Illinois, and they talk about their partnership with you to help that out-licensing of your germplasm. That research farm, you can't tell whether this row is a GDM germplasm or Corteva. Is that a meaningful opportunity for you for that independent seed entity out there that whatever that is, 20% of the market to shift to your germplasm?

Yes. It's a huge opportunity. So for us, what we're talking about is corn, soybeans and canola. We feel we've got some of the best technology in those three crops. There are obviously 3 of the largest crops produced. And today, in corn and soybeans, each, we do have 100 licensees, over 100 licensees. So we are already accessing that market. You mentioned DONMARIO, fantastic partnership. They do things right. We have had a long and storied history with them, and we think the world of them. And so we are always looking for more organizations that want to take our proprietary technology and license it and put it in their branded products. In fact, how we go to Brazil, the Brazil market for corn will be just like that. There will be -- we just don't think that it's important for us to have a branded profile in Brazil. We think accessing it through very good partners with good routes to market will be an important part of this. And so we think that we're well set up. The key for us was, look, we've always known who's out there, and we know the relationships, and we know who's strong in this area, but we needed the access and the freedom to operate with top performance. And we believe with corn and soybeans and now canola, we have that. So it's all coming together pretty nicely and the relationships are growing, and you can see that in our financial results, early days. I will say, Steve, so by 2028 then, the story doesn't stop, right? Then we get into sort of net income from royalty, and that will take us well into the 30s. And the lineup and the technology that Sam and his team have for us, will just get better and better. And we can see that, right? We -- by the time a product like the corn genetics and the trait packages or soybean get to the market, we've played with that for over a decade. We know what it will do. And the pipeline remains strong as we get into the next decade, very strong.

David, what's your view on capital deployment? How much do you think could be in M&A? The last panel with Sam up here, we were talking about this Corteva Catalyst initiative that you have looking for potential partners. Are those also acquisition candidates?

I would say yes and yes. I mean one of the strengths that we have at Corteva is we have a strong balance sheet. We generate really good cash flow. We said this past year, almost $1.7 billion of cash. I would remind investors, we have returned cash $1 billion of buybacks last year. We've communicated $1 billion of buybacks this next year. And our dividend is in that $500 million range or so, a little bit north of that. So with that, I think we've done a really good job of deploying capital back to investors. But when we look at our balance sheet, we do have capability to be more aggressive in M&A. I think in the last year, we had tens of millions, I won't give the number invested in Catalyst. And we continue to look at those opportunities as far as are there full acquisition potential. But we consistently, as Chuck said, always look at opportunities for improvement. And we feel like coming up in the next year or 2, there are opportunities in M&A, and we're going to deploy our balance sheet where we need to. I think we're in a really advantageous spot to be, quite honestly, because of our strength of our balance sheet vis-a-vis a lot of folks in the industry and what have you. So we think this is going to be a critical time for us.

These gene editing conferences also have biologicals platform there. So there are just a massive number of new entrants out there in both. When you look at M&A, do you see more opportunity on the seed side or on the biological side?

Yes. We're looking at both. We're active in the space. We're building relationships through catalysts in our commercial channels. We like both of the spaces equally. And I would say, some of the gene editing companies that we're looking at are sort of pre-revenue. So it would be more to build our pipeline and our capability, potentially our IP and to acquire exceptional talent. So the reasons why we would invest in a gene-edited company may be slightly different. With biologicals, what we're looking for is to grow the business with great technology, of course. but a lot of these have revenue and good earnings profiles with good margins. And there's a time and place for both of those. So from my perspective, I would consider the M&A strategy for biologicals to be sort of bolt-on real businesses that are going to build and supplement our existing portfolio as well as access technology that we may not have today in Sam's pipeline. With gene editing, it's really to supplement our R&D efforts to bring capital, to bring our expertise in gene editing and then we have the muscle to take those products to the market. But that's a multiyear journey, as everyone knows, when it comes to seed.

And when you say bolt-ons on biologicals, are you thinking something like Stoller or Symborg, something like that?

Yes. So we're very pleased with both of those acquisitions. With Symborg, we acquired, I think, next-generation nitrogen fixation technology that is microbial-based. And this technology is quite special. We've seen enough of it now to say that there is a significant benefit to farmers, especially when we mix that technology with some of the Stoller products and some of our existing products in different formulations, we're seeing real benefits to farmers. And the data is crystal clear. We're bringing that now, say, for example, into the United States. And we're going to be -- our biological strategy in the U.S. is new and it's exciting. We're going to have the technology available to any distribution or retail partner that wants to license the technology and brand it as theirs. So there's a licensing play here that's going to be pretty powerful for Corteva. But we're also going to sell to some customers direct through our existing direct channels, and we'll use our branded technology for that. So we're accessing the U.S. market like we've never done before. It's pretty exciting for us, and we've got a lot of great partnerships underway with existing channels, which I have a background on that, as you said, and I think there's some excitement there. I think the other piece that we're excited about with Stoller is that had a direct selling model in most places around the world, and they were as good as I've ever seen. So if you recall how Corteva is really built, we were built the company selling seed direct through the Pioneer channel. Stoller's business demand creation really comes from a direct selling channel and then order fulfillment was through many different ways, but a lot of partners. And that capability we now have in dozens of countries around the world to move biologicals. So we feel we have a great biological channel. The pipeline is getting full from the investment and the ramp-up we've made inside of Corteva. And now we're sort of on the lookout to supplement that either from a channel perspective or next-generation technology.

And are you selling these biologicals along with your Pioneer sales reps?

We -- in some cases, we are, and we're moving that in places around the world where it makes sense, where we feel that the Pioneer agent has the right to win and has the relationship with farmers because the sale of a biological is very similar to a sale of a seed. It's actually not as similar to selling a crop protection product. So that is one of the really key learnings we've had from the acquisition is that when we're selling a biological, we're talking about plant physiology, plant health. That is different than suggesting that we have something that needs to be killed, whether that's a fungus or a bug. And the sale is very different. And what we find is that folks that are selling seed understand plant physiology, understand the soil. And so that's how we've sort of thought through moving forward is in some cases where we have strength direct, we're going to move the biologicals through that channel. That's right.

And does this also give you a platform to then immediately sell a bolt-on?

Yes. So that's one of the things the Stoller acquisition has given us is strength on farms around the world. And the thing that would -- I'd suggest would differentiate us, Steve, as a company, if you take it up a level or two, is we're really one of only a handful of companies that can bring the seed, the crop protection and now biological solutions under one umbrella to either a distribution or a retail partner because we do that with our Brevant series and some of our other third-party brands when it comes to seed, but also direct to the farm. And that's one of the things, I think, that separates Corteva from many others is we have sort of strength in all three of these now with the acquisitions we've made recently with the biologicals. And don't forget, biologicals is the fastest growing, it is a segment of CP. It's the fastest-growing subsegment of CP. And we -- our expectation is still that it will cross around 20% of the global CP market in the next 5 to 7 years. So it's fast growing, and it's going to become very significant because farmers need choices, they need solutions, they need different tools. We don't think it replaces traditional chemistry. What we've seen in Brazil, who's been using biologicals for 50 years is that it is an integrated complementary solution that works really nicely together.

And Stoller, does that also provide you that commercial platform to either run your other biologicals, your Symborg through there because you're globalizing Stoller.

That's right. And that's exactly what we're doing. So where Stoller had strength on direct selling, we're moving not only the Nutrition products, but the Corteva suite of biologicals that is growing and will continue to grow over time. And then if we do acquisitions that have interesting products, we will already have the infrastructure and the channel built.

Let's talk a little bit about the Brevant brand. I mean that's your germplasm, but going through the retail channel that you know well. Is there more opportunity to accelerate growth in that Brevant brand?

Absolutely. We're very excited about the Brevant and its performance so far. So Brevant is our distribution channel technology. It has very similar performance characteristics to Pioneer. And today, it would have about -- if you look at the U.S., maybe just to step back, about 1/3 of the market is direct and 1/3 of the market is through retail distribution and then 1/3 sort of independent. And Corteva really did not access the third through retail and distribution for a very long time. And then we introduced 4, 5 years ago, the Brevant brand. And so out of that 1/3 now, we have about a 10% share. So in the U.S., 3% from essentially almost nothing. So we've seen really nice ramp-up of market share in that channel. And just a quick fun fact. So 9 out of 10 of the major U.S. retailers are now selling Brevant. And that is, for us, a remarkable feat. The one that is not -- is in an area where we haven't made it as available because of our other go-to-market strategies. So we feel very good about the market penetration. So then the question is, okay, well, if we're at 10% today, how much more can we go? And we've set an internal target to be about 20% of that channel. So still to double the growth again in the channel. I was actually with one of our large retail customers in Florida last week at their Board and management meeting, and they were telling me how well Brevant is doing for their customers in their markets. So it was a bit of an endorsement that the technology and the strategy is definitely working.

Sam was talking about Z Series versus A Series and so forth. What do you put through the Brevant platform versus the Pioneer?

Yes. So we make -- we're going to make as much as we possibly can available to Brevant. The difference between Brevant and Pioneer, it's not really a huge differentiation in the technology. It's how farmers want to be serviced and how Corteva wants to service customers through the Pioneer channel. So what do I mean by that? The -- so Pioneer is one of these storied brands in agriculture. Next year, it turns 100 years old, absolutely remarkable history. And when we do our Net Promoter Scores, the brand loyalty is off the charts when it comes to Pioneer. But a farmer that wants to work directly with Pioneer I call it the white glove service because what they get, they get their Pioneer agent on that farm, but they also get Corteva support on that farm. Not all farmers want that kind of level of dedicated support for seed only. Others really value their relationship with retail, and I spent many, many years in retail, and they have a coveted relationship with their farmer customers. But they're selling usually a package of a suite of products. They're offering financing. There's a whole bunch of reasons why farmers will choose to work with retailers. Some farmers like that model. Some farmers want to go direct and have a lot of service around their seed. We have now accessed both of those channels. The technology is really what I would argue is not the differentiation factor. Our Brevant technology will go head-to-head with the top shelf that a retailer is selling. And that's what we -- that's how we designed it. We designed Brevant to sit at the top level of the shelf for a retailer and have choice because farmers don't want to be beholden to one company, whether it's Corteva or not. They want choice, and that's what Brevant gives a farmer that is accessing their seed through a retailer now.

I'd like to switch to spinosyns. Clearly, the crop chemical market in the last 2 years has had significant disruption. I'm sure you're not immune to that. But that is a category of insecticide that you have that, correct me if I'm wrong, has minimal generic competition. And maybe tell us why.

Yes. So great question. So spinosyns is an insecticide. It's a -- I can't call it a biological because there's a little chemical processing at the end, but it is a natural-based product. It is very close to a biological product. It's about a $900 million revenue business for us today. And even last year in the market, it grew organically high single digits, really volume-driven, and we expect a similar growth this year. So it is what I call a franchise product, phenomenal technology, very environmentally friendly. But it has also been off patent for some time. And the reason that we have kind of less impact when it comes to generics is because this is a microbial. So it's a living organism. And for you to have a generic, you would have to find the microbial, figure out how to breed and scale it. And we've been doing this for over 20 years, and we have engineered the microbial to be much more effective than what you could find in nature. So even if you found the microbial, you would have to try to improve its efficacy quite rapidly to compete with what is currently in the market by Corteva. I would suggest that's a very long put. Now that's also the reason why spinosyns is only produced here in the United States in one facility. I'm the CEO of Corteva. I have never seen the vault. They won't [ have me ] near the vault. It's like Fort Knox. So the security physically around this is pretty impressive. And part of that reason is because we want to protect our IP around the microbial species.

And am I right that those products continue to change because it is a microorganism that you can edit the genetics.

Yes, that's right. So now Sam and his team are starting to really get excited around gene editing the microbial. And that's where I think the capability for Corteva will overlap. If we're one of the leaders in the world in gene editing, and we're now one of the largest biological companies in the world, you can overlap these where we're gene editing the microbials in biological solutions. I think that is going to be a golden gateway for us when it comes to taking biologicals to the next level of performance, especially around biocontrol. So we're very excited about some of the work we're seeing and the early results we have. And we're searching the world for more, of course, but the capability to gene edit microbials for biologicals, I think, is a unique space that Corteva can excel at.

I wanted to get your view on the regulatory outlook Sam's view on the last panel was we could still be a few years away from European approval of gene editing. Is that soon enough that you would start to move some of these gene edited traits into your germplasm and get ready to commercialize? And is this an opportunity for you to accelerate your platform in Europe? I have driven through Germany not that long ago, and I was amazed at the height of the corn in Germany, I grew up not far from where you live, and I'm accustomed to 10-feet tall corn. And it's 3-feet tall there. Is this an opportunity for you to use your gene editing expertise, not just in the U.S. platform, but in your European platform?

Yes. It's hard to predict regulatory because it's hard to predict politics. But our view is, and I think Sam covered this pretty well. We have freedom to operate in almost every major exporting country. And the U.S. framework, the Canadian framework, I think, are certainly benchmarks now. We're waiting on Europe. The Presidency is Poland, as Sam called out. If the council approves it, I think what we have to then see is each country will develop their own policies within that framework. And how quickly can that happen? Sam's assessment, I think, is right. It's going to be a couple of years. But at that point for us, we're already leaning into getting our products ready. In fact, when we get freedom to operate, whenever that is, let's assume it's still a few years out. we'll be able to bring our first corn hybrid with the disease resistance Sam talked about, call it the disease super locus. We'll be able to put that into the market probably within 2 years, which in corn breeding time is record time because we are already doing plant trials in Europe of this material. So we are investing because we believe our fundamental premise for gene editing is this. It's going to be transformational to agriculture. The capabilities that what we can bring is probably limitless right now. We don't see where it will end. We're going to see yield advantages. We're going to see healthier food. We're going to see more sustainable production. You name it, the world needs it. So I think that the world is going to endorse this technology because to be candid with you, we need it. Now once we have Europe, Sam also rightly called out, we need China. but China is already approving gene-edited products in their own country, and we're hoping that, that soon will follow importation. We're hopeful. Who knows. So we're not necessarily waiting. I think we're investing appropriately to make sure that when we get freedom to operate, we will be first in the market with products that are going to be exceptional from a farmer performance perspective.

And David, anything that you've observed being new to the platform that has surprised you either on the positive or negative, if the latter, something that you think you could initiate an improvement?

And one thing as Chuck has been talking here reminds me of when I think of Corteva, I do think of this very technology science-based great leadership company in agriculture. I think the one thing that's for me that was surprising and a positive is just the strength of the commercial organization in this route to market. It's something that in my past in other industries is very, very hard to develop, mimic, develop over time. I think that is one thing that we have a very big advantage of is we know the farmer. We know the farmer because we're there directly. I think that helps us through our entire organization. It helps Sam get insights into what farmers are thinking and making sure that we're developing the right products. So for me, if I step back and think about the #1 positive thing that I didn't fully understand is just the strength of that commercial organization.

And any thoughts from you, Chuck, on how you'd like to maybe grow the company in any new directions? Any new seed platforms that you could see expanding into?

Yes. So I think back to gene editing. I think gene editing is going to open up the opportunity for Corteva to look at other seed that maybe was not technology performance-based, didn't really have a lot of margin available to us. So we'll have to wait and see, but that is certainly one thing that we'll keep our eyes on as we learn more about approvals and about what the technology and science can do. We haven't talked about biofuels -- but there is a massive opportunity for U.S. farmers to double crop. So a winter crop of biofuel. Of course, they will need the seed, they'll need the agronomy support, they'll need Corteva. So this is a very significant opportunity as the world moves slightly away from fossil fuels and wants to build more biofuel capability. American agriculture, which is one of the most sophisticated ag markets in the world, there is a golden opportunity for farmers to drive profit and income for their families, enter a new market, just like we did with ethanol 25 years ago. The SAF in the biodiesel market could even be bigger than that. And we are investing heavily on making sure that we're able to support farmers when it comes to biofuels.

Awesome. Thank you both.

Thanks, Steve.