Corteva, Inc.

Good day and welcome to the Corteva Q2 Earnings Conference Call. Today's conference is being recorded. I will now turn the call over to Megan Britt, Director of Investor Relations for Corteva. Please go ahead.

Good morning, everyone. Thank you for joining the second quarter 2019 Earnings Conference Call for Corteva AgriScience. We're making this call available to investors and media via webcast. We have prepared slides to supplement our comments during this call. These slides are posted on the investor relations section of our website and through the link to our webcast. Speaking on the call today are Jim Collins, Chief Executive Officer, and Greg Friedman, Executive Vice President and Chief Financial Officer. In addition, Tim Glenn, Executive Vice President and Chief Commercial Officer, and Rajan Gajadia, Executive Vice President of Business Platforms, will join the Q&A session. During this call, we will make forward-looking statements regarding our expectations for the future. I direct you to slides two and three of our earnings release for our forward-looking statement disclaimers. All statements that address expectations or projections about the future are forward-looking statements. These statements reflect our current expectations but are not guarantees of future performance and are subject to risks and uncertainty regarding assumptions. We urge you to review our SEC filings or a discussion of some of the factors that could cause actual results to differ materially. We are providing information on a pro forma basis prepared in conformity with regulation FX in order to provide the most meaningful comparison, so please take note of the pro forma basis discussion in our earnings release and slides. Unless otherwise specified, all historical financial measures presented today exclude significant items, which can be found in the schedules that accompany our earnings release. We will also refer to non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and on our website. Turning to the agenda for the call today, Jim will share accomplishments on our priorities for shareholder value creation and provide perspective on the quarterly financial results, market backdrop, and revised employer guidance. Greg will then review our second quarter and first half financial results by segment. Following this review, we will take your questions before wrapping up the call. With that introduction, it's now my pleasure to turn the call over to Jeff.

Thank you, Megan, and thank you also to those joining our call today. Earlier today, we reported the second quarter results for Corteva, our first quarter reporting as an independent company. Two months ago, on June 1st, we completed the separation of Corteva from Dow DuPont. the culmination of three and a half years of journey and a significant milestone for our employees, our customers, and now, we are pleased to say, our shareholders. With our spin, we created a new kind of ag company, a global pure play built on a foundation of industry leadership and focused on bringing new and integrated solutions to farmers, enriching the lives of those who produce and those who consume and ensuring progress for generations to come. That is our purpose, and our early days as a public company have deepened our resolve on delivering on that purpose. The unprecedented market backdrop for the second quarter presented considerable challenges to our customers and, in turn, to us. Flooding, planting delays, prevented planting, delayed deliveries, insect pressures, trade-related market disruptions, the list is long and exceptional when viewed from the lens of history. In the 150 years of tracking data in our industry, the events that transpired in North America region this season are without precedent. Now, amid these historic events, both our spin and market disruptions, we've worked hard to deliver progress this quarter on our priorities for shareholder value creation, noted on slide four. These priorities continue to guide our actions and underscore the quality of the results that we are targeting. Two announcements this quarter reinforce our commitment to return excess cash to shareholders. In June, we announced the authorization of a share buyback program to return $1 billion to shareholders, which we expect to complete over the next three years. Additionally, we declared a quarterly dividend of $0.13 per share, consistent with our earlier indications. These are proof points regarding our confidence in the strength of our long-term strategy. On our priority related to developing innovative solutions, I'm pleased to report that in the second quarter, we began recognizing licensing income related to our Enlist E3 trait, where we already have over 100 executed licenses to date. We also began seeing traction in the market in terms of units sold. Over 150,000 units were sold through our rep network in the quarter. Although this represents a small percentage of our overall units, It highlights our early groundwork toward reaching our target of having this technology on 10% of North America planted acres in 2020. Now, beyond Enlist E3 soybeans, new product launches overall are driving both sales and operating EBITDA improvement in the quarter, with growth from Chrome and PowerCore Ultra in seed and Aerovex herbicides, Zorbac fungicides, and Isoclast insecticides in crop protection. We continue to see solid momentum in our crop protection product portfolio with geographic label expansions for Arilex, Isoclast, Rinscor, and Zorvec. This includes the very recent registration we received in Brazil for Isoclast and Rinscor. On cost advantage and our priority around best in class cost structure, we delivered $115 million in cost synergies in the quarter. and approximately $200 million in cost synergies through the first half of this year, exceeding the original target set for this timeframe by about $50 million. Overall, when you add up what we have delivered since the merger closed, we have realized cumulative cost savings of $700 million through the end of this quarter, which is approximately 60% of our $1.2 billion commitment. On top of that, we announced earlier this year that we are targeting an additional $500 million in operating EBITDA improvement over the next five years. To further our progress in this regard, we launched a company-wide initiative this quarter that we are calling Execute to Win, or E2W. This effort is focused on establishing an owner mindset for all of our employees to drive the cultural reinforcement that will be needed to deliver and sustain our growth and productivity gains long-term. We look forward to providing additional detail on this effort and our productivity plans in the coming months. And finally, regarding our second quarter performance, outside of North America, we realized net sales growth of 10% and organic sales growth of 17% in the quarter, demonstrating the balance inherent in our global operating footprint today. Though our results were negatively impacted by the North American market, We capitalized on strong performance outside of North America and realized results that demonstrate our ability to set expectations and deliver what we promise. So moving to chart five and a few highlights on our key performance indicators for the quarter. Net sales decreased 3% versus the same quarter last year. Market disruptions due to the weather in North America significantly delayed planting and resulted in volume declines in both segments from reduced planted acres and missed crop protection applications during the quarter. Sales were also impacted by ongoing currency headwinds and pricing pressures in seed. Outside of North America, organic net sales were up 17% versus the same period last year on both volume and price improvements. demonstrating the strength of our new product launches and reflecting significant benefit to the quarter from an early start to the season in Latin America. Operating EBITDA decreased 6% for the quarter, largely driven by declines in the North American market. Demand for new crop protection products resulted in margin expansion in the quarter, which helped to partially offset the impact of currency, raw material cost increases, and declines in North America. Selling, administrative, and R&D costs declined 9% in the quarter on a net basis. This result highlights the benefit of our cost synergies as well as the discretionary actions our teams are taking to curtail spending in light of the impacts of the market-driven declines in our results. Slide six shows second quarter highlights by region. I'll start with our results in North America. North American sales declined 8% for the quarter due to the weather-related planting delays that drove reductions in planted area, a significant level of product switching, and a loss of crop protection applications. Uncertainty remains on the planted acres, and the USDA announced plans to perform a broad resurvey in July that is expected to be released on August the 12th. In crop protection in North America, elevated channel inventories are impacting restocking. Additionally, competitive price actions, generic price pressure, and large distributor inventory reduction initiatives are impacting pricing. On a positive note, indications are that demand for Corteva crop protection products with Pioneer customers is strong, driven by joint offers like True Choice and Corteva Cash. Moving to Latin America. We are seeing strong early demand with net sales up 39% on an organic basis. The trend toward an early season started in December of 2018 with the Supremia season and has continued with a very strong early start to the summer season. We estimate that approximately $80 million in sales that would normally have occurred in the third quarter have moved into the second quarter. Sales have also been bolstered by demand for new products. including year-over-year growth for Picoxie, Dermacor, and herbicides in crop protection, and PowerCore Ultra and Leptra corn products in seed. In Asia Pacific, with organic net sales up 10%, the clear headline is crop protection volume growth due to higher pest pressure and pricing on supply-constrained, high-demand products. The region is seeing broad-based volume and price growth in spinosan insecticides across several markets and crops. Corteva is pleased to have a strong solution to offer customers to address pest pressures evident in the region. Our spinosan technology, while supply-constrained, remains an important tool in the local market. In addition to the Spinosan's growth, the launch of Rinscor rice herbicide in China and pricing growth in both corn and rice seed contributed to results in the quarter in Asia Pacific. Finishing with Europe, Middle East, and Africa, up 6% on an organic basis. EMEA has had a strong season, particularly in seed. Share gains in our oil seed portfolio, particularly in sunflower in Eastern Europe, and implementation of a direct agency model in Eastern Europe have delivered volume gains. The region also delivered organic growth in crop protection due to strong penetration of Lumiposa seed treatments. Increased demand for new crop protection products like Zorbeck fungicide, recently launched in grapes and potatoes, and Aralex cereal herbicides are also contributing to growth in the region. Currency devaluation in the region has impacted overall sales growth by 9%. I'll turn now to slide seven and cover the drivers of our operating EBITDA results for the first half and updates to our guidance for second half and full-year operating EBITDA. Looking at the first half, pro forma operating EBITDA is down 13% compared to the same period last year. Our focus on controlling costs and realizing cost synergies delivered about $200 million in the first half, $50 million ahead of where we expect it to be. In terms of volume and price, there were several drivers that impacted our results. Starting with new products, we generated $50 million of EBITDA improvement in the first half, predominantly in the crop protection segment. Price and volume improvements across the rest of our portfolio contributed $120 million in incremental benefit to the first half versus last year before we factor in the impact of the North American market. We estimate that the North American market for the first half represents an approximate $350 million headwind, an estimate that reflects lower than expected planted area for corn, soybeans, and canola, missed crop protection applications, and shifts to lower margin products, including shorter maturity corn products. This estimate also includes the impact of delayed sales as seed delivery shifted into the third quarter. as well as early deliveries that occurred in the fourth quarter of 2018. Netting with the seasonal shifts, the full-year impact from the challenging market conditions in North America is estimated to be approximately $250 million. Looking ahead to the second half, due to the late North American season, we see some seed revenues shifting into the third quarter, primarily in soybeans. This impact is almost directly offset by the volumes that shifted into the second quarter due to the early season in Latin America. Consistent with our statements earlier this year on the second half, we continue to expect strong price improvement year over year on supply-constrained high-demand products, primarily in our insecticide portfolio, and we expect to have year-over-year improvement in Latin America in the second half. We will keep up our momentum to deliver additional cost savings from synergies in the second half, bringing our annual incremental savings to $350 million. On top of this, we are beginning to stage other productivity initiatives related to the additional $500 million in incremental operating EBITDA improvements I mentioned earlier. We'll have more to share on specific actions as we work through them. In total, we expect to deliver operating EBITDA that's about break-even for the second half by using the midpoint of the range provided. This represents an approximate 200 million improvement over prior year, which is in line with the improvement we guided to back in May for the second half. When you add it all up, this means we are guiding to an operating EBITDA range of $1.9 billion to $2.05 billion for fiscal 2019. down about five percent versus 2018 using the midpoint on net sales for full year 2019 we expect declines of roughly three percent predominantly on currency headwinds on an organic basis we expect sales to be about flat year over year now before i turn the call over to greg i will summarize by saying that it is difficult to overstate how challenging this year has been to date however Our team has waited a long time for the chance to be a standalone company, and we intend to show the market what we can deliver. With that, I'll turn it over to Greg, who will get into the details behind our second quarter and first half results.