On the Corteva Second Quarter 2023 Earnings Call, Kim Booth welcomed the attendees and introduced the speakers, Chuck Magro (Chief Executive Officer) and Dave Anderson (Executive Vice President and Chief Financial Officer). Tim Glenn (Executive Vice President, Seed Business Unit) and Robert King (Executive Vice President, Crop Protection Business Unit) will join the Q&A session. The call also includes forward-looking statements and references to non-GAAP financial measures, which can be found in the earnings press release and related schedules. Chuck Magro then took over the call.

Corteva had strong financial performance in the first half of 2023, with 180 basis points of operating EBITDA margin expansion and double-digit organic sales gains in corn. Enlist E3 is the number one selling soybean technology in the US and PowerCore Enlist Advanced RA for corn was launched, providing farmers with added flexibility. Crop Protection customers are adjusting their purchasing patterns due to macroeconomic factors.

In response to supply chain rebalancing, the Crop Protection business is focused on pricing, portfolio and productivity actions, as well as the integration of recent acquisitions. The team is also advancing a pipeline of new AIs, including the expected global launch of Reklemel Active later this year. Despite positive agriculture fundamentals, the company is adjusting its 2023 net sales and EBITDA guidance due to muted sales growth and forecasted production in the U.S. and Brazil. Commodity prices are expected to be down from recent highs, but still remain above historical averages.

The demand for biofuels hit a record high in 2023 and is projected to grow again in 2024. This has led to favorable farm income and demand for inputs, resulting in farmers investing in technology to increase and protect their yields. Supply chain reliability and higher interest rates have caused order patterns to shift to a more just-in-time approach, leading to a pullback in orders late in the second quarter, particularly in Latin America and North America.

Corteva has seen delayed customer purchases due to weather, higher interest rates, and supply availability, particularly in Latin America and North America, leading to a 4% decrease in organic sales in the quarter. Despite this, Corteva has made strategic and operational decisions to get ahead of industry-wide channel destocking, and is investing in R&D to strengthen its portfolio and drive strong, sustainable growth. This provides confidence in their 2025 targets.

In the first half of the year, total company sales grew 1% compared to the prior year, driven by an 8% increase in Seed net sales and a 9% decrease in Crop Protection net sales. Seed net sales were driven by a 14% increase in global seed price and a 3% headwind from the exit from Russia. Crop Protection net sales were down 9% due to a 9% decrease in organic sales, offset by pricing gains. Despite the decrease in top line growth, improved product mix and ongoing productivity and cost actions resulted in 8% growth in operating EBITDA and 180 basis points of margin expansion.

In the first half of the year, Global Crop Protection pricing increased 7% due to the value of their technology and higher raw materials and currency impacts in EMEA. Crop Protection volumes decreased 16% due to order patterns and strategic portfolio actions, while currency headwinds impacted both Seed and Crop Protection by 3%. The acquisition of Biologicals added $135 million in revenue. Operating EBITDA increased $220 million, with pricing and product mix, productivity and cost actions, and increased royalty income offsetting volume declines, currency headwinds, and market-driven cost headwinds. SG&A spend was roughly flat, including $50 million from the Biologicals acquisitions.

The Crop Protection segment now expects net sales to be in the range of $17.9 billion to $18.2 billion, which is roughly $700 million lower than the previous guide. Operating EBITDA is now expected to be in the range of $3.5 billion to $3.65 billion, with an operating EBITDA margin of 19.8% at the midpoint of guidance. Operating EPS is expected to be in the range of $2.75 to $2.90 per share, an increase of 6% versus the prior year at the midpoint. This is due to lower top line growth, improved product mix, reduced net royalty expense, productivity and cost actions, and lower forecasted effective tax rate.

Corteva is confident that it is on track to meet its 2025 financial performance targets, despite the industry-wide destocking trends and macro level headwinds. The company is expecting to deliver second half earnings in the fourth quarter, with free cash flow in the range of $1 billion to $1.2 billion. Share repurchases are estimated to be $500 million for the year, and the company recently announced a 7% increase in the dividend. Corteva is well-positioned relative to the market and is expecting sales and earnings growth in 2023.

Dave and Chuck discussed their confidence in their 2025 financial targets and 2023 performance, and then turned it over to Kim to answer questions. Vincent asked about the algorithm between 2023 and 2025 and Chuck and Dave explained that they believe the current situation is temporary and not sustainable, and they are still on the same trajectory as when they laid out their plans in September.

The company is reshaping its overall strategy and portfolio and expects its new products in CP to continue to grow. Royalty expenses are lower than expected, and there will be lower costs flowing through the P&L in Seed and CP in the next two years. The company is planning to invest 8% of revenue in R&D, and they expect the channel destocking issue to be resolved by the end of the year, with some pockets lingering into next year.

Dave Anderson and Chuck Magro both discussed the strong performance in terms of EBITDA and margin despite the volume headwinds in the Crop Protection business. They attribute this success to cost management and portfolio refinements. They expect the March to proceed forward to 2024 and are optimistic about the future despite the destocking issue and inventory correction in the channel in 2023. Chuck Magro then answered a question about the cadence of the destocking, stating that it came up quickly and that it is still ongoing.

In May, it became clear that the inventory problem was systemic and broad-based, and that on-farm demand had been growing steadily over the last few years. As a result, the channel has pulled back significantly, and it is expected that most of the problem will be resolved by the end of the year. However, some product lines and geographies may continue to be affected into 2024. Additionally, the higher cost of capital and interest rates have caused a shift back to pre-2022 supply chain operations.

Chuck Magro and Dave discuss the seasonality of earnings in Q3 and Q4 due to the high demand for grains, oilseeds, and biofuels. They believe that farmer margins are still healthy and buying behavior has not changed. However, there may be carryover in terms of destocking in the first part of 2024. Magro believes that the surplus inventory is mainly in the distributor and retail channel and needs to move to the farm. Dave will provide more information on the Q3 and Q4 earnings split.

The speaker is discussing on-farm storage and the supply chain issues that have caused an inventory issue in the channel. They are confident that the product is moving out and there has been progress in the last few months. For Q3 and Q4, the midpoint of the revenue guide is $18.5 billion, which includes the Biological acquisitions. The EBITDA is expected to be $600 million, with $70 million coming from the Biologicals acquisition. The full year contribution to EBITDA from the Biologicals acquisition is expected to be $90 million.

In terms of 2024, there are a few variables that the company has a better line of sight on or is in direct control of, such as net royalty reductions, E3 penetration, and cost reductions from lower payments to certified growers. Additionally, CPC inputs are expected to ease.

Chuck Magro discussed the outlook for 2024, stating that the agricultural setup looks constructive, with healthy farmers coming off two record years and strong demand for grains and oilseeds. Corteva expects to see growth and margin expansion, driven by new products, royalty expenses, and lower costs due to crop prices.

Dave Anderson gave an update on crop chems volume formats, noting that on a reported basis, volume was down 16% in the first half of the year, but down 10% when accounting for product exits. For the second half, reported volume was up 4%, but up 8% when taking into account the store acquisition.

In the second half of the year, Latin America is seeing an improvement in terms of inventory levels and sellout. Dave Anderson then goes on to explain that the higher use of cash in the first half of the year is due to the size of the business, the growth of the business, commodity costs and pricing actions. Regarding trade payables, the company is pulling back in terms of inventory management on the crop protection side.

The company has seen impressive growth in their seed business, with Enlist E3 gaining 55% market share in soybeans and 20% in corn. They are confident in their ability to continue to gain market share in the future, due to their disciplined capabilities and outlook for 2024 and 2025.

Tim Glenn discussed the market share of Enlist for the year and how they felt good about the volume and value capture. He noted that the USDA will revise the acreage numbers over the coming months and that they will not declare victory until they have the final share numbers. He concluded by stating that they feel good about where they are currently and that they are on track to reach their 2025 EBITDA guide.

Chuck Magro and Dave Anderson have stated that the company will be pricing their seed business for value and that it will be accretive to their margins. Additionally, they are introducing new trade packages and out-licensing new technology, which will allow them to price for value and create more value for farmers. Tim Glenn further explains that they are bringing in new varieties and hybrids which will open the door for them to price, and they have four traits that they are able to license in the marketplace.

Enlist E3 has allowed the company to have access to their own proprietary germplasm and they are making gains in licensing. In Latin America, Conkesta E3 soybeans are being introduced into the marketplace. PowerCore Enlist Refuge Advance is the largest segment of corn in North America providing aboveground insect protection with an integrated refuge. Additionally, the company has approval for optimally like canola. Seed pricing will have taken place through 2023.

Tim Glenn discussed the strong seed pricing in North America in 2021, attributing it to a combination of mix, new products, and pricing for value and performance across the board. He also discussed the royalty neutrality target of $250 million between 2022 and 2025, which was overperformed due to higher levels of Enlist business mix.

The company is planning to be fully converted over the next few years and is excited about the potential of gene editing in agricultural science. The EU proposed a policy in early July which is a good start and the industry is hoping for clarity in the next 1 to 2 years. The company is actively investing in gene editing products and tools in order to be ready when the market allows them to use them.

Dave Anderson explains that the value creation framework from Investor Day will help to provide more detail and color into the buckets of restructuring program gains, royalty reduction, market growth and pricing. He further explains that the royalty neutrality will be greater than $250 million, product mix will provide a margin lift, and SG&A will translate into $400 million of savings. He also mentions that in 2023, on an apples-to-apples basis, excluding acquisitions, they will be down north of $50 million despite inflation and merit.

Corteva is committed to operational excellence and increasing R&D investment, with a goal of 8% of revenue by 2025. In the first half of the year and their 2023 guidance, they are reinforcing this commitment. They will provide more detail and color on their 2024 plan when they present their guide later.

This summary was generated with AI and may contain some inaccuracies.