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

I think we'll get started is with great pleasure that not one, but 2 days in a row, I get to kick off my conference with the 2 most successful DuPont spins of all time. This is obviously my favorite. Don't tell John [indiscernible]. This time, it is Corteva, ticker CTVA. Today with us, we have David Johnson, who's the CFO and future CFO of Vylor, the seed spin -- or seeding technology, I suppose we should say. And Sam Eathington, who is the Chief Technology Officer, and I think they added digital and your job title as well recently. So obviously, a lot going on, I'm looking for discussing that. I've had the pleasure of knowing about David and Sam for many years, and I look forward to nerding out for the [Technical Difficulty].

[Audio Gap] gene editing policy, and this really starts the opportunity to bring gene-edited products not only just for importation, but actually cultivation now in the European market. So think about that. They've had a GMO ban for 30-plus years. And now they're actually getting on board with really the technology and the opportunities that gene editing unlocks. And so we still got about 2 years of grinding through the implementation phase. So there's a lot of stuff that still has to be written and how it gets done, but this is a huge step forward versus like what we're saying like 10 years ago when they basically band gene editing also, which was a real slowdown to the technology and the opportunity. What it really means to us is we've got a strong footprint over there in agriculture seeds. So both our corn, our oilseed rate business, for example. We've got gene-edited products in corn, for example, one we talk about is our multi-disease resistant product, where we've used gene editing to enhance the disease resistance that's already in corn, but we made it really a complete package so that a grower doesn't have to choose. Am I going to select the hybrid that's resistant to Southern Russ or one that's resistant to Gray lease spot or something else. And each year, they're trying to make that choice. If they're wrong, then they've got to go out and manage that field differently. And so we've been testing this concept now for about 5 or 6 years. We actually have a nice pipeline of multiple genes and concepts ready to go. And just to give you an example, last year, U.S. had a really big southern rust infestation. And farmers were spraying fields sometimes twice. They didn't spray, sometimes they're losing up to 80 bushels of yield per acre in their corn crop. This is like in my home state in Illinois, and our disease, super locus actually look outstanding, and we had lots of trials where it was 40 to 50 bushels above the control. So think about that being available in your seed and you don't have to worry about how to spray, when to spray, what display for, all that decision is really simple. You just buy the right seat upfront. We can now bring that technology in 30 to Europe, right? So bringing really enhanced genetic technology to Europe and corn and oilseed rate that just we couldn't do before. So it's a pretty exciting time for seed industry, I'd say. It's a great move for where Vylor is going. Gene editing is going to be core to who we are. And I think if you think about the bigger picture, a lot of countries look to Europe for the regulatory standard. So this really changes the conversation what's going on in China, for example, which is still we need approval because our grain moves around the world. So we got to have import approvals. So we still got some work to do, but this really helps with the conversation.

I think for those who like pictures, a couple of quarters ago, we actually had a picture of a 1 that had our gene edits on and 1 that didn't. And if you look at that picture, it's pretty clear that the technology capabilities. .

One of the things I just wanted to very quickly go over and understanding we're pulling a bit of an audible this morning based on the positive news flow. But could you just remind people in the audience and perhaps on this webcast today, what Gene Editing actually is? What is different than GMOs in terms of the old school nomenclature. And then also, it's -- I don't want to spoil it. But you also have a very unique standing in terms of your intellectual property that has been long standing, in some cases, multi-decades long in some cases, within the last decade. So you're very firmly well positioned in this. And I'd love for you to share your thoughts on that as well.

Great. So yes, a good call out. We did to sometimes forget where we're at. So GMO, so genetically modified organisms really back in the '90s was created, and this is where we took DNA from a different species and put it into a row crops. So think about core and soybeans. This is how we got glyphosate resistance, insect resistance. We took genes from other species and moved those across into corn and soy garden as an example. . In Gene Editing, we only work with the genes and the variation that's already in that species, right? So we're not transgenic, we're not bringing in genes from other species, it's already there. So think about our corn disease. Super locus, those genes are already in corn somewhere around the world, right? All we did was use this technology to find them and then quickly in aggress them and move them into our germplasm. So something we could have done with plant breeding. And this is what's really helped in the conversation in Europe is, look, you could do this with plant bread. It's just now we can do it a lot faster, a lot cleaner or a lot better than what we could have done through traditional plant breeding procedures. So that's been really the shift in the change. Now it gets a little muddy sometimes because you could use gene editing to do GMOs and all sorts of things. But the simplest way is there's no foreign DNA. It's really -- it's within the genetics that species already has.

I would just remind people in the audience, the first GMO crop for cultivation is 1997, I believe, is around up ready canola. And so this is now probably perhaps one of the largest technological evolutions that we've seen in almost 30 years. So...

We will do -- the interesting thing is -- we can do stuff with gene editing. We were not successful at doing with GMOs. For example, there are no GMO disease control products in the marketplace, right? We all spent a lot of money working on yield and stress and GMOs and very little success in that technology, yet we see in gene editing already success in disease. Products coming through our pipeline are with yield enhancements and improvements we've never seen before. We think there's opportunities as we think about insect control. There's people working on herbicide control, so -- or weed control with herbicide. So I think it's actually going to open up the space of what genetics can solve. And then you start rolling into -- it's a cheaper cost structure, right? If we don't have to go through all the regulatory hurdles and burdens that we do today, we can actually work on additional product concept. So there's a lot of concepts we leave behind because we return on them is just not there. So it's going to be more concepts, more crops, more geographies. So it really expands our where to play as an industry.

I think one another point I want to make whenever you think about Corteva itself, you have to have a base germplasm. So all of this technology is fantastic, but you have to have something to add it. And so when you look at something like Pioneer, which is going to be 100 years this year, it is this year, it's 100 years of germ plasm. So when we look at our IP and what do we think is one of the most important assets we have is Corteva. It's starting with that germplasm and then that allows or enables a lot of this technology.

And on the IP front, we branded this [ Gen Linux ] as the ecosystem that we're calling it. In September, we'll update you. It's amazing just in the last 2 years, how much is expanded. But lot of IP. We're also doing lots of license. We have a lot of collaborations. We have a lot of third-party investment opportunities. So we're taking a very broad look at the technology, including the number of things we're doing with social acceptance and really helping people feel like we're transparent in explaining what's going on and not be afraid of the technology.

So let's take a step back to [indiscernible] integral to -- let's take a step back to last September when you announced the spin. So David, I suppose we could focus this initially with you and Sam, obviously, feel free to chime in with anything incremental. But what was the initial thesis 12 months ago in terms of where we stand today, you're going to do a couple of CMDs in September, basically year-end. Can you just talk about what you think, especially in your new role, what the thesis is on the seed business for those of us that have covered this as an integrated company, whether pre-Dow-DuPont or after Corteva. Could you highlight a few thoughts there, perhaps integrate what gene editing means so that what I perceive is optionality? I would love to hear your thoughts on that.

Sure. Thank you for the question. I think when we think about the independent company or we'd like to call the genetics company going forward because I think our aperture our thought process is a little bit broader than what the business is today. But for me, it's all around strategic kind of just focusing in on those growth opportunities around gene editing, our licensing business, some very exciting things like hybrid wheat, all these new opportunities we have. I look at it as more of a focus ability to have the separate company. I think there are some value unlocks that may be a little bit surprising to people. But whenever you look at Corteva today, by and large, the businesses are operating differently even within the Corteva business today because when you look at CP, it's essentially a global specialty chemical company with an R&D element to it. So it operates as a global functional business. When you look at seed business, it's a very regional business. When you look at Sam's R&D operation, it's many, many locations in every region around the world because you have to be able to develop and produce within that region. So when I talk about value unlocked for seed and CP, it's getting these organizational structures and the operations around that focus around either a global functional business or this regional business. And quite frankly, Corteva today had some costs to keep that together. So I think that's a pretty exciting element. I think the other one is just focus on capital deployment and what we can do there. I think whenever you look at 2 separate businesses, I mean, I do believe in the CP business, there's going to be opportunities for more collaborations, more opportunities in that market. That may be as a combined Corteva business. We'd focus a little bit more on the seed business given the returns and so on and so forth. So the -- I think the jump-off for capital would typically go to like the seed business. I don't think that's appropriate. I think it's better whenever it's separate. And then for us, we don't know this yet, but as a separate seed company, I mean, could there be more independence seed companies that would be very much more interested in being part of Vylor, I think that that's an opportunity. And then just seeing how far we can go with adjacencies and what have you, whenever you think about gene editing broader than just row crops. So I think around strategic focus, capital deployment and a little bit of a value unlock are the main items I think about whenever we think about the separation.

And Sam, when we take -- once again, take a step back and when you look at the initial Vylor thesis and seed, there's also a lot. I don't want to dismiss anything that's going on in the GMO side. You've been working for, once again, perhaps well over a decade likely to further enhance the E3 platform. There are some things in terms of replacements for the Chrome platform. Triple stacks contested on Brazil. There's -- I don't want to take away from the excitement that you likely contain there as well. So I'd love to hear your initial thesis on that opportunity as well. And then perhaps we can branch off from there?

Yes. No, great. And it's easy to sometimes lose that. But if you just roll the clock back, right, as a company, we in-license most of our biotechnology trades. We paid a lot of royalties. We've been shifting that over time to where it's moving more to what's our own, either codeveloped or proprietary treats. This will bring royalties down to essentially neutral and positive this year. And as we look forward, we're actually moving to a higher percentage of proprietary developed trades. So you mentioned we have a replacement in Latin America, [ Conkesta ] and Insight controlled trait. It's a really, really important trait down there. We've just launched it a few years ago, will be a mid-teen percent already of market share on that trait. And we've already got the next-generation biotech trait ready to go that enhances durability and scope of that insight control looks fabulous. It's in the field, it's in varieties, we're testing it, et cetera, right? So that's already there. Same thing on the corn side, right? So you mentioned -- we have platforms like Chrome, Insect Control, we've got [indiscernible], we're now going to a new triple. But we've got actually new genes for above-ground and below-ground insect control for North American market and above ground control for our Latin American market. And so these will now be 100% proprietary. They're kind of unique. In some cases, we got some of the genes out of actually ferns. So a lot of the history has been some sort of bacterial gene, maybe 1 or 2 RNAi genes, and we actually are going to be bringing some of the first genes from ferns out into the marketplace. And so those give us all sorts of new things to think about well what stack combinations do we want? How do we want to out-license those traits to other companies and how do we want to deploy them in the market. And so that base of germplasm and biotech traits, we do see it getting stronger and stronger all the way out into the middle part of the next decade. And then we get to build on hybrid wheat, biofuels, gene editing, adjacent spaces. So why we feel really good about where balers going?

And just you mentioned -- well, first of all, I just want to take a step back for something for those that aren't aware of it. please correct me if I'm a little bit off, but you're coming from a negative $850 million plus or minus...

$700 million when we fund you spot -- and then if you look at today, we're going to be neutral this year. We actually said we're going to be slightly positive this year. So you think about that margin journey over a fairly short period of time. That's why you see the margins of the business going up into the upper 20s. And then we also said that by mid next decade, we expect it to be like a $1 billion opportunity for Vylor.

So one of the things you did even prior to these announcements in terms of the biotech optionality and out-licensing was there was a litigation with Bayer, which obviously has lasted a very, very long time, and something that most of us just read once a year on page 210 of the 10-K, took some notes, asked me a few questions and moved on. Could you basically speak to what that -- it seems like you've done a lot of cleaning up for the thesis and for the spin. If you could take a step back and share your thoughts on that as well, it'd be greatly appreciated?

So when you think about the bar agreement, it did a few things for us. One, give us a little bit more certainty about certain molecules after to so post-patent opportunities there. So that enabled us to do a few things. We're able to introduce some new products like the triples literally in the next 2 years versus when we thought it'd be early 2030s, okay? So that was a big move up for us for that opportunity. I think on the other side, part of that equation is reducing the net in-licensing expense. So that was one that we saw a benefit also with that agreement. And that's why we're now saying that we're going to be positive this year, Chris, which should be about $120-plus million better than last year. So a really nice increase in margin. And I think just generally speaking, it reduces the uncertainty and puts everything kind of behind us whenever it comes to our relationship with Bayer.

Yes, I think you just -- it removes some uncertainty. It gave us some clear path of what we could do with some products. It was financially a good deal for Corteva and Vylor and made sense to sort of clean up some of the past. .

In terms of just perhaps wrapping with this topic and we can move on to a few other exciting things. When you take a step back and look at -- and I'm not asking you to preview September, if you're not, but when you take a step back and you look at the gene editing optionality in terms of -- you've had this pendulum, you're swinging thus far, very slightly in deposit territory this year. There's still some net license payments going on for sure. And now you have wonderful GMO portfolio is step one. And then kind of the step 2 in terms of really getting that pendulum into positive territory for you on the gene editing side. Could you speak to just perhaps kind of the balance of those 2 things? Are they roughly equal? Is it too early to tell? I would like to hear your thoughts in terms of just the longer-term trajectory without putting any dates on it?

In the simplest way I'd put it this way, that we're still really very much a GMO sort of value equation even well into the early part of the next decade, right, mid-decade, which means we have time to keep building all the gene editing stuff on top. From a research point of view, since we're thinking about 10 years out, we've made a much harder shift to how much is gene editing and how much is GMO. But at the product commercial space, it will be very heavy GMO and germplasm still for another 5, 8 years.

So plenty of runway on that even well without the gene editing, if we could still call it optionality perhaps. But the pathway -- the initial pathway that you've been discussing is basically GMO?

And the way I'd like to think about it, Chris, when you think about the near-term financials, like the next several years, 3, 4 years, whatever, a lot of that is already somewhat predetermined. We're talking about net licensing improvement we will still have our price mix, we believe, because Sam's group will continue to have improved yields that we're able to price off of and productivity improvement. So I'd like to think the near-term playbook very similar than what we've seen in the last several years. Now when you start talking about the mid-2030s, and that's a long time for some of us, but that's when we start to see probably a real I would say, hybrid wheat will be starting to become more material into the P&L. I would say things like biofuels, when you start thinking about the SAF requirements in Europe and some of the joint ventures we have made, what have you, we should see more of a material kind of accretion to the P&L in the mid-2030s for that? And then this continuation of the net out-licensing will continuing to see that through 2035. Then probably gene editing and what have you is kind of even beyond that. So I'd like to think of it in 3 time phases. I think the one very proven model we've had for a short period of time, we should see that as improvements year-over-year through the early 2030s.

Your expectations on that, I think, 3 times in the last 18 months. So I think...

We built a little conservative sometimes.

I'll take it. All right. So let's move on to the thesis. I mean, 1 thing -- 1 of the biggest debates, and I don't want to lead you in terms of the actual numbers, but 1 of the biggest debates has been that between the 2 platforms. And this belief that, oh, everything has to be the integrated model, which in my defense I never was with that, even when you didn't like it. So I take a step back and look at this. I don't even want to give you a number, but just how confident are you in terms of just breaking out? You already indicated that there are 2 separate R&D facilities, 2 separate teams. How should we think about that from both of your perspectives?

This is one of my favorite questions, I will say, because I think a lot of people are a little skeptical about how much we said it would cost to separate and then how much the synergies we would have because of separation. We've talked a little bit about it already. The R&D facilities are separate. There's literally no overlap in operations whatsoever. There is a little bit in commercial, but not the feet on the street. It's more the management layers and so on and so forth. So when we think about it, we initially said we'd have a net $100 million of net EBITDA synergies, and then we recently said we'd be a little bit favorable to that. And we started talking about what does that mean? The increased cost side is going to be there. We're going to have 2 boards. We have 2 executive teams. We have some more IT licensing costs. Like all these sort of things will still be there, although maybe a little bit less than what we had initially thought, Chris. But really, where we're making it up is on the opportunities to, again, rightsize both businesses to their operating model, like I had mentioned before. We also said during our last earnings call, right before that, we had initiated a new restructuring program to be able to handle kind of how we're going to get these work structures put together. So as we went through splitting out the 20-some thousand people and we get this org structures, we are able to save some of that money. And so we would have an updated number in our next earnings call, but I would say that we're trending pretty significantly favorable to the initial estimate.

I always find it ironic that when Corteva has created, you divested Sinan not a single cell side a rota note and said, "Oh my gosh, the R&D dissynergies as in there like a makes any sense." So that seems like it's going on track as well. Is there anything else -- just before you kind of shift topics, is there anything else that you -- there's obviously a lot to be excited about that, but that particularly cites you about -- Sam, you've obviously been behind a lot of the launches that have enabled Corteva to steal a lot of market share. But is there anything that's particularly exciting that we haven't yet discussed here today?

I mean, look, I wouldn't ignore our hybrid wheat product. It's a pretty incredible technology and where it's going. And look, I've worked on hybrid wheat multiple times in my career. And there's always been this challenge of can you get a system that's consistent that you can actually make hybrids, produce seed at the right cost, get the purity and quality that a grower needs. And that's why he's been the limit of the hybrid wheat system. . We spent decades solving that, and we continue to look outstanding, like we can really produce hybrids, they yield more and we're running towards a launch year in '27. And so it will take a little time, obviously, to change the market, build the market, think about where to deploy that and use that around the world. But if you look at what 100 years of hybrid corn did, we're just about ready to unlock the same thing in wheat. And so it's pretty cool. And now you start to say, gosh, if hybrid wheat is the base, what do we get to do with gene editing and wheat, and what we get to do is seed treatments and wheat and who knows, maybe we'll get back to GMOs, and we -- so it's really building a whole new pillar for a crop that's on 500-plus million acres around the world.

To be clear. So that's been my next question. You've highlighted that as roughly $1 billion opportunity, which is fantastic, and I can tell you from spending some time with Chuck over the years. He -- when I asked a similar question is, hey, what are people not talking about #1 response. So perhaps I need to write a little bit more. One of the other things that is fascinating about the industry is, and you -- we got back to it at the beginning of this conversation, but breeding is kind of still the core. And having the base germplasm and the varieties and the hybrids matters more than what most investors believe and I've been discussing that since years ago. So one -- and perhaps it's maybe in my eyes, the first innovation in this. I'm sure there have been 20 in the last 10 years or so. but AI has the potential to potentially to shorten a lot of breeding cycles. It seems as though you have, based on your library, a tremendous, let's say, competitive boat and optionality yourself in terms of -- because you have the access to the history. But all others are sure are going to pop up in this and that and say, well, now we can basically try to catch them and you down, how would you perceive that as an opportunity? Would you be perhaps want to share a risk or 2? How are you thinking about it would be great.

So maybe to unpack that. So there's -- as you mentioned, there's a tremendous amount of knowledge that we have. I mean, we're 100 years of corn breeding history, we genotype 1 billion markers a year. So we understand the genetics on that stuff. We're running 15 million yield plots on this stuff every year. Like we characterize and understand this germplasm at the genetic level and at the phenotypic plant level, like you can't imagine, right? It's one of the world's class biggest things out there. And so then you get to add on. Okay, so how do I use AI to enhance all that? And we've been running a very large AI program in R&D. David sometimes criticize me for how much I spend on it, but we've been poring a lot to -- even historically, things like machine learning languages were been around a long time. They're very powerful what we can do in in the plant breeding program and now you look at the generative AI sort of stuff, it's even more interesting. We've actually enabled teams to run whole new breeding concepts. We actually have AI agents that are plant breeders, like they are running plant breeding programs, right? And so you think about how fast they can make decisions and use all this information available to them. It's pretty cool, and we're watching what they can do and how they can do it. And then you throw on their gene editing. And I think this is something that maybe gets missed a little bit is the interplay between AI and gene editing, right? Because all of a sudden, it's like I can use AI to -- today, we can, for example, with 95% accuracy, predict the gene expression change based on the gene edits we're going to make now, up from our AI agents, right? And so upfront, our genetics and breeders are designing how they want those genes change and what genes to work with and then how to use AI to design the actual gene edited construct. And then on the back end, you're sorting through genetic variability and complexity that you've never seen before. So we've used it really end to end. We're seeing some incredible uplifts in efficiencies and capabilities. And what I would say building the types of products and the product selection that we're getting. We still yield test. We still got to go out in the field, improve. It actually works at yields, it looks right. It behaves right. If farmer's going to be happy with it, we don't skip that stage, right? And we still got regulatory in a lot of cases to deal with, but the front end and the power of the pipeline are just getting ramped up. When you think about that combination of your germplasm capabilities and knowledge with gene editing and with -- it's a nice little triple plus up, that's hard to replicate.

And just add 1 thing, too, then whenever you decide what you do want to produce, the ability to produce at scale. There's very few companies that can do that. And then we're also using AI and to help us when is the best way to produce seed, where, when, so on and so forth. So I think that's a capability of Vylor going forward that a lot of people miss out there, spent a lot of time on the needs or the DMO or the new hybrids or whatever, but how do you actually get to market that whole kind of piece of our business is the capability, like I said, primarily 2 companies can do in the world.

Yes. We have a complete digital twin of our seed manufacturing process.

I tried to keep you in buyers separated today. Your upstairs there downstairs, a safe distance. First of all, thank you, but I want to give you the opportunity to answer 1 last question. That's very simple, but I want to give you an open floor. When you think about the opportunities for Vylor, what does it look like 5 years ago, 10 years ago, I feel like you already had a couple of highlights, but what's your vision once this was publicly announced last September.

For me, I go back to that short mean long term. And so we never Chuck talks about an overall genetics company kind of thinking a little bit differently. I think that's kind of where my mind goes. So near term, maybe not a lot of difference, although pretty exciting and continuing the journey we're on. kind of mid-decade starting to think of a third crop like wheat, starting to think about things like SAF and all these different fuel options and what have you. I think that's super exciting and then gene editing beyond that. So to me, I think it's a pretty bright future. .

Yes. I think David said it well. And look, as a plant breeder genetics, I wish I was 20 years younger because I think when we get 5, 10, 15, 20 years out, we're going to look back at gene and what it did to this entire plant space, animal space and say only go like look what it just did. -- then when we get all the regulatory and social stuff worked out, which we're working hard on. But the opportunity that's in the genetics of species to unlock that, I mean we've got tools we just never had before and capabilities we never had we're creating plant breeding, genetic populations we've never -- the world has never seen, right? I mean that's where we're at today and what this innovation is doing. So who knows what it's going to unlock, but it's going to be pretty amazing.

As long as you promise not to change your GICS code to like biologics or anything in health care we'll be good. I'm looking forward to covering it. Thank you so much.

Thank you.