Corteva, Inc. (NYSE:CTVA) Q1 2024 Earnings Call Transcript May 2, 2024

Corteva, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Mark and I will be your conference operator today. At this time, I would like to welcome everyone to Corteva Agriscience First Quarter 2024 Earnings Call. All lines are been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Kim Booth, Vice President of Investor Relations. Please go ahead.

Kim Booth: Good morning and welcome to Corteva's first quarter 2024 earnings conference. 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 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. We continue to be very pleased with the progress we're making, executing our strategic plan, including items such as the Enlist technology, biologicals, increased investment in strategic innovation, and our productivity and cost actions. Today's focus will be on our first quarter performance and also some insights into how we see the rest of the first half and year unfold. Let me start with the bottom-line. While the crop is not yet fully planted in North America, 2024 is playing out mostly as we expected. And so we are reaffirming our full year guidance, which we announced in early February and remain on track to meet our 2025 financial framework.

Globally, from an industry perspective, we have relatively constructive fundamentals. We continue to see record-setting demand for grain, oilseeds, feed, and biofuels. In order to meet this growing demand, farmers are investing in premium seed and crop protection technologies to enhance and protect yield. Our Seed business is having a very good start to the year. Organic sales are up 5% and price is up 6%, reflecting the value our seed technology consistently delivers to farmers. Our Seed order book reflects strong demand for our product lineup. We are planning to bring about 500 new products to the market this year with approximately 300 new seed hybrids and varieties. Factored into our guidance for the year is the fact that farmers in the U.S. are projected to shift planted area from corn to soybeans, resulting in a projected increase in soybean area of about 3.5%.

If current trends hold, about 60% of all U.S. soybean acres will be planted with our Enlist technology in 2024 quite an impressive feat in less than five years where we continue to be the number one selling soybean technology in the U.S. On the Crop Protection side, ample supply and residual effects of destocking are creating a more competitive environment. This is coupled with farmers making their purchases much closer to the application window, resulting in a delay in volumes. But all signs point to volume growth in the second half, particularly in Latin America as the channel inventory imbalance in remaining regions is expected to stabilize. At a high level, our Crop Protection business has made significant performance improvement since 2021.

By the end of 2024, we anticipate that we will have added $1 billion of new products in biological sales, exited $500 million of lower-margin products, and improved EBITDA margin by about 200 basis points in that three-year timeframe. Our differentiated crop protection portfolio will continue to create new pathways to value creation, and this has been strengthened by our industry-leading biological business. As a result of targeted portfolio actions and strategic investments in fast-growth market segments, our portfolio differentiation mix has grown from about 50% to an estimated 60% in 2024. We also continue to execute on the optimization of our global crop protection asset footprint, where we are estimating annual run rate savings of $100 million by 2025.

As I said, we expect the crop protection industry to return to volume growth in the second half. Mixed enrichment driven by our new products and biologicals, as well as the cost actions I mentioned, will drive margin improvement in our crop protection business in 2024. A final point on controlling the controllables. In 2024 and again in 2025, we're still expecting to see between $350 million and $450 million of benefits from our self-help levers. These actions continue to drive value creation for the company and are providing margin enhancement throughout the ag cycle. Finally, I'd like to note that in about a month, Corteva turns five. We'll be celebrating not only our fifth anniversary, but also the impact we've had on farms around the world over that time and the value that impact has created for farmers, for shareholders, and for the world at large.

It's been a remarkable journey in which we rolled out more than 1,500 new next generation products and technology to our 10 million global customers. I'm proud to say that together with our 23,000 employees, we've built one of the most competitively advantaged agricultural technology portfolios in the industry, and we remain optimistic about the future of agriculture and the future of Corteva. With that, let me turn the call over to Dave.

Dave Anderson: Thanks, Chuck, and welcome everyone to the call. Let's start on Slide 5, which provides the financial results for the quarter. As Chuck said, and you can see from the numbers, the results for the quarter were largely in line with expectations, with both sales and operating EBITDA down from prior year. Organic sales were down 6% compared to last year, with seed growth offset by crop protection. Seed volume gains in the first quarter in North America were offset by seed volume declines in all other regions. And as expected, crop protection volumes were down double digits against a strong first quarter of 2023 comparison. We're obviously pleased to report another first quarter with more than $1 billion of operating EBITDA, in part due to benefits from improved net royalty expense and productivity savings.

However, operating EBITDA was down 16% compared to prior year, and EBITDA margin for the quarter was 23%, or down approximately 200 basis points versus prior year, with margin expansion in seed offset by crop protection headwinds. Let's go to Slide 6 and review sales by segment. Seed net sales were up 2% to nearly $2.8 billion. Organic sales were up 5% on broad-based pricing gains as we continue to price for value. And global seed pricing was up 6%, with gains in every region and across the portfolio. Seed volumes were down 1% versus prior year. Gains in North America driven by mild weather and strong execution were offset by declines in other regions. Notably, volumes in EMEA were down due to delays in demand associated with unfavorable weather.

Crop protection net sales were down 20% in the quarter versus a strong first quarter in 2023. The sales decline was driven by residual impacts of destocking in EMEA in Latin America and the shift to just-in-time purchasing in North America, pushing sales out closer to the application window, which is largely in the second quarter. Crop protection volumes were down 18% in the quarter, including the impact of strategic product exits. Pricing was down 3% compared to prior year, driven by competitive pressures and tight channel inventory management. Crop protection pricing in EMEA was up 4%, largely in response to currency impacts. Slide 7 illustrates the significance of the last week of March for seed deliveries in the US. With mild weather in much of the United States during March, pioneer seed deliveries tracked ahead of prior year, putting 2024 closer in line to the first quarter of 2021 and 2022, which we would consider a normal delivery pattern versus last year's delays.

The favorable product mix coupled with seasonal price increases translated to a strong Seed operating EBITDA margin for the quarter, approximately 300 basis points above last year. With that let's go to Slide 8 for a summary of first quarter operating performance. For the quarter, operating EBITDA was down approximately $200 million to just over $1 billion, again largely in line with expectations. Pricing gains coupled with improvement in net royalties and productivity actions were offset by volume declines and cost and currency headwinds. The $22 million of cost headwinds in the quarter was related to higher Seed commodity costs and modest Crop Protection inflation on input costs reflecting the sell-through of higher cost inventory. Importantly based on raw material purchases, we still expect to deliver approximately $100 million of savings for full year 2024 from Crop Protection input cost deflation.

SG&A for the quarter was up approximately 1%, primarily from a full quarter of SG&A from the Biologicals acquisitions. Excluding acquisitions SG&A was down more than 2% versus prior year as we maintain disciplined spending. With that, let's go to Slide 9 and transition to the setup for the remainder of the year. I want to share the key assumptions for the first half and second half of 2024. We expect sales for the first half to be down low-single digits, with EBITDA flat to slightly down versus last year. Seed is expected to continue the momentum from first quarter and deliver solid growth in the first half of the year led by North America on a strong product lineup. Crop Protection will continue to experience impacts from the shift to just-in-time demand and residual destocking and will likely be down in the first half of 2024 compared to the prior year.

Both Seed and Crop Protection are expected to experience cost headwinds through the first half of the year related to higher Seed commodity costs and Crop Protection input costs. These market-driven cost headwinds will be partially offset by benefits related to reduced net royalty expense and also productivity actions. SG&A and R&D investment are both expected to modestly increase in the first half of 2024 compared to last year. Now turning to the right side of Slide 9, regarding the second half of the year. We expect double-digit sales and EBITDA growth, driven primarily by Crop Protection, partly as a result of the comparison to 2023 second half, where volume and price combined were down 16% from 2022. In Seed, we expect a rebound in Brazil safrinha corn area after a reduction in the 2023, 2024 season, due mostly to weather.

We expect Seed results in the second half to be in line with historical pattern meaning likely a small EBITDA loss in the second half. Crop Protection volume gains will drive much of the growth in the second half with pricing expected to remain challenged. We expect Crop Protection volume growth in the second half to be enabled by some market stabilization in Latin America. Our base case assumption is for a volume uptick year-over-year in Brazil led by new products, Spinosyns and Biologicals. And available data suggests, channel inventories are trending down in Brazil. While they're still higher than historical average inventory levels have come down versus 2023 year-end. So the channel is making progress towards a more normalized inventory level.

And the demand at the farm gate in Brazil remains healthy and the expected increase in planted area supports additional Crop Protection applications. So the second half outlook for Biologicals growth is largely driven by Stoller, which has a strong market position in Brazil. We expect to see input cost deflation in Crop Protection, during the second half of the year. Coupled with productivity and cost actions including benefits from the footprint optimization project, we anticipate a cost tailwind for crop protection. And as a reminder, we expect an increase in SG&A spend in 2024, driven by normalized bad debt and compensation accruals. We also continue to increase the investment in R&D. So the balance of improved market conditions and continued execution on controllables will drive second half growth.

Together with the roughly flat first half and double-digit second half EBITDA growth, we remain on track for full year 2024 operating EBITDA guidance in the range of $3.5 billion to $3.7 billion, but the path will be a little different than our original assumptions. Specifically in addition to more volume growth, we now expect total company pricing to be slightly down for the year with Crop Protection pricing more than offsetting the low single-digit price gains in Seed. And while we're expecting total cost to be marginally higher for the year, an increase from our original assumption we remain on track to deliver savings on our controllables, $100 million reduction in net royalty expense, $100 million in Crop Protection input cost deflation and $200 million from productivity and cost actions.

So let's now go to slide 10 and summarize the key takeaways. First operating EBITDA performance for the first quarter was in line with expectations led by the strength of the Seed business. And while first quarter 2024 results were down versus prior year, we remain on track to deliver our full year 2024 guidance including sales and earnings growth. And after our standout performance in 2023 the Seed business momentum continues in the first half of 2024 driven by pricing for technology and continued reduction of net royalty expense. Looking forward to the second half of the year, Crop Protection cost actions and some market improvement will drive much of the growth. And finally, the strong first quarter cash flow result supports our ability to deliver at the midpoint of our free cash flow guidance of $1.75 billion or approximately 50% conversion.

And with that, let me turn it over to Kim with an announcement about a significant upcoming event. Kim?

Kim Booth: Thanks, Dave. We're excited to announce that our 2024 Investor Day will be held on November 19 in New York City. The management team will provide updates on the company's strategy and financial targets along with highlights showcasing our innovation and pipeline. We look forward to seeing many of you at this event in November. 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.

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