Corteva, Inc.

Good morning, everyone, and welcome to the Corteva Q3 Earnings Conference Call. Today's conference is being recorded, and at this time, I would like to turn the conference over to Megan Britt. Please go ahead, ma'am.

Good morning, everyone. Thank you for joining the third quarter 2019 Earnings Conference Call for Corteva Agriscience. The call is available to investors and media via webcast. We have prepared presentation slides to supplement our comments during this call. These slides are posted on the Investor Relations section of the Corteva 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, Rajan Gajaria, Executive Vice President of Business Platform, and Tim Glenn, Executive Vice President and Chief Commercial Officer, will join the Q&A session at the end of the call. 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 a forward-looking statement disclaimer. 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 for discussion of some of the factors that could cause material differences in actual results. We are providing information on a pro forma basis, prepared in conformity with Regulation SX, 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 where available, and other associated disclosures are contained in our earnings release and on our website. Turning to the agenda for the call today, Jim will review highlights for the third quarter, including progress on our priorities for shareholder value creation, results by region, and key drivers of second half and full year operating EBITDA. Greg will then review our third quarter financial results in more detail, including segment performance highlights and a comprehensive walk of operating earnings per share. Following this review, we will take your questions before concluding the call. With that introduction, it's now my pleasure to turn the call over to Jim.

Thank you, Megan, and thank you to everyone joining the call and online. Earlier today, we reported third quarter results for Cortella, delivering solid earnings improvement relative to the prior year, despite the emergence of currency headwinds in Latin America and additional weather-related impacts in several key regions. As we consider the market backdrop for this quarter, uncertainty regarding North America yield, production, and ending stock levels for the 2019 season has persisted, as an unprecedented planting season has now given way to an extraordinarily late harvest. To some extent, large carryover supplies have moderated market reaction to North American production problems, especially as markets expected Latin America to respond to elevated commodity prices with additional production. However, recent planting progress reports from Brazil, where markets were poised for a strong row crop season indicate lack of rainfall is delaying soybean planting, which may have an impact on the timing and size of the second crop, or safrinha. Coupled with production disruptions and delays, recent softening in the Chinese economy, African swine fever, and slower growth in other emerging markets are impacting the demand outlook for commodity grains and oilseeds. On trade, while China has resumed purchases of some U.S. agricultural products, the timing of a full resolution is still unknown. In the face of this considerable market turmoil, our teams have remained focused on the levers in our control, taking self-help actions and driving execution in the marketplace while setting the stage for a solid 2020 when we expect more normal conditions to arrive in many sectors of the ag markets. Now, as we did last quarter, we would like to start our update today with some longer-term perspective, where we can look beyond the market uncertainty that has continued to challenge our day-to-day operations to evaluate the progress we are making as a company relative to our priorities for shareholder value creation, noted on slide 5. As I said last quarter, these priorities continue to guide our strategic actions and underscore the quality of results we are working to achieve. particularly as we work dynamically to adjust to short-term market disruptions. Starting first on culture, we highlighted the launch of Execute to Win last quarter. With this, we are establishing an owner mindset for all employees to drive the cultural reinforcement that is needed to deliver and sustain our gains long-term. So far, we've engaged more than 25% of our employee base in the initiative identification, planning, and execution that we expect will ultimately contribute $500 million in incremental operating EBITDA over the next five years. On capital allocation, we remain committed to delivering cash to shareholders in the form of quarterly dividends and share repurchases, while continuing to invest in innovation and growth. 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. This quarter, we repurchased $25 million in shares. Additionally, Corteva paid its first quarterly dividend of $0.13 per share on September 13th and has declared its second continuous quarterly dividend payable on December 18th. In total, our actions so far will return approximately $220 million in cash to shareholders by the end of the year. On our priority related to developing innovative solutions, we delivered over $30 million in operating improvement from new products in the quarter, consistent with our commitment to deliver over $100 million in improvement in the second half and greater than $150 million for the full year. Crop protection and new product sales increased 56% versus the same period last year and are on track to grow to 12% of our overall crop protection sales by the end of the year. Products driving net sales and operating EBITDA improvement in the quarter included PowerCore Ultra in seed and Aralex herbicide, Visaria fungicides, and Isoclast insecticides in crop protection. We continue to see momentum in our crop protection portfolio with notable geographic label expansions for Aralex and Rinscor herbicides, Isoclast insecticide, and Zorbac fungicide this quarter. On our priority around best-in-class cost structure, we delivered $100 million in cost synergies in the quarter and are on track to deliver approximately $150 million in cost synergies for the second half of 2019. Overall, we have now realized cumulative cost savings through the end of this quarter of $800 million out of the $1.2 billion commitment expected by 2021. Finally, seasonal shifts during the period, and currency obscure several positive signs of operational momentum. Based on the current USDA acres, we are confident that we gain share in pioneer brand corn and soybeans in North America. We also gain share in summer corn in Brazil and insecticides and fungicides globally. Further, in support of our growth in the spinosan insecticides, We announced today a project approved by the Board of Directors to add manufacturing capacity for key spinosan insecticide products to release supply constraints and grow our leadership in natural products aligned with our market growth expectations in insecticides and natural products over the mid-term horizon. Moving to slide six and a few highlights of our key performance indicators for the quarter. Net sales on a reported basis decreased 2% versus the prior period, primarily due to currency. Organic sales were flat for the quarter as weather drove offsetting shifts at the segment level. As we reported last quarter, market disruptions due to the weather in North America delayed planting and shifted seed sales into the third quarter, while strong early demand moved crop protection volume for Latin America into the second quarter. Further pressuring third quarter performance a lack of seasonal rainfall in Brazil delayed soybean planting and crop protection applications, shifting crop protecting volumes into the fourth quarter, primarily for Visaria fungicide. Our operating EBITDA improved 18% compared to prior year, largely driven by the margin benefit from the shift of seed volumes and the continued realization of cost synergies. Demand for new crop protection products also resulted in margin expansion in the quarter, which helped to partially offset the more than $40 million hit to quarter from currency. Margin declines from higher corn and soybean replants and the seasonal shifts of Latin America crop protection volumes due to early demand coupled with the delayed seasonal rains further pressured operating EBITDA results for the quarter. For North America, when we exclude the impact of replant And despite the mixed shift we experienced to shorter maturity products, we held corn price in our pioneer brand. We reduced selling general and administrative and R&D costs 2% in the quarter on a net basis due to cost synergies, as well as the discretionary actions taken to curtail spending.