Corteva Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2022

There are 9 speakers on the call.

Operator

Welcome to Corteva's Second Quarter and First Half twenty twenty two 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 Schind Business Unit, who will join the Q and A session. We have prepared presentation slides to supplement our remarks during this call, McMullen, which are posted on the Investor Relations section of the Corteva website and through the link to our webcast. Mason.

Operator

During this call, we will make forward looking statements, which are our expectations about the future. McMullen. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. McMullen. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to, Meadows discussed on this call and in the Risk Factors section of our reports filed with the SEC.

Operator

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. McMillan. 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 Mavalval on our Investor Relations website. It is now my pleasure to turn the call over to Chuck.

Speaker 1

Thanks, Kim. Good morning, everyone, and thank you for joining us. There are several key topics we're excited to share with you today, McMullen, including our strong results for the first half. Robust customer demand and sustained execution amidst dynamic market conditions resulted in double digit growth in sales and operating EBITDA. Strong organic sales gains in every region On the seed side, our top tier genetics continue to be in high demand as growers prioritize yields to help offset inflation.

Speaker 1

And Crop Protection, new product sales surpassed $1,000,000,000 for the first half, an increase of more than 60% compared to prior year. This was led by products like Enlist Herbicides, which has more than doubled in sales compared to the same period last year. The Enlist system continues to gain traction in the market given its superior performance and grower confidence. And we now estimate Enlist soybeans were planted on at least 45% of U. S.

Speaker 1

Soybean acres in 2022. McMullen. This is a remarkable feat considering this technology has only been in the market for 3 seasons. Market challenges persist, including tightness in supply chains and continued inflationary costs. Despite this, the organization is executing well, utilizing price and productivity actions as well as tight controllable cost management Minichsen, to offset inflation.

Speaker 1

Through the half, these actions along with a mix of new technology products McMullen's operational actions to further accelerate our performance and create shareholder value. Let's turn to Slide 5, Miller, where I'll provide an update on the progress we've made on our strategic framework. Earlier in the year, we announced that we moved from a matrix organization to a global business unit model to drive overall simplicity and speed of business, while increasing accountability. Today, we are announcing actions associated with a comprehensive strategic portfolio review we recently completed. At the center of our strategic review, we focused on several key priorities, including developing and commercializing differentiated technologies, Shaping a performance driven organization and maximizing customer experience.

Speaker 1

As a result of these reviews, We plan to exit non strategic geographies and product lines, while redirecting resources closer to the customer in core markets. Importantly, We are employing a strategy of differentiation to drive our competitive advantages, bringing unique, sustainable McMullen, our ag technology solutions to growers to drive advancements in global food security, climate change and the energy transition to include biofuels. I've said from day 1 at Corteva, our technology engine is a powerful differentiator in terms of value we create for growers, society and shareholders. We plan to provide a deep dive of our pipeline as part of our upcoming Investor Day. But here are a few highlights to give you more confidence today.

Speaker 1

On the seed side, we have nearly 20 times the experimental hybrids McMullen in our corn pipeline compared to 10 years ago, a testament to the strength of our data science capabilities. On the Crop Protection side. As I look forward to 2024, we will have launched 10 new active ingredients, 90% of these new products McMullen in the form of share repurchases and dividends. Now let's turn to the outlook on Slide 6. Recent ag commodity price volatility Miller has increased due to several factors, including the war in Ukraine, increased energy costs, especially in Europe, The strengthening U.

Speaker 1

S. Dollar and continued cost inflation pressures. Although we expect to see expansion of planted acres in Latin America, Global grain supplies remain tight, especially as dry weather casts uncertainty over important growing regions. Smith. Despite the short term volatility, the outlook for agriculture remains positive.

Speaker 1

We expect record demand for grains and oilseeds in 2022, McCormick's stocks. Farmer income levels remain at near record highs despite increased input costs for fuel and fertilizer. McMullen. We are encouraged by resilient demand as growers prioritize the latest technology and top tier products to increase productivity on the farm. Based on this market outlook and in conjunction with our refocused strategy and second half operating plans, we are raising our previously provided guidance for the full year.

Speaker 1

Net sales are now expected to grow 11% and operating EBITDA 17% at the midpoint McMullen over prior year. This level of operating leverage demonstrates we are on the right track and I look forward to sharing more of our plans with you soon. McMullen. With that, let me turn it over to Dave to provide financial details on the half and the outlook.

Speaker 2

Thanks, Chuck, and welcome everyone to the call. Let's start on Slide 7, which provides the financial results for the quarter and the half. As Chuck said and as you can see from the numbers, McMullen with gains in both segments and all regions. This translated into earnings growth of 18% and margin improvement of more than 150 basis points, another solid quarter of continued growth and margin expansion, and I think differentiating Corteva in this environment. Now focusing on the half, organic sales grew 14% over prior year with broad based price and volume gains.

Speaker 2

Global pricing was up 9% with notable increases in both seed and crop protection. Volume growth in crop protection of 16% was driven by strength of new products, which delivered approximately $400,000,000 of sales growth year over year, Mason, an increase of more than 60%. We delivered $2,800,000,000 in operating EBITDA in the half, McMullen, a 17% increase from the same period last year. This is noteworthy given the continued inflation of raw and energy costs, McMullen. Pricing and productivity more than offset the higher costs incurred McMullen, as well as an approximate $200,000,000 currency headwind driven predominantly by European currencies.

Speaker 2

Let's go to Slide 8, where you can see the broad based growth with strong organic sales gains in every region. McMullen. In North America, organic sales were up 9% driven by crop protection on demand for new technology, including Enlist Herbicide. McMullen. Seed volumes were down versus prior year, primarily due to a reduction in U.

Speaker 2

S. Corn acres and supply constraints in canola. McMullen. Soybean volumes were up 4% versus prior year, driven by continued penetration of Enlist. Both segments delivered pricing gains McMullen with corn and soy up 6% 7% respectively and double digit pricing gains in crop protection more than offsetting higher input costs.

Speaker 2

In Europe, Middle East and Africa, organic sales increased 19% compared to prior year, mentioned, driven by both price and volume gains, again in both segments. It's an impressive performance by the organization considering the impact from the war in Ukraine and the recent dry weather condition in parts of Western Europe. Seed pricing increased 12% and help to mitigate currency impacts. And for crop protection, demand remains high for new and differentiated products, driving volume growth of 15% year over year. In Latin America, we delivered 31% organic growth with double digit volume and price gains.

Speaker 2

Pricing increased 13% compared to prior year, driven by our price for value strategy, coupled with increases to offset rising input costs. McMullen. Seed volumes were flat due to tight supply of corn, while crop protection volumes increased 34%. We also had a timing benefit on an early customer demand in Brazil, shifting some forecasted volume into the 2nd quarter. Asia Pacific organic sales were up 13% over prior year on both volume and price gains.

Speaker 2

Seed organic sales increased 24% on strong price execution and the recovery of corn planted area from last year's COVID related impacts. Mac. Crop protection volume growth of 5% was again led by demand for new and differentiated products. Operating EBITDA increased nearly $400,000,000 to $2,800,000,000 And as I covered on the prior slide, strong customer demand drove broad based organic growth with price and volume gains in all regions. On costs, McMullen.

Speaker 2

We incurred more than $500,000,000 of market driven cost headwinds in half driven by higher seed commodity costs, McCormick, Crop Protection raw material costs as well as freight and logistics. The company achieved approximately 130,000,000 McMullen and the company's productivity savings in the half, which helped to partially offset this impact. Currency was a $200,000,000 headwind, for the half. Let's turn now to Slide 10. I'd like to expand just a little bit on our cost actions.

Speaker 2

McMullen. In connection with the business realignment that Chuck referenced, we've completed a strategic assessment of our priorities and operational structure. As a result of this assessment, we anticipate incurring restructuring charges on a quarterly basis through the Q2 of 2023 McMullen of approximately $400,000,000 Roughly half of the $400,000,000 of restructuring will result in cash payments and the remaining $200,000,000 is related to long lived assets, the Russia withdrawal and some inventory write off. This quarter, we recognized $68,000,000 in restructuring and other charges. These charges were primarily a result of contract terminations, McMullen, a reduction in headcount and a $45,000,000 charge related to our previously announced withdrawal from Russia.

Speaker 2

We expect additional restructuring and other charges of approximately $325,000,000 over the next 12 months, And finally, and a key point, we expect the restructuring actions will deliver more than $200,000,000 in run rate savings by 2025. More to come on this, but we believe these actions will position us to deliver increased value in both the short and long term. Let's go now to Slide 11 and talk about the remainder of the year and our updated expectations for 2022. With the backdrop of our strong first half performance, we're raising our reported net sales guidance to be in the range of $17,200,000,000 McMullen to $17,500,000,000 for the year, representing 11% growth at the midpoint and includes an approximately McMullen with a 2% to 3% currency headwind. We're also raising our operating EBITDA guidance to a range of $2,950,000,000 to 3,100,000,000 McMullen, where 17% growth over prior year at the midpoint.

Speaker 2

This increase reflects continued strong price execution McMullen in both segments in all regions, both for our technology and response to rising input costs. We now anticipate $500,000,000 of year over year improvement in sales from our new crop protection products, McMullen, an increase of $200,000,000 over our original annual assumption driven by strong demand in every region. And as we focus on the second half of the year, we expect pricing and productivity to more than offset cost headwinds, McMullen, which are driven by crop protection raw material costs, commodity costs as well as freight and logistics. Volume growth will be led by Crop Protection primarily in Latin America as farmers look to the newest technology to drive productivity on the farm. Seed volumes are expected to be relatively flat in the back half of the year with tight seed supply in Latin America corn.

Speaker 2

McMillan. And regarding the 3rd and 4th quarter outlooks, we expect the distribution of both revenue and operating EBITDA between the quarters McMullen to be consistent with our historic patterns. The volatility of exchange rates We anticipate that SG and A as a percent of sales will improve by more than 100 basis points for the full year. McMannan. Increased customer demand, coupled with the ability to manage cost headwinds through pricing and productivity is expected to result in approximately 100 basis points McMullen, a range of margin improvement for the full year at the midpoint.

Speaker 2

We're raising our operating EPS guidance McMullen to a range of $2.45 to $2.60 per share, a lower share count McMannan, driven by the $600,000,000 of share repurchases completed in the first half of this year, coupled with strong operating earnings Lastly, we expect free cash flow to be in the range of $1,000,000,000 to $1,300,000,000 lower than our earlier mentioned that the change is led largely by higher accounts receivable balances on higher revenue. McManus. Despite the increase in working capital balances, all working capital metrics, including days sales outstanding receivables and our inventory data supply continue to be strong. Let's now go to Slide 12, just to summarize a few key takeaways. It's clear that our organization, as Chuck has said, is executing very well.

Speaker 2

We're obviously very pleased with the strength of the first half results. This momentum gives us confidence to raise our full year revenue and earnings guidance. And we've taken very important steps in our strategic roadmap McMullen to accelerate operational performance and drive continued operating EBITDA margin expansion. McMullen. We've completed comprehensive portfolio reviews.

Speaker 2

We're taking cost actions to support our strategic priorities McMullen and our performance outlook. And finally, we plan to maintain our track record on capital deployment with our recently announced 7% increase in the dividend and we expect to complete approximately $1,000,000,000 McMullen and share repurchases for the year. So we're excited to share more about this at our upcoming investor event. And with that, Kim, I'll turn it over to you. McMillan.

Operator

Thank you, Dave. On Slide 13, I want to briefly share the agenda of our upcoming Investor Day. McMannan. As a reminder, the event will be held on September 13 in Johnston, Iowa at our Global Business and R and D Center. McMullen.

Operator

The management team will provide more detail on the strategic update that we touched on today as well as how these actions will translate into earnings and margin growth. Who will detail our financial framework and include a showcase of our innovation pipeline. Registration details are available on our website, and we look looking forward to seeing many of you in person at the event. 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 and A.

Operator

Operator, please provide the Q and A instructions.

Speaker 3

McMullen. McMullen. McMullen. And we'll take our first question from Vincent Andrews with Morgan Stanley. Please go ahead.

Speaker 1

Thank you and good morning everyone. Just a question on the 5% of sales that you're going to exit as as well as the $200,000,000 program. How would you characterize both of those in terms of is this just complete finality and You've gone through everything top to bottom and that's it. It's only 5% of sales and the $200,000,000 That's all you've that's it. You figured it out.

Speaker 1

Or is it the case that maybe there's some more sales that are sort of on the bubble that you're going to reevaluate down the road McMullen, and that you think maybe as you get through the $200,000,000 you may find other things to do. How would you characterize these programs? Good morning, Vincent. So why don't we do this this morning. We'll have Dave talk a little bit about the process that we went Nickshavan, what we think, where we are in the overall outcome and what we'll share more for you in September.

Speaker 1

So let's start with the process

Speaker 4

this morning.

Speaker 1

Go

Speaker 2

ahead, Dave. Sure. Yes, let me just say that, echo what Chuck said, which was this was McMullen, very comprehensive and involved the breadth of the organization to really ensure that we're looking at all elements of the portfolio as well as again as our cost structure, Vincent, I'm going to call it fit for purpose in terms of that cost structure. In terms of the process, you really think of it I think of it as 2 dimensions. One dimension is, our call it McMullen's unique and technology based differentiated products.

Speaker 2

In other words, do we have, call it, comparative and competitive advantage in particular products, in particular geographies, they'll call it markets. And the second one is, of course, then we applied to that screen McMullen in terms of our financial performance. Are we delivering, if you will, economic profit in those markets? McMannan. It was really that screening process that allowed us to really stand back and really scrub, which are those that are really, Miller.

Speaker 2

Really strategically significant and core to the business going forward and what was the appropriate McMullen's resource allocation associated with that, including the appropriate go to market strategies. All of that then resulted in What you just referenced, which is a decision, which by the way is still in process and Chuck will talk about that from a timing standpoint. McMullen, but decisions in terms of some of these, call it, market exits as well as some of the realignment of the cost structure. Just on the cost structure and that may be what you're referencing in the $200,000,000 to $400,000,000 of restructuring, dollars 200,000,000 of that is called Cash costs, which will generate $200,000,000 of savings in terms of run rate savings by 2025. McMullen.

Speaker 2

There's more that we're doing. There's more simplification, more additional other work that will also provide benefit. And again, we'll expand on that McMullen, as we come together again in September. Chuck, you want to add to that?

Speaker 1

Yes. So look, I think from a process perspective, We spent a lot of time and effort. We've made the decision to exit what we call some non strategic geographies and product lines. Where we're still focused, Vincent, to be candid with you is there's some markets that we're still analyzing when it comes to McMullen, what level of resourcing should we have, what's the route to market. So these are some of the other pieces of work that are still on the to do list.

Speaker 1

But the way you've referenced it is accurate. We I think did a very good analysis on The ability for the markets to grow, the strategic fit that we're trying to shape up for our focus and then how much money we make in some of these markets and different product lines. And we've made the decision and as you referenced. So there's about 5% of our revenue that's impacted here, but we're going to keep essentially all of our EBITDA. McMannan, but there's some further work to be done.

Speaker 1

The reason we're not talking about specifics today just to be candid is, we still have to go through the internal communication process. We haven't notified some of our other stakeholders around the specifics. And so those plans are going to take some time. But I think when you think about the $200,000,000 that's related to the $400,000,000 write down, what I would say to you today is McMullen. That is one element of a broader strategic and financial framework, which we will share McMullen in our September Investor Day.

Speaker 1

So I think the way you asked the question is this it, is it done. I think You need to wait till September to see the overall financial framework that we're going to lay out at the Investor Day, so that you'll be able to measure to monitor McMullen, our progress for value creation. We think that we've got a great plan now put together. Obviously, it's going to be key to execute the plan. McMullen, but we've I think looked at the company from, 1st of all, a strategic lens and then an R and D and innovation lens and now a financial lens.

Speaker 1

McMullen. And when we put that together, I think what you're going to see is a very comprehensive plan to drive shareholder value, but more than that

Speaker 3

And we'll take our next question from Joel Jackson with BMO Capital Markets. Please go ahead.

Speaker 4

Hi, good morning. Maybe a 2 parter on seeds. It looks like your soybean performance is really strong this year. The first part is, it looks like you're taking share in soybean seeds. Are you maybe giving up some share in corn seed.

Speaker 4

And then my second question is, if you look into now a little early, but it looks like there's some really good trends happening in seed pricing and one of your competitors talking about double digit, low double digit price mix in corn and soybean seeds when we get into pricing season soon. Can you talk about that a little bit and where costs might trend for the next season versus now? Thanks. Hey, good morning, Joel. This is Tim.

Speaker 4

I'll take a shot at these. So obviously, the first part on market share, McNeil. Appreciate the comments on soy especially in calling that out. The USDA reported in June McMullen, what their expected acres were in the U. S.

Speaker 4

And I would say they were consistent with what we believe was planted. So not a lot of conflict there. And again, they'll update that report next week. But based off of where we sit today is, we believe we gained market share in North America, both on corn and soy. So on corn, both Pioneer and Brovant contributed to that.

Speaker 4

McMullen. And on soybean, Pioneer really drove the growth there. And on top of that, we did very well in Europe for both corn and sunflower. Really strong execution in the field for us to be able to capture both share and value through really outstanding execution. So Miller.

Speaker 4

Proud of where we sit there and really positive momentum on both corn and soy as we go here. In terms of pricing as we go into next year, clearly, that's going to be one of the big questions that's always out there. I guess I'd start with really reinforcing McMullen with the strong execution we had in the first half of twenty twenty two. We went out with a, I think, I'd say a bold approach to pricing this past year and we were able to Miller to deliver 7% globally and really 7% for each of our major crop categories in the first half, corn, soybeans and our oilseed products. McMullen.

Speaker 4

To me, it's a testament to the value that we're delivering to farmers and also continuing with that strong execution in the field. As we turn the page to 23, we know it's going to be a competitive market, but the general economics continue to remain favorable and our customers are demanding products, technology that are going to help them drive yield and profitability. So we're in the process now of working on our offer for 2023. From a North America timeline, we'll start to roll that out here in August and that will continue. August September will be out in Marketplace.

Speaker 4

In Europe, it'll be more like a September, October timeframe. We've got a strong portfolio of hybrids and varieties. Farmers are recognizing the value. McMannan. Our teams have a proven track record of executing in the field and capturing value, and we continue to expect our pricing to be accretive to margins in 2023.

Speaker 4

So In seed, it's a huge amount of priority. Generally speaking, we don't have the area increase that much in any 1 year. So for us to be able to continue to drive growth value and margin expansion, we've got to be able to continue to execute strong in the price area.

Speaker 1

Yes. Joel, maybe just a good call out on Enlist. So McMullen. We mentioned in the prepared remarks that we're now anticipating that we're on 45% of the U. S.

Speaker 1

Soybean acres. McMullen. I've traveled through the South and the Midwest over the last 2 weeks talking to our customers. And I'll tell you there's a lot of excitement around this technology. Musch, just from multiple dimensions.

Speaker 1

I think it is a set of tools that farmers need. We're just very pleased at How the farmers are adapting to the technology. I actually attended a couple of training sessions for some of Mitsubishi, our retail channel partners 2 weeks ago. And look, everything looks great when it comes to the Enlist system. And in the first half, we crossed the $1,000,000,000 range for the entire technology platform system.

Speaker 1

So you start thinking about that now, it's another $1,000,000,000 and I think that there's some good things to come down the road. As I mentioned,

Speaker 3

And we'll take our next question from David Begleiter with Deutsche Bank. Please go ahead.

Speaker 4

Thank you. Very nice quarter. Chuck, just on crop protection, again, very good results here. Are you still seeing cost increases here? Are you still raising prices and how durable are these price increases going forward?

Speaker 1

McNeil. Yes. Thanks, David. I'll have Robert address those questions.

Speaker 5

Yes, David, when you begin to look at crop protection for the year, Yes, we've seen some inflation in the 1st part of the year and been able to use our value for pricing strategy as we move forward there of more than offsetting with price and productivity. So we've been able to Head those headwinds off. As you look into the 2nd part of the year, we'll continue to follow that same strategy and we do expect to continue to have some headwinds, although we think that the inflation will begin to slow a little bit based on being able to lap previous year increases, but we do anticipate there'll continue to be headwinds. And so we're going to continue to follow the same strategy, watch inflation closely, but we think we're in a very good position with the technology that's being pulled onto the farm from our growers. McMullen.

Speaker 5

If you look at our new products, right, we're up 60%. And I think that's a big, I guess, Shot in the arm for us from a standpoint of the demand for our new technology that is being pulled into the market. So I think that's sort of how you should look at the second half. Mason.

Speaker 2

Yes. Dave, maybe this is Dave Anderson. Maybe I could just add a little bit to Robert's comments McMullen. As we indicated, we have some incremental inflation that we've now built into our guide for the second half. McMullen.

Speaker 2

It's bringing the total up now for the full year probably into the 10% to 11% range McMullen in terms of inflation as a company overall. And the components of that, Robert referenced, obviously, the active ingredients McMullen is a key component freight and logistics, a very, very important component of that. McMullen. So we're really looking at all of this eyes wide open. Robert said, the early planning that we have is for the McMullen as we go forward.

Speaker 2

Again, we provide a little more insight to that forecast on that McMullen as we go forward to the year. I think one of the things that's really testimony to the company is the fact that we've been out in front of this. When you go back actually to early 2021 in terms of what we began to see then and the actions that we've been able to take subsequently. So It's something that's very, very front and center for us.

Speaker 3

And we'll take our next question from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Speaker 4

Yes, good morning. Would you comment on your latest expectations for your net royalty payments McMullen in 2022 trending into 2023. And based on what you're seeing with Enlist and other trends, How would you describe your latest level of confidence in achieving neutrality there in the 2018 or 2019 timeframe?

Speaker 2

Maybe I could just comment very quickly, Tim, on a couple of numbers and then why don't you follow a little bit with that strategic view that Kevin asked about, but Kevin, you recall that basically we're even with 2021 in terms of that net royalty that's in the P and L that had to do with some benefits that we achieved in 2021 that were basically constant McMullen in 2022. There is a nice pickup that begins in 2023 and then will continue to ramp. Again, we're going to share more insights on that and more of a multiyear look of that when we get together in September. Tim, you want to talk a little bit just about overall from your perspective?

Speaker 4

Yes, Dave. I think the big thing now as we look into 2023, there's one major driver. And as Dave said, we take a big step forward McMullen in terms of that move towards royalty neutrality as you say, Kevin, and that's driven by our significant ramp up in the sale of Corteva Genetics with the E3 trait in Corteva Seed Brands. And so that's been something we've talked about for it seems like a long time now, about 3 years here and 2020 is when you're going to see the big move forward there. So we're going to continue to increase the amount of Corteva branded sales that are in in List E3 and we'll take a major step forward with that in the year and also a major ramp up in terms of the that does as we introduce our proprietary germplasm is opens the door for more licensing, not necessarily a 23 item, but further down the road that's going to continue

Speaker 3

And we'll take our next question from Chris Parkinson with Mizuho. Please go ahead.

Speaker 1

Great. MacKinnon. Great. Thank you

Speaker 4

so much for taking my question. You hit on this a little bit earlier in the potential for CPC margins, just given the degree of inflation and obviously you've been pricing quite well. There are also a lot of moving parts in terms of the new product momentum. I mean, it seems like Isoclass, All the things over the last few years are still carrying a decent degree of momentum as well. Could you hit on that as Go ahead, Robert.

Speaker 5

Yes, Chris, when you thanks. When you look at McMullen. 2nd half and margin, Dave mentioned some of it a little bit ago, how we'll manage that. We've had a great run-in the first half of being able to manage our margin with the strong demand that we've got for our new products as you mentioned there. McMullen.

Speaker 5

And so like we said before, historically first half margins are higher. The new product growth was disproportionate to first half, but Latin America has also had an early season buying that happened a little bit in Q2 with just the strong demand that's going on there. But all that said, we still expect to have a very solid second half of margins and we expect that our new products continue to give us value there. The technology we're putting on the farm and driving value for the growers something that is really being pulled by them and it's something that's given them a new tool in their toolbox. Specifically to Spinosad, so our capital projects that has been running there up in Midland, Michigan is on track.

Speaker 5

McMullen. We've actually had our first commercial product come off the line and we're working on moving forward there. So McMullen. This is going to be a good expansion for us over the next few years on a product that is in high demand in our markets. And as we ramp up between now and 2,050, that's going to put another 50% capacity into the market that Will be good value add for us and to the growers.

Speaker 1

Yes. Chris, the way I think about CP and the journey we're on for the next couple of years, it's sort of more of the same. I think just if you look at first half results. It's clear we have the right strategy and the CP team is executing very well in, but I would consider to be quite a challenging market backdrop when it comes to supply chain challenges and cost inflation. So I think we do have the right formula and where we're trying to take the CP business is to be a seller of differentiated and unique CP products.

Speaker 1

And so the new products plus the Spinozan's capacity as it comes online over the next couple of years, what you're going to see from us is that we're going to continue to sell the higher margin differentiated type solutions to farmers and that should continually to improve our business. Now when I look at the first Smith. It's a strong year by almost every measure when you look at our CP business. And some of that is The fundamentals and the timing from a customer demand perspective, some of it is structural change that we're making in the product portfolio. And as you look out to 2023 2024 and I'd even say 2025, what I would expect you to see is just continued Steady Business Improvement Margin Expansion as we manage our controllable costs and we've brought new technology into the market.

Speaker 3

And we'll take our next question from P. J. Juvekar with Citi. Please go ahead.

Speaker 6

Yes, hi, good morning. Your price cards for seeds typically come out in August or September, McMullen, which is way in advance of the actual planting. And a lot can change between when the price cuts come out and the planting, Especially in a year like this when there is so much volatility. So how do you manage that volatility? How much of your seed production is hedged right now?

Speaker 6

And then you also mentioned Brevant brand gaining share. Can you just give us an update on that in the retail channel? Thank you.

Speaker 4

Mearsi. Yes, P. J, let me take a shot at that. So in terms of volatility, I mean, there's always a fair amount of uncertainty at and Chuck. So as we look out across the board, we've been it's been an interesting environment and Chuck.

Speaker 4

In the U. S, we saw commodity prices kind of peak in the spring and go down and now bouncing around a little bit. So we're off of the high there. So that's clearly one of the factors we deal with. In terms of the other factor is clearly around our production volumes.

Speaker 4

We've and this is both a U. S. And North American and Europe issue in terms of the production season. We've got a very distributed production footprint in terms of geographic footprint. So got some diversification there.

Speaker 4

We're largely irrigated in both North America and Europe. And I would say as we evaluate far from certain in terms of what we'll harvest, We feel like we're close to budget right now in the U. S. Despite some of the weather challenges that have been out there in Europe. Feel very good, harvest is underway and we probably have a little bit of higher stress from our production in Hungary, but other plants Seem to have handled the stress well and we really do expect to be in a good position there.

Speaker 4

So in terms of timing, I mean, obviously, it's a balance. I'd love to be able to price just and time and have every variable known, but from a competitive standpoint, it's very important that we get out in the marketplace and connect with our customers. And As customers are harvesting the commercial crop through the fall month, that's when they're evaluating their hybrids and what performed, what didn't Form, who they're going to commit to for the next year. So it's very important that we're positioned well. We can go out there with a competent offer and put that in front of a customer at the time when they're ready to make their decision.

Speaker 4

And so that seed purchase decision timing has been very consistent over products and they'll finalize the volumes as they get closer to planting and what the ultimate crop mix is. So, I don't anticipate that changing and I wouldn't I wouldn't say we're dealing with a whole lot more variables. We are well hedged at this point, but we still have some hedge to go on both corn and beans. And so we have not locked down our COGS right now, but we feel like we've got a pretty good grasp on what that will be. And obviously, We're going to continue to use the levers, as Dave said, the controllables that are in front of us around productivity and pricing to help to mitigate those situations.

Speaker 4

In terms of Brabant, we're rolling into year 3 with Brabant in the U. S. McMullen. We continue to grow the business, and which is really exciting in a year when acres were down in the U. S.

Speaker 4

And Revant definitely did contribute to our share growth for corn in the U. S. This year. Our focus with Brevant right now is to continue to build confidence with our channel partners and we got to continue to build confidence with our farmers. And so We've got excellent product performance.

Speaker 4

Things look good in the field right now. I spend a fair amount of my Meadez, connected with those key channel partners. We continue to build the confidence in relationship and the interest and as we roll into 2023, our 3rd year in the market, I'm very satisfied with the progress up to date and really excited about the opportunity and full expectation, we're going to continue to grow that segment of our seat business.

Speaker 3

And our next question comes from Jeffrey Zekauskas with JPMorgan. Please go ahead.

Speaker 7

Thanks very much. A few questions, Preston, through one. Can you

Speaker 4

talk about your pension liability and what it might look like at the end of the year and how that might Can you talk about what your crop chemical growth and volume would have been if you didn't have new products? And then thirdly, is the restructuring that you plan really more in seeds than in crop chemicals? Mason, if so, why or is it even split?

Speaker 2

Okay. Jeff, why don't I start with the first one on McKenzie. The pension status is another, I would call right now a good news story. And despite McMullen. Some of the challenge in the equity market, I think we've managed this very smartly.

Speaker 2

We've significantly reduced Miller, the percentage of asset allocation in our overall portfolio to return seeking assets. And we've also been able to obviously benefit from interest rate increases. At the end of 2021, the pensions funded status was over 90% funded. So that was very healthy and you recall those numbers from our filings and from our previous McMullen's discussions. And despite equity markets and some of the other challenges, McMullen.

Speaker 2

The reality is we've been able to hold to an over 90% funded status through June 30. In fact, I looked at the numbers just a couple of weeks ago and we're still in that, if you will, positive territory. We've recently recalculated McMullen. All of the math looking forward, and as you know, it's a fairly complex statistical analysis that goes into that using our outside experts and actuaries. And there is little claim McMullen on the company's free cash flow within the foreseeable multiyear outlook in terms of pension liability.

Speaker 2

So I think it's something that's been very, very well managed. I think it's a really good news story when you think of Corteva. McMullen. And what it translates to obviously is it gives us fairly significant flexibility when we think about our capital deployment strategies and we think about the opportunity not only to return cash to shareholders and to invest, if you will, organically for growth, it also gives us And then Robert, you may want to talk a little bit about the CP volume without the new products. On the restructuring, there really isn't McMullen, a precise split that I can give you between the two business units between seed and crop.

Speaker 2

When you look at it McMullen. In terms of the major categories, of and components of what we're doing with the restructuring, It's really across the organization and it's really again associated with an outcome of our portfolio reviews or strategic review McMullen, as well as looking at our overall cost structure and we think doing the right thing to set us up, not only as you would suspect for 2023 and as Chuck reference, but really is taking a view over the, if you will, the midterm, McMullen, a multiyear midterm look at how to best position the company going forward.

Speaker 1

Yes. And maybe before going to Robert, so Jeff, just on the restructuring. So Dave covered that well. What I would say is this was a company wide So Dave covered that well. But what I would say is this was a company wide exercise.

Speaker 1

It wasn't simply a product line or a BU exercise. McMullen. So we started with the top of the house strategic direction. So yes, there's going to be AIs that we're exiting. There's going to be more focused on certain crops, McMullen, but there's also a really good look at our infrastructure and our and what cost structure do we need to go forward.

Speaker 1

We've even looked at our digital offerings. So McMullen. This was very comprehensive. It wasn't contained to 1 or 2 of the BUs, and we'll put all of that together for a financial and operational framework for you to understand at our Investor Day. So maybe Robert, can you address the CP growth volume question?

Speaker 5

Yes, sure, Chuck. Jeff, when you look at this, the new products grew $400,000,000 for the half. But more importantly, your question of what would be without it, a lot of things in that. Old products would still be sold in those place of an etcetera that it's not just straight math. There's a lot of different moving parts to this.

Speaker 5

I think the big thing to understand here is the grower demand is very strong. And so there would be there is continued need for products on the farm. And the new products are filling a need there with the technology, etcetera, that we give them as a new tool.

Speaker 2

And I think just maybe, Robert, just to add quickly to this and something you mentioned earlier is obviously we're benefiting in terms of McMullen, what you're able to bring to the bottom line and what you're demonstrating in terms of margin expansion that those new products are also contributing to. So Very important, not only meeting demand in the marketplace, but also adding value, which is great.

Speaker 3

And we'll take our next question from Steve Byrne with Bank of America. Please go ahead.

Speaker 8

Yes, thank you. Curious as to what you heard on your travels in recent weeks, Chuck, McMullen, on the level of bicama drift that has occurred this year. What are your data sources indicating to you in terms of is it worse or perhaps maybe less so than prior years just because of the shift towards Enlist. But McMullen. More importantly, if you have a view on whether EPA might take some action on the administration like they've suggested where that could make over the top use of Dychema more challenging in 2023.

Speaker 8

If that were to happen, MacIain. How would your lineup of seed production in 2022 give you the opportunity to really shift more towards Enlist in 2023. And just one more on there, you mentioned renewable fuels. I'm curious if any of that soybean pipeline you have

Speaker 1

McLean. Yes. Good question, Steve. Thanks. I'll comment on from my travels and Tim spends most of his days out there.

Speaker 1

So let me just address the renewable fuels question for you right upfront. So yes, I guess the short answer is We're going to show you some of our technology pipeline at our Investor Day. This is an area we're quite excited about to drive up higher Miller, but also other elements of the genetic code, I think as well that Sam and his team are working actively on to do different things even in alternative proteins. So these are things that I think the world needs. There are solutions that We're working with some of our partners in different industries.

Speaker 1

There's a lot of excitement around what we can do. And so that the Key for us will be not only solving the technology formula, but then the regulatory arena and the freedom to operate and we need to put all of that together. McMullen. But I think that from what I've seen certainly is the science and technology is getting to a point where we can solve some of these at least make major steps to solve some of these really difficult challenges. Renewable fuels needs to be part of the energy transition, and I think that we're going to demonstrate some of that for you in September.

Speaker 1

MacKenzie, Dicamba Drift. So I did as I mentioned, I spent some time in the South and certainly I've seen the fields where there was Macias, Dicamba drift and damage the soybean fields unintended consequences is the way I would say it. So I won't comment on whether this McMullen, which should be further taken up by the EPA. I think the EPA needs to figure that out. But what we're trying to do, of course, is ensure that McMullen, Growers and even the retail channel has options and solutions.

Speaker 1

And when you look at the Enlist technology, of course, It doesn't have that same characteristics. When you spray the Enlist herbicide, it stays where it is intended to stay on its target. And that's one of the major reasons that's driving, I think, strong demand from a customer base. So that is one of the things that I think the market has demonstrated that it does that very well. Tim, observations?

Speaker 4

Yes. Chuck, I think your comments, Michelle, is very consistent. McMullen. There's been a few pockets where I'd say the visibility or the noise and Chuck. Some of those issues have been stronger this year, and particularly in the when you get into the Mid South or the Delta area.

Speaker 4

And I'll be there next week and be spending time on the ground with customers and our sales team and channel partners and understand more about it. In terms of speculating on what could happen from a regulatory standpoint, it's impossible to do that. And as Chuck said, the EPA is going to make a call on that. We have seen some states step up and be more aggressive in terms of regulation. And I'd say, McMullen.

Speaker 4

I'll speak in general and last night I spent a better part of the evening with about 30 of our field sellers in a meeting and got feedback on this. I'd say across the Midwest, we've kind of gotten to a critical mass within list where and some of those state regulations that are in place where maybe the issue is not quite as visible as it had been in the past years, McMannan, at least in terms of what our customers are experiencing there. So what we have to continue to do is support our customers through proper advocacy, our technologies, McMannan, customers where they have concerns, farmers need to speak up to their channels within their states. And obviously, we're going to continue to support and advocate for best practices around safe use for all the technologies that are in the marketplace. I don't think we want to position this as enlist versus extend or anything like that.

Speaker 4

We want to make sure that all technologies are available and that customers do have choice and that those products are used appropriately and those best management practices have to be in place. So In terms of the 2022 seed crop that's in the ground. And so we will have a significant ramp up in our branded business

Speaker 3

And we'll take our next question from Michael Piken with Cleveland Research. Please go ahead.

Speaker 4

Yes, good morning. Just wanted to get your sense in terms of the early buying from Latin America, how

Speaker 7

Interesting in terms of our crop protection inventories. Thanks.

Speaker 2

Yes, maybe I could just start there and just comment quickly on the numbers and then Robert, why don't you pick and talk a little bit about those inventory levels in the overall market as you see it in LATAM and Brazil. Estimate from kind of best estimate, This is a judgment is it's about $100,000,000 or approaches $100,000,000 of benefit that we got in the second quarter. McMullen. It's part of what when you look at our guide for the second half, we've factored that in, in terms of our thinking and also contributes to what I said earlier. When you look at the distribution of both revenue and EBITDA between McMullen, our outlook or our guide matches or is consistent with our historic patterns.

Speaker 2

That's one of the contributors in terms of that math. Robert, and that's really just reflective by the way, the $100,000,000 McMullen. Our estimate is really attributed, I think, to 2 things. Number 1, just the strength of demand. And the second thing is that we had product available McMullen to fulfill that demand.

Speaker 2

So Robert, you want to talk a little bit about just the overall conditions?

Speaker 5

Sure. Yes, Latin America, like Dave was talking about there, very and the growers there and unprecedented first half organic growth, Love to have it into the future, but that's really not realistically to be sustainable. But all that said, There is early season buying because when products available, they're going to take it. The farmers are healthy financially and in a good position. But we expect still have very good growth in the second half down there anyway.

Speaker 5

If we hit net we McMullen. We should hit in that 25% to 30% organic growth and that's nothing to laugh at either. So we expect a very strong second half down there and The growers demand is really driving that.

Speaker 3

That concludes today's question and answer session. At this time, I will turn the conference back to Kim Booth for any additional or closing remarks.

Operator

McMullen. Thank you. And that concludes today's call. We thank you for joining and for your interest in Corteva. We hope you have a safe and wonderful day.

Operator

Thank you.

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Earnings Conference Call
Corteva Q2 2022
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