Corteva, Inc. (NYSE:CTVA) Q3 2023 Earnings Call Transcript

Corteva, Inc. (NYSE:CTVA) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good day and welcome to the Corteva Third Quarter 2023 Earnings Call. Today’s conference is being recorded. At this time, I’d now like to turn the conference over to Kim Booth. Please go ahead, ma’am.

Kim Booth: Good morning and welcome to Corteva’s third quarter 2023 earnings conference call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer; and Dave Anderson, Executive Vice President and Chief Financial Officer. Additionally, Tim Glenn, Executive Vice President, Seed Business Unit; and Robert King, Executive Vice President, Crop Protection Business Unit, will join the Q&A session. We have prepared presentation slides to supplement our remarks during this call, which are posted on the Investor Relations section of the Corteva website and through the link to our webcast. During this call, we will make forward-looking statements which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties.

Our actual results could materially differ from these statements due to these risks and uncertainties, including but not limited to, those discussed on this call and in the Risk Factors section of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today’s presentation, we’ll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in our earnings press release and related schedules, along with our supplemental financial summary slide deck available on our Investor Relations website. It’s now my pleasure to turn the call over to Chuck.

Chuck Magro: Thanks Kim. Good morning everyone and thanks for joining us today. Just over a year ago, we unveiled a strategic framework to enhance Corteva’s competitive position while achieving margin expansion and long-term value creation. What we didn’t know at the time was how important the efficient execution of that plan would be in delivering continued earnings and margin growth in 2023, a year with no shortage of complicating geopolitical, macroeconomic and ag-specific factors. We’re making good progress towards our 2025 earnings and margin targets despite these challenges. Through the first nine months of the year, we generated over 120 basis points of margin expansion. What sets us apart is the strength and balance of our Global Seed and Crop Protection portfolio and our continued focus on controlling our controllables.

Our Seed business is delivering exceptional performance in 2023 and is set up for continued growth with our pipeline of technology in new hybrids. For 2024, we will roll out over 200 new hybrids and varieties around the world after more than 300 in 2022 and 2023 combined. This is helping farmers around the world increase yield and production which is reflected in our price for value strategy. Thanks to the continued success of our Enlist platform, where last quarter, we announced having become the number one selling soybean technology in the US, we’re expecting to deliver royalty reduction benefits in 2023 of approximately $200 million with another $100 million expected in 2024. This is about a year ahead of our plan to achieve royalty neutrality.

And just last week, we announced our next series of Enlist E3 soybeans in North America that builds off our industry-leading A Series performance. More to come on this soon. In Corn, we are delighted to say that we now have a decade view of corn trade technology, which represents a robust market opportunity, including out-licensing, all of which will translate to significant value creation. We’re also running ahead in cost and productivity across both of our businesses. Last September, we estimated cumulative run rate savings of $400 million, and we’re now set to deliver over $300 million in 2023 alone. And today, we’re announcing the next steps in the plan to optimize our global crop production network. The plan includes the exit of production activities at our site in Pittsburgh, California as well as ceasing production at other select locations.

These actions will strengthen our competitive position in the market by improving our cost base and increasing supply agility. Dave will describe the plan in greater detail but I’ll highlight that we’re estimating annual run rate savings of approximately $100 million by 2025 that should significantly enhance our competitiveness and our customer service globally. Overall, the ag markets remain constructive but mixed. Global ag fundamentals remain positive with farmer income still above historical levels. Destocking and crop protection appears to be largely behind us in North America, with an uptick in orders from the channel, but we expect destocking to continue through the current season in Latin America and the upcoming season in Europe. Underlying farmer demand in terms of applications is on track with historical trends.

However, just-in-time order patterns, which are most pronounced in Brazil will likely persist into 2024. So, what does all this mean for the remainder of the year? Our current expectation is that our 2023 full year results will still deliver operating EBITDA growth and over 100 basis points of margin expansion. While responding to the local pressures we’re experiencing in Brazil, we remain committed to long-term value creation, including returning cash to shareholders as evidenced by the $750 million in share repurchases this year. Turning to the market outlook. We’re seeing solid global demand for agricultural production. Global demand for biofuels in 2023 is at a record level, and we expect continued growth in 2024. Global production of many key crops is estimated to be up versus the 2022-2023 crop year, including corn and soybean.

Although current USDA estimates for the most recent crop year show it would be the fourth consecutive year of below-trend corn yields in the US, we’re starting to see a rebound of US ending corn stocks due to an increase in planted area. This comes after several years of tight stock levels driven by weather challenges. However, total corn and soybean stocks, excluding China, are not back to pre-pandemic levels and are dependent on critical southern hemisphere production, which is even more apparent in soybeans where Brazil is a critical exporter. Meanwhile, corn production in Europe remains markedly below pre-conflict levels, particularly in the Black Sea region, where Ukraine production is down 30%. Brazil is really a tale of two crops. Soybean area is expected to be up in the 2023-2024 crop year based on relative production economics between soybean and corn.

Extreme weather varying by region and driven by the El Nino transition are adding an additional level of complexity to current USDA and corn ad crop area estimates. This is all factoring into our latest operating assumptions that both summer and safrinha area will be down. Although the combination of factors at play in Brazil this season are quite complex, this is part of the global agricultural markets ongoing balancing of supply and demand, which is expected to also result in a modest shift from corn to soybeans in the US in 2024. To wrap-up, we believe we have one of the most competitively advantaged ag technology portfolios in the industry. We believe our performance over the past three years speaks for itself. Since the beginning of 2021, our revenues are expected to be up about $3 billion, while delivering an increase of over $1.2 billion of EBITDA.

But what perhaps is even more impressive is EBITDA margin improvement approaching 500 basis points. No other company in our space has come even close to that level of performance. And there’s even more to come. And now, let me turn the call over to Dave.

Dave Anderson: Thanks Chuck and welcome everyone, to the call. Let’s start on Slide number 6, which provides the financial results for the quarter and the year-to-date. You can see from the numbers that we continue to deliver operating EBITDA growth and margin expansion despite the mixed market conditions that Chuck outlined. Briefly touching on the quarter. Sales and earnings were largely in line with our expectations. Organic sales were down 13% compared to prior year, with seed pricing gains offset by volume declines in both Seed and Crop Protection. Lower seed volumes were driven by lower expected planted area and delayed farmer purchases in Brazil and an earlier operational finish to the season in North America. Crop Protection volumes were impacted by approximately 95 million in product exits.

In addition, we saw inventory destocking in both North America and Latin America and delayed farmer purchases, particularly in Brazil. Turning to year-to-date, sales were down 1% versus prior year, with broad-based pricing gains offset by lower volume. Global pricing was up 9%, with gains in all regions and increases in both Seed and Crop Protection. Feed volume was down 5% versus prior year, largely driven by the decision to exit Russia. Crop Protection volume was down 16%, which includes a 5% impact from product exits. Put in perspective, total exits year-to-date represent a $530 million impact to volume. Now, despite the reduction in the topline growth, strong operational performance translated into operating EBITDA of nearly $3 billion year-to-date, an increase of 5% over 2022.

Pricing, favorable product mix, and productivity more than offset higher costs in volume and currency headwinds, driving more than 120 basis points of margin expansion for year-to-date. So, let’s now go to Slide 7. You can see the gains in the Seed business were offset by Crop Protection market headwinds year-to-date where total company organic sales declined 1% compared to prior year, which again includes a 4% headwind to volume from the exits. Seed net sales were up 7% through the third quarter to more than $7.8 billion. Organic sales were up 9% on strong price execution as we continue to price for value and offset higher input costs. Global seed price was up 14% year-to-date with gains in every region, led by North America and EMEA. Seed volumes were down 5% versus prior year.

Gains in North America, driven by increased corn acres were offset by declines in EMEA driven by the exit from Russia as well as lower corn planted area. In Latin America, due to expected corn planted area and delayed planning, the exit from Russia represented a 3% headwind for the Seed segment. Crop Protection net sales were down 10% versus prior year to approximately $5.7 billion. Organic sales were down 12% with pricing gains, more than offset by lower volume. Global crop protection pricing was up 4% year-to-date as the high single-digit pricing gains from the first half of the year moderate due to increased competitive pressures. Crop Protection volumes were down 16% through the third quarter, impacted by channel destocking, a shift in timing of seasonal demand delaying farmer purchases in Latin America as well as more than $330 million headwind or 5% impact from exits.

Currency headwind for the total company was 2%, largely driven by European currencies. And finally, the Biologicals acquisitions added more than $280 million of revenue, which is reflected in portfolio and other. With that, let’s go to Slide 8 for a summary of the year-to-date operating EBITDA performance. During the first three quarters, operating EBITDA increased approximately $140 million to just under $3 billion. Year-to-date, we delivered more than $1 billion in pricing and product mix improvement. Pricing gains, coupled with improvement in net royalties, productivity and cost actions more than offset declines in volume and higher cost and currency headwinds. Roughly $460 million of net cost headwind was related to seed commodity costs and unfavorable yield impact as well as Crop Protection inflation on input costs.

Crop Protection raw material costs were up 5% versus prior year as we sold through higher cost inventory. Market-driven and other costs were mitigated by approximately $190 million of improvement in net royalty expense and $240 million of productivity savings. SG&A spend year-to-date is up less than 1% versus prior year, including nearly $90 million in SG&A from the Biologicals acquisitions. Excluding acquisitions, SG&A is down versus prior year by 3% as we maintain disciplined spending despite year-over-year inflation. Currency was a $228 million headwind driven largely by European currencies. Now as Chuck noted, we’re taking several large steps to optimize the Crop Protection manufacturing footprint. You can see more details on Slide 9. Although this analysis has been in process for some time, given the current global macroeconomic backdrop in the crop protection industry, we’re taking the opportunity to accelerate these actions.

We expect to record pretax restructuring and asset-related charges of $410 million to $460 million through the end of 2024, including $320 million to $340 million of noncash asset related and impairment charges. Cash payments related to these actions are anticipated to be $90 million to $120 million, primarily related to the payment of severance and related benefits and contract terminations. And we’re estimating annual run rate EBITDA improvement of approximately $100 million by 2025, which translates to a payback of a little more than two years. Of course, we’ll keep you posted on the progress of this plan as we deliver a reliable and flexible cost competitive supply network. Turning now to Slide 10. I want to take you through the full year guidance.

We now expect net sales for the year to be in the range of $17 billion and $17.3 billion or down 2% at the midpoint, including a 3% impact from portfolio exits. This change from our August guide is driven by lower volume and pricing expectations in Brazil Seeds and Crop Protection. We continue to expect over $400 million of net sales for the full year from the Biologicals acquisitions. Operating EBITDA is now expected to be in the range of $3.25 billion to $3.45 billion, 4% growth versus prior year at the midpoint. The updated guidance is driven by lower topline growth, partially offset by productivity and cost actions. These updates translate into an expected operating EBITDA margin of 19.5% at the midpoint of guidance, approximately 100 basis points of margin expansion over 2022.

Led by the strength of our Seed business performance. Operating EPS is now expected to be in the range of $2.50 to $2.70 per share, down 3% versus prior year at the midpoint. The change in guidance reflects lower operating EBITDA, partially offset by lower interest expense and lower forecasted effective tax rate and lower share count. Free cash flow is now forecast to be in the range of $600 million and $1 billion, with a change in guidance reflecting the lower earnings range and the forecast for higher inventory and lower payables. And as Chuck mentioned, we expect share repurchases to be approximately $750 million for the year, which includes roughly $580 million that we completed through the third quarter. Let’s now transition to the setup for 2024.

Slide 12 presents the initial high-level view of our planning framework and provides key assumptions as we begin our internal planning process for 2024. Importantly, using this framework as a starting point, we expect to deliver earnings and margin growth again in 2024. After a 7% increase in US corn acres in 2023, we expect to shift back to soybeans in 2024. While also expecting lower planted area for Brazil, safrinha. But the Ag fundamentals remain relatively healthy with U.S. farmer income and commodity prices above historical average. However, we expect Brazil farmer margins to remain generally tight, particularly in corn due to macro factors, including higher interest rates and lower commodity prices. Our price per value strategy continues to be a key lever, driving organic growth.

I think for our yield advantage technology and differentiated solutions is expected to drive low single-digit pricing gains for the total company in 2024. We continue to make progress on our portfolio simplification. We expect another $100 million of volume headwinds related to product exits. Despite the impact of the product exits, we expect Crop Protection volume gains in the US led by new and differentiated products. Brazil volumes are expected to be muted due to ongoing expected market dynamics. Biologicals are expected to grow double-digits with both price and volume gains. Cost and productivity will remain a focus for the organization as we drive improved margins. While we’re seeing the prices of raw materials fall, the cost improvements in Seed and Crop Protection will lag stock commodity price trends, driven by the timing of inventory turns.

In Seed, we expect another $100 million of improved royalties as we shift to more proprietary technology, and we expect to combine $100 million of productivity in Seed and Crop Protection. We’ll continue to tightly manage our SG&A costs with core SG&A expenses increasing less than inflation. R&D will continue to increase as we invest in innovation for the long term. To summarize and highlight, we expect lower revenue growth in 2024 as well as in 2025 versus the level implied in our multiyear revenue targets. Despite this, we’re confident in our ability to continue to deliver earnings and EBITDA margin within the range of our 2025 financial framework. So with that, let’s go now to Slide 13 and just summarize the key takeaways. Importantly, our third quarter year-to-date operating EBITDA performance is in line with expectations, led by the strength of our Seed business.

Continued cost discipline and productivity actions coupled with significant improvement in royalty expenses is making a difference to the bottom line and helping to drive more than 120 basis points of margin expansion year-to-date. The current guidance range reflects updated fourth quarter outlook and importantly, still forecast operating EBITDA and margin growth for the year. The planning framework for 2024 that we shared today supports continued earnings growth and as you would expect will be followed with detailed market analysis and planning assumptions when we release full year 2023 results in early February. With that, let me turn it over to Kim.

Kim Booth: Thank you, Dave. Now, let’s move on to your questions. I would like to remind you that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.

See also Top 20 Gold Mining Companies in the World and Top 20 Diamond Producing Countries in the World.

Q&A Session

Operator: Thank you. [Operator Instructions] We’ll first take our first question from Vincent Andrews from Morgan Stanley.

Vincent Andrews: Thank you and good morning everyone. Dave, can I just ask you, you made the comment in the slide that you’re expecting low single-digit pricing for the company in 2024. It seems like it’s driven mostly by Seed, but I’m just trying to get the bridge there because we see pricing in crop chem was down, I think, 4% in the third quarter. You’re citing competitive pressures in two of your four major regions, what’s the algorithm for next year in terms of getting the total company to flat? Is crop chem going to be positive? Or is it going to be down slightly? And then is the Seed order book giving you confidence in the US that you’re going to achieve kind of mid-single-digit-ish price on the Seed side of the equation to get us to low singles for the total company?

Dave Anderson: Let me just share with you a couple of highlights. And then, Tim, maybe you could comment a little bit on Vincent’s point about Seed. Vincent, you’re right. So, low single-digit for the company overall is the expectation right now. And again, this is an early indication and I call it, preliminary view as part of our framework for 2024. For Seed, Tim will comment more specifically, but obviously, we’re looking at continued positive, we call it price for value, as you know. So, we think that’s going to lead the way in terms of our year-over-year pricing performance. For Robert’s business, the Crop Protection business, we think the price is going to be generally favorable with the exception significantly for our LatAm business, where we continue to see pricing pressures.

In the aggregate, we think Crop Protection pricing will be potentially up slightly to neutral to down slightly compared to 2024. So taking all that together gets us to the low single-digits for the company. Again, early, Tim, you want to comment on Seed

Tim Glenn: Yes, absolutely. And I’ll just reemphasize what Dave said on pricing. This year, we had exceptional pricing, roughly 14% year-to-date and very broad by crop and geography, a testament to our technology and how we’ve executed across the board as an organization. Next year, we do expect that to return to more of a typical call it, low single-digit type of a growth on a global standpoint. And looking at where we’re at in North America, maybe the setup there to touch on that, including how things are going from a pricing standpoint and what the order position looks like. We do expect a rotation from corn to soybeans, call it, 3% to 4% of the area shifting back. We’re well advanced in terms of harvest in North America from a farmer standpoint.

And I’d say farmers are very satisfied with our product. And that puts our current order book in a good spot for this time of year, allowing for the shift from corn to beans. That said, the next 45 days are really critical for us as we lock up our business for 2024 and secure payment. But the order position is good, our price position in the marketplace. We’ve been out there since August in front of customers and putting proposals in place and it’s holding strong. So we feel very good about what our opportunity there. And we continue to have excellent momentum in the marketplace in North America. So strong value proposition, strong execution by the team. And so we feel good about how we’re setting up for 2024 in North America despite the shift from corn to beans.

Operator: Thank you. And we’ll take our next question from David Begleiter from Deutsche Bank.

David Begleiter: Thank you. Good morning. Chuck, have any of the changes you’ve seen in Crop Protection impacted your confidence in achieving the midpoint of the 2025 EBITDA guidance of $4.4 billion?

Chuck Magro: Yes, good morning David. So, obviously, it’s a pretty dynamic market that we’re operating in right now. Let me just give you sort of what we’re thinking. And it’s a very good question. And obviously, we’ll have a lot more to say as we give final results for the full year of 2023 in February, and then we’ll really be able to talk about 2024 and with a level of degree of specifics that we just can’t get into today. But I’d say right now, the entire Corteva organization, it’s remaining very highly focused on hitting that $4.1 billion to $4.7 billion with the 21% to 23% EBITDA margins. I’m not going to talk about the specifics in terms of exact numbers because I think the key, I think, for us is that we’re still feeling very good that we’re within that range.

And if you think about that just for a minute, a couple of years ago, just look at what’s happened, right, over the last two years, we’ve had the Russia invasion of Ukraine. We’ve had a global chemical destocking, and now we’re seeing weakness in Brazil, which we haven’t seen weakness in Brazil since 2015. But when you put all that together, it’s pretty clear that we’ve also overachieved when it comes to some of the controllables. So if you recall that the framework that we laid out last year, it had 4 buckets, portfolio simplification, royalty neutrality, product mix and what we called operational excellence. And these were largely in our control, and we’ve made very good progress. In fact, on a lot of these dimensions and elements, Dave in his prepared remarks commented, we’re running a year and sometimes a little ahead of program there.

So, we’re finding ways as a management team and as an organization to offset some of the market headwinds that we’ve been — have been put in front of us. So, I guess what I’d say right now is that when we look at the 2025 targets, we’re still very comfortable we’re well within that range. And that, of course, assumes that we don’t see another significant step down in Brazil, for example, because we are planning as part of that 2025 framework that there’s modest growth in Brazil over the next couple of years. So, if that was not to unfold, then we would obviously have to find ways to offset that weakness. And we’ve been pretty good at offsetting the weakness. If you think about just the acceleration of Enlist on those acres, that royalty neutrality is actually, we’re making better progress than we thought there.

The productivity and cost management issues in this organization, I’ve been very impressed with, our SG&A barely hasn’t moved on an apples-to-apples basis. And now that just yesterday, we announced sort of that next level of our operational efficiency program. This is something that’s been in the work for a very long time. We’re quite pleased with the progress, and that will add to the operational excellence and cost management of the organization. So, when you put it all together, there’s always puts and takes but we’re feeling very good that we’re still on the right track when it comes to delivering that framework.