Corteva, Inc.

Good day, everyone, and welcome to the Corteva Q4 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Megan Britt. Please go ahead, ma'am.

Good morning and welcome to the fourth quarter and full year 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, Tim Glenn, Executive Vice President and Chief Commercial Officer, Rajan Gajadia, Executive Vice President of Business Platforms, and Greg Friedman, Executive Vice President and Chief Financial Officer. During this call, we will make forward-looking statements regarding our expectations for the future. Slides two and three of our earnings release contain 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 risk and uncertainty regarding assumptions. Our SEC filings provide discussion of some of the factors that could cause material differences in our actual results. We are providing information on a pro forma basis prepared in conformity with Regulation SX to provide the most meaningful comparison. We provide a 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. It's now my pleasure to turn the call over to Joe.

Thank you, Megan, and thank you and welcome to the participants joining the call. Earlier today, we reported fourth quarter and full year results for 2019. Our key operational performance indicators for the full year are captured on chart four. Net sales on a reported basis decreased 3%. versus the prior year, primarily due to currency. On an organic basis, net sales were flat, as weather-related declines in North America were offset by above-market organic growth in other regions. Outside of North America, reported net sales were up 1%, and organic sales were up 7%, demonstrating the strength of our pipeline, brands, and multi-channel distribution strategy. Operating EBITDA, declined 4% compared to prior year, largely driven by currency and weather-related price and volume declines in North America. Continued realization of cost synergies, disciplined spending actions, increased sales from new products, and gains on divestitures were a benefit. Operating EBITDA margin declined 10 basis points for the full year for the company. In crop protection, new product sales and gains on divestitures resulted in margin expansion. And C, weather-related price and volume declines in North America drove margin decline. Selling, general and administrative, and R&D costs declined 4% for the full year due to cost synergy realizations and the benefit from disciplined spending actions. In total, we realized approximately $350 million in cost synergies, accelerating $50 million of savings into 2019 relative to our expectations at the beginning of the year. Overall, these indicators show that we capitalized on the strength of our product pipeline and realized above-market organic growth outside of North America. We also delivered on our cost synergy commitments and intensified our productivity actions to support sustainable operating EBITDA expansion. Finally, we acted on our portfolio to divest products that are not aligned with our strategy moving forward. Turning to slide five, we have previously talked about ROIC as our key performance indicator to assess our effectiveness in using capital to generate earnings. We are targeting a sustained mid to high-teens percent performance on this metric. Using a four-quarter average, we delivered a return of 19.8% for 2019. This result demonstrates our focus on driving effective risk management, reducing inventory carryover, and maintaining diligence on accounts receivable and collections. Going forward, our ERP implementation will be critical to maintaining performance at this level. A harmonized ERP system will allow our teams to have real-time transparency and actionable data to drive continued working capital productivity. Slide six highlights our progress on our five priorities for shareholder value creation. These priorities guide our strategic actions and underscore the quality of the results we are committed to achieve. Starting first on culture, given the historic market backdrop, it is sometimes easy to forget that we launched a new pure play agriculture company in June with the new Corteva brand, new values, and a new purpose. In our first quarter as a public company, we put in place a cultural transformation called Execute to Win. This is an example of how we intend to operate differently as Corteva. In 2020, we are targeting $30 million in operating EBITDA benefit as we get started on delivering our target of $500 million in incremental operating EBITDA over the next five years. Moving to capital allocation, we look to invest productively in innovation and growth. An example is the project announced last quarter to add additional manufacturing capacity for key spinosan insecticide products. While continuing to invest in innovation and growth, we are committed to delivering value to shareholders in the form of quarterly dividends and share repurchases. In total, our actions returned approximately $220 million to shareholders in 2019. On our priority related to developing innovative solutions, we received regulatory approvals in 2019 for several proprietary traits. In February, we received the final import approvals necessary to launch and list E3 soybean products and chrome corn products. In late December, China approved our Conquesta insect control trait in soybeans. Conquesta soybean import approval had been in progress in China since 2014. The receipt of China approval or Conquesta, is a necessary step for commercialization of Conquesta E3 product in Latin America. This is another important milestone toward trade independence. Today, we announced our intention to accelerate product development and production of Enlist E3 soybean products along with Enlist One and Enlist Duo herbicides ahead of the 2021 selling season. This decision reflects our focus on rapidly ramping up differentiated technology solutions that we expect will enable greater choice and value for growers over time. On our priority around best in class cost structure, we delivered $50 million in cost synergies in the quarter and approximately $350 million for the full year. Overall, we have realized cumulative cost savings through the end of 2019 of $800 million out of the $1.2 billion commitment expected through 2021. In 2019, we also authorized and launched an ERP harmonization project that is focused on eliminating approximately $200 million in costs inherited with the spin. Finally, weather-related impacts and currency obscured several positive signs of operational momentum in 2019. Of note are strong growth in insecticides and our positive organic net sales performance outside of North America. We took several actions in seed, like launching our global retail brand, Bravant, and restructuring our brands in North America to create a more powerful regional anchor brands that we expect to deliver above market growth in the future and continued momentum on share gains in local markets. And now, I'll turn the call over to Tim to provide some details on our commercial performance.

Thanks, Jim. Starting on slide 7, I'll provide details on how our teams executed around the globe in terms of top-line performance. 2019 was a very complex and dynamic ag market, but through all of that, I'm proud of how our teams positioned themselves to win in the market and deliver above-market growth. In North America, organic net sales were down 6%. Due to the weather-related delays, approximately 11 million fewer acres of corn and soybeans were planted in the U.S. year-over-year. As a result, seed units were down significantly, and reduced applications had a negative impact on crop protection. Pricing was challenged due to higher replants in both soybeans and corn, coupled with heightened competitiveness in the marketplace around soybean pricing. Despite a very challenging environment, our teams achieved sure gains in both pioneer corn and soybeans for the year. Additionally, excluding replant, we were able to hold price flat in pioneer corn. In terms of crop protection inventories, we see elevated levels in the U.S. market, primarily in corn and soybean herbicides. We also saw strong early demand in the fourth quarter for enlist chemistry due to 2020 ramp-up. In Latin America, our teams delivered 8% organic growth, led by strong demand for new products. We successfully implemented the brand positioning for Brabant and launched new technology like PowerCore Ultra, jane and summer corn in brazil we did see a more normal start to the second corn crop or supremia season which limited volumes in the fourth quarter but we expect to see those sales in first quarter 2020. in crop protection new products like isoclast insecticide contributed to growth as we obtained registration for the product in brazil and the overall insecticide market continues to expand In Asia Pacific, we delivered 3% organic growth on improved pricing and volumes under challenging and dynamic market conditions. Insecticide continued to drive growth, particularly in our spinosins product offering, given strong local demand. Drought conditions limited our opportunity to drive fungicide sales, particularly in South Asia and Australia. Indeed, the launch of our Vermont brand in the India corn market and an integrated portfolio approach around rice continues to be a strategy that enables us to win in the market. In Europe, Middle East, and Africa, gains in volume and price led to organic growth of 7% versus a market growth of around 1%. In Europe, strong demand for new products like Marlux herbicide and Zorbeck fungicides continue to drive top-line growth, despite regulatory challenges for other products, including chlorpyrifos. We believe that our seed and crop protection business gains share across Europe this year, primarily due to strong demand for new products. In particular, route-to-market changes in Russia and Ukraine drove market share growth in both corn and sunflower seed. Now, before I turn the call over to Rajan, I want to quickly make a point on slide eight that I believe sets us apart in the marketplace and is at the center of how we operate each and every day. And that starts with demand creation, our ability to create demand or market pull for whatever products and services through direct contact with farmers. At our core is the focus on servicing farmer customers and our ability to be on the ground working closely with them to find technology and agronomic and address their challenges. We used multiple paths to reach farmers, including strong collaboration with our channel partners and an increasing use of digital technology to support face-to-face contact in the field. There are several illustrations on this chart, including education of customers on solutions to manage a new insect pest that was threatening their crop and livelihood, the introduction of a new rice production system that would deliver economic, societal, and environmental benefits, and the introduction of a new solution that combines seed and crop protection technologies to address one of the most pressing needs of soybean farmers. This relentless focus on the customer is something we believe we do better than anyone else in the industry as we engage with more than 10 million farmers worldwide. As a result, we've gained share in Asia for insecticides, we've sold more than 6 million units of Rabant branded corn after just launching two years ago, and have overcome portfolio changes in our Brazil corn business as a result of the merger through share gains, just to name a few. I'll now turn it over to Rajan to review segment performance.

Thank you, Tim. Turning to slide 9, highlighting the performance for full year in both our crop protection and seed segment. In crop protection, net sales were $6.3 billion, down 3% from the prior year. The decrease was primarily due to 3% decline from currency. Organic net sales increased 1% from the prior year, partially due to volume improvement on new and differentiated products. The percent of sales from patented and differentiated products for 2019 was approximately 30%, up from approximately 25% in 2018. Crop protection operating EBITDA was approximately $1.1 billion, down 1%. Unfavorable currency, volume declines in North America, and higher input costs excluding synergies drove the decline in EBITDA. The segment delivered on cost synergies and realized a benefit from new products and gain on divestitures. For the full year, crop protection delivered approximately 30 basis points of operating EBITDA margin expansion. In seed, net sales were $7.6 billion, down 3% for the year. Currency was a headwind of 2%. Weather-related impacts in North America were partially offset by growth in other regions, particularly strong demand and pricing, on power core ultra corn products in Latin America, new route to market enhancements in Europe, and market share gains in corn in South Asia. Seed operating EBITDA was approximately $1 billion, down 9% versus the prior year, reflecting the impact of the North America weather-related decline, market competitiveness in soybeans, and unfavorable currency. Our synergies. particularly in R&D and seed production, were a benefit to the segment. Turning now to slide 10 for a closer look at several products that contributed to the full year segment results and are helping to create a clear path for future above-market growth. Starting with insecticides, with overall market growth 6%, Corteva net sales were $1.7 billion, an increase of 10% from the prior year. Organic net sales were up 14%. This growth was led by a unique SpinoSense franchise. Outside of North America, SpinoSense contributed 40% of the organic net sales growth for crop protection despite supply constraints in several regions. As we expect strong market growth in insecticides to continue, We recently announced our intention to add additional capacity in support of our spinosan insecticide offering. The combined impact of our investment in merger close will essentially double our capacity at full utilization to address global market growth in insecticides. Looking next at corn, net sales were $5.1 billion in 2019, down 1% from the prior year. With nearly 60% of global corn sales originating in North America, weather-related volume and price impact in that region resulted in the decline. Though it was a challenging year, we have seen green shoots sprouting. Chrome corn products received China import approval in February 2019 and were offered commercially across a broad range of geographies. In November, we shared the results of our field trial. Pioneer brand chrome products delivered nearly a seven bushel per acre average yield advantage, measured against all competitors and comparable technology segments. In 2020, chrome products are expected to represent 20% of our online. With the demonstrated yield advantage, we expect chrome products to deliver low single digit price improvements year over year. And today, we announced our decision to accelerate production of Enlist E3 soybeans along with the Enlist One and Enlist Duo herbicides. During the fourth quarter of 2019, we finalized our breeding plan and large scale product development timelines that enable the seed ramp up. We believe Enlist E3 soybeans launched in 2019 in the United States, and Canada are the most advanced weed control trade technology for soybeans. Following the positive on-farm performance of Enlist E3 soybeans in the fall of 2019, we received supportive feedback from growers, retailers, and independent seed companies. So, we have accelerated our ramp-up plans to deliver this important technology even faster than originally anticipated. We now estimate that endless E3 soybean penetration in 2020 will be 20% of total North America acres, up from the 10% previously indicated. These are just a few examples of tangible actions that underscore our target of growing 2-3% above the market over the mid-term. With that, I'll turn the call over to Greg, who will provide details on our financials.

Thank you, Rajan. Turning to slide 11 for a brief overview of our fourth quarter performance. Net sales on a reported basis improved 6% versus the prior year, primarily due to strong volumes in both North America and Latin America, partially offset by currency. Organic sales were up 9% with improvements in both segments. In seed, we delivered 13% organic growth led by both volume and price improvements, primarily in North America and Latin America. Specifically, we recorded higher sales in our multi-channel brands in the U.S. versus prior year due to improved supply chain performance. Continued penetration of new products in Latin America drove 8% pricing improvement for the quarter. In crop protection, organic sales improved 7% for the quarter on broad-based growth in most regions, which was led by North America with improved volumes from early demand for enlist herbicides in advance of the 2020 season. In addition, continued ramp of new products, particularly insecticides, in Europe, Middle East, and Africa, and Latin America, helped drive volume and price improvements. Operating EBITDA of $224 million improved by $174 million compared to prior year, largely driven by higher sales in both segments, continued realization of cost synergies, and gains on divestitures. Margins benefited from improved mix from PowerCore Ultra in Latin America and demand for new crop protection products like isoclast insecticide and Enlist herbicide. Gains on divestitures aligned with our ongoing best owner portfolio strategy resulted in approximately $70 million of gains in the quarter. R&D expense was lower by more than $50 million in the quarter compared to prior year due to cost synergies, timing, as well as focused actions to control spending. Turning to slide 12 for a year-over-year comparison of operating EPS. Currency was a 19-cent headwind for the year, primarily from the Brazilian real and the euro. Volume and price amounted to a 4-cent decline year-over-year, primarily due to weather-related impacts in North America and competitive pricing in soybeans. Costs were better by 8 cents on continued realization of merger-related synergies, which were partially offset by higher input costs in SEAT. Our base tax rate for the year was 19.6%, representing a reduction of $0.06 compared to prior year. We generated $0.10 of benefit from foreign exchange gains related to our balance sheet hedging program. Lastly, other was a $0.02 benefit, primarily from gains on divestitures. Turning now to slide 13, I'll provide our full year guidance for 2020. Considering our market backdrop, a few key areas that we continue to monitor include commodity price levels, near-term fluctuations in trade, and expected farm-level profitability. There continues to be uncertainties in each of these areas which impact customer planting decisions and input purchases. Our full-year guidance incorporates caution relative to these uncertainties. Touching first on net sales, We expect reported net sales to be approximately $14.5 billion, up about 4% to 5% over prior year. This primarily reflects normalized conditions in the North America market, coupled with continued ramp of new products globally in both our crop protection and seed segments. We expect global ag markets will grow at about 2.5% to 3% next year, as US corn and soybean area and production are expected to be higher in 2020 on a return to normal planting season weather. Global demand for agricultural products continues to be strong, helping reduce ending stocks in both corn and soybeans. Market opinions differ on the degree of increase for both corn and soybean area, and this will continue to materialize into the first half as growers make their ultimate planting decisions. At this point, we expect currency to be relatively flat year over year. However, we are closely monitoring currency movements in Latin America, particularly the Real, as well as employing hedging strategies to help manage volatility. On operating EBITDA, we expect to deliver about 12% improvement year over year. With our expected top line growth, and continued focus on delivering cost savings commitments, we expect to improve margins by approximately 100 basis points for the total company. Turning to operating EPS, we expect to deliver between $1.45 and $1.55 per share, which would represent a 5% improvement using the midpoint over 2019. We have provided detailed modeling guidance in the appendix of our presentations. Now, as it relates to key assumptions incorporated into our guidance, slide 15 provides more detail. Starting with above-market growth, 2020 expectations are led by the recovery to normalized conditions and planted area in the North America market. We are assuming roughly 11 million acres return with about two-thirds going to soybeans. We will update our assumptions when market data is available as part of the March prospective planting estimates published by the USDA. On pricing, we are confident we will realize gains in the low single digits for corn globally. This is a function of the technology we offer customers and the value it creates in the market. In North America, we expect pricing left in corn due to improved mix, primarily from the launch of chrome and proprietary seed treatment offerings. In soybeans, 2020 will be a continuation of 2019 in terms of price competitiveness. We expect these trends to potentially amplify this upcoming year and believe soybean prices in North America will be an approximate $50 million headwind on operating EBITDA year over year. In crop protection, new products will continue to ramp globally as registrations expand. In total, we expect growth from new product sales in 2020 to be approximately $250 million. Turning to cost, we remain committed and fully expect to deliver on the incremental $200 million in merger-related synergies. In terms of productivity, we expect to capture approximately $30 million in operating EBITDA improvement in 2020 as we execute against projects to deliver savings. As part of this, we are considering a restructuring plan that is subject to board approval. This program represents the necessary actions we need to take as an organization to build on a targeted cost structure that is best in class. We look forward to sharing more details as these plans further develop and we take action. We expect corporate costs to remain on target at less than 1% of sales. Cost of goods is estimated to have incremental costs of approximately $150 million, which includes higher unit costs in seed from lower yields and increased royalty costs primarily due to the accelerated ramp of Enlist E3 soybeans. To close, we expect 2020 to be a year of strong sales and earnings improvement in line with our midterm targets and are confident we have appropriately dialed in risks based on uncertainties as we see them today and are fully committed to deliver on the guidance we are providing. In addition, the organization is focused on maximizing opportunities as market conditions firm, and we look to provide updates on those as the year progresses and results materialize. I'll now turn the call back to Jim.

Thanks, Greg. Before we go to Q&A, I wanted to offer a few final comments on a remarkable year. Without a doubt, we will remember 2019 as a historic year for our industry and our company. As we look forward, I'm encouraged by our accomplishments as we navigated unprecedented market conditions to deliver a solid finish to the year. We've also laid the groundwork to deliver on our commitments going forward. I've said that Corteva is a different kind of agriculture company, and part of that difference is how we support our customers and partner with society. The agriculture industry has been facing one of the most challenging periods in history due to weather, trade, and regulatory burdens, which have limited access to new innovations and safe and reliable seed and crop protection products. We are encouraged to see a resolution to the trade dispute with China and the passage of the USMCA. We work closely with the US government to advocate for more transparent and predictable regulatory approvals as part of the trade resolution with China. which helped to secure important approvals for Enlist E3, Chrome, and Conquesta. I testified last July in front of the U.S. Senate Finance Committee in support of the USMCA as a vehicle to further expand and modernize North America trade and increase grower and consumer access to innovation. Both trade deals will be positive over the long term for growers and agricultural demand. We feel privileged to use our influence as a public company to drive positive societal impacts. It is our purpose to enrich the lives of those that produce and those who consume, ensuring progress for generations to come. With that, I'll turn the call back to Megan.

Thank you, Jim. Let's move to your questions. I'd like to remind you that our cautions on forward-looking statements, non-GAAP measures, and pro forma financials apply to both our prepared remarks and the following Q&A.

operator please provide the q a instruction thank you the question and answer session will be conducted electronically to ask a question please press star 1 on your telephone keypad if you're on a speakerphone please make sure your mute function is turned off to allow the signal to reach our equipment we ask that you limit yourself to one question to allow everyone an opportunity to ask a question we'll pause for just a moment to assemble the key And our first question will come from Joel Jackson with BMO Capital Markets.

Morning, everyone. Morning, Joel. Hi. You talked about in the past about trying to hit a free cash flow conversion target in 2020 of 50% or maybe a little bit better than 50%. There wasn't anything on the release, the presentation about that prepared remarks today. Can you give an idea of the puts and takes on free cash flow conversion, where it might be in 2020, where it might be in 2021? Thanks.

Yeah, great, Joel. Obviously, all of that is still coming together, and as we close our kind of first full year, we're getting new clarity around those numbers. Greg, do you want to share some more specifics?

Yeah, thanks, Jim. As Jim mentioned, 2019 cash flow was a complex year with the first half incorporating cash flow elements from our heritage companies, and the second half really represented Corteva's results and And that validated our ability to manage effectively our seasonal working capital movements. So we remain committed to our target of converting more than 50% of our operating EBITDA into pre-cash flow while continuing to grow the top line and improving our margins. Specifically for 2020, we're focused on driving working capital productivity that will translate into cash flow improvement in a year where our business is growing. And also, you'll notice in our guide, our capital expenses are lower by roughly $100 million than the prior year at the midpoint, which is consistent with our commitment to manage capital. And 2020, as I mentioned, will be the first year that we'll have standalone cash flows without discontinued operations and SPIN-related uses of cash. So, we'll continue to provide updates on our progress on free cash flow conversion for 2020 and throughout the year.

Thank you. Our next question will come from David Bakelider with Deutsche Bank.

Thank you, Jim. Just on the soybean price headwind, I think before you were looking at perhaps soybean price mix to be flat in North America with price down mix up maybe 2% each. Now I think we're looking at pricing in soybean to be down maybe 5% or more. One, is that correct? And two, what caused the change or the more severe pricing headwind in North America?

Great, David. Thanks for the question. You're right. We do expect our soybean pricing, primarily in North America, to be down kind of low single digits. And it is a direct response to kind of the market competitiveness that's going on and the aggressiveness that is out there in the market. It is early and early in the invoicing process for soybeans. And we're taking a very selective approach to how we respond to that. Tim, you're a lot closer to this on a day-to-day basis. Anything else you would highlight?

Yeah, Jim, I would highlight that we have very strong performance in our soybean product line, especially around our ready-to-extend portfolio. And we did come out with the expectation of being flat. The year started where our largest competitor in the Roundup Ready to Extend segment came out of the door by taking their prices down low single digits. So that was kind of the environment we entered the season in, and I think our value proposition and our performance advantage in services is holding up well. But it's important to know that we need to take this $50 million and use it on a very selective basis to kind of shore up our position. So this is not a broad price adjustment. It really is a very specific competitive response, and we can manage this on a customer-by-customer basis. So just to give you some idea that $50 million really represents somewhere less than one-half of 1% price adjustment. across that business. So it is very specific, very targeted, and I think it's really important that we use that to shore up our position in what is a very highly competitive marketplace.

David, I would just add, as I step back and we think about overall pricing, we always put that in the context of three areas. The market backdrop is one of them, and I think we've dealt with that pretty well globally, understanding what our customers are facing We always put that in the context of our product performance, and I think we've got about the best lineup in the marketplace from a performance perspective. So we're going to continue to price for the value that we deliver. And the third element that Tim mentioned is the competitive response out there. So, you know, it really is we're focused on one region and really one product right now, and everywhere else in the world, you know, I'd say across the board I feel really good about where we are.

Thank you. Next, we'll hear from Vincent Andrews with Morgan Stanley.

Thank you. Good morning. Jim, if I could just ask you on the Enlist rollout that you expect, when do you think you'll have Enlist and Pioneer germplasm? And then, as you do this, can you help us understand sort of the skew complexity and maybe inventory management decisions you're going to have to make, and is this going to impact working capital at all?

Yeah, great, Vincent. Thanks for the question. You know, from the beginning of the creation of Corteva, we've talked about creating more choices in the marketplace, and so we're very excited about the announcement that we put out today about our plans to accelerate the ramp-up of Enlist. I think about that ramp up over the next five years would be kind of the timeframe of where we would expect to get to peak penetration. And it's about a commitment that we're making to the technology and towards that longer term kind of proprietary trade and brand strategy that we've been talking to you about. So a real big proof point here today that we're on that path. The other thing to remember is we talk about enlist. It is a system. It includes branded seed sales. So you're right, there's a pioneer brand element to this, but also our other multi-brands. And maybe I'll have Rajan share a little more about that, around how we're going to manage kind of through the inventory cycle that you were asking about. Remember, this also gives us an out-licensing opportunity. So there's income and revenue from out-licensing. And it's part of that royalty improvement path that we've talked about. So with that, Rajan, we've got a project team up and running. We've got a detailed plan over the next three to five years to really manage all of those moving parts. Do you want to share a little more of those details there?

Absolutely. Thanks again for the question. Just let's start talking about inventory. I think inventory management is a key area of focus for us from a seed productivity standpoint, and we've got a lot of activities initiated as we transition platforms. We start really with no carryover from Endless into our germplasm. So we've got a very robust plan, so you should not expect an increase in inventory. We will continue to work with getting the best Pioneer germplasm with the Endless trait in there. We're already launching Endless in the Pioneer brand and with our multi-channel brand this year. So we've got a very robust inventory management plan which will ensure that the transition doesn't result in any increase in inventory. So thank you for the question.

We'll go next to Jonas Oxcard with Bernstein.

Good morning.

I was hoping to talk a little bit about the value of Conquesta. What kind of premium you're hoping, market share and ramp? And also, what happens to Conquesta if Bayer loses the patent dispute on Intacta that they're fighting right now?

Great. Thanks, Jonas. You're right. We're very excited to have recently received the China approval that I mentioned. We'll have that opportunity to stack Conquesta with E3 soon. for something, you know, for a product in the Brazil market that we believe will be differentiated. And it's, again, one more step towards that trade independence that we have talked about. We need still a little bit of time for that product to kind of be ready for the full launch in Brazil. One of the things we're waiting on is EU approval for the stack we've submitted, you know, and we anticipate that sometime in 2021 or so we'll get those approvals. We also have to go through the same process that we went through on Enlist around the breeding plan, accelerate the introgression of that trait into our background germplasm, and that process kind of starts now. So earliest commercialization could be the latter part of 2021, and it gives us a real opportunity to drive new market share. Our share in soybeans in Brazil is kind of in the low single-digit range here today. So, Rajan, anything else you'd add?

Yeah, I think just to add on the question, Jonas, about intact, we are watching that closely, but really it comes back to a value proposition for the growers. We feel very confident about the value proposition that Conquista will bring to the marketplace. The Brazilian farmers historically have been always willing to pay for the right technology which we bring there, and from a Conquista perspective, we are very confident that we should be able to extract value from for the technology that we are bringing there for them. So, looking forward to a rapid ramp up of progress.

Our next question will come from Jeff Zakakis with JPMorgan.

Thanks very much. On page four in your press release in your crop protection area, you have You have good growth in your major subsegments, but in your other category, I think you go from $155 million in revenues to $70 million for the year from $382 million to $253 million. What's behind that decrease? And because the decrease is so large, has it come to an end so that whatever is going on in that category will change for the better in 2020 as a base case?

Thanks, Jeff, for the question. You're right. That category covers a number of our other products in the marketplace. And as part of our portfolio work, and we talk about our best owner mindset, you see that we begin to rationalize pieces of those portfolios. And some of those products would have been in there with revenue, but very, very low margins or contributions to earnings. Rajan, anything else you share about that category?

I think, Jim, just building on what you said, I think on the other category, yeah, there are products. Sometimes we have third-party products, et cetera, that did not necessarily fit there. So we continue to reduce our sales in some of those products which have no impact on us. There's also some categories which is like a catch-all where you have a miscellaneous bucket as we are working through our systems to see what that is. So as that category reduces, I think the key message, Jeff, back to you is that we continue to expect a rapid ramp-up of our products as they move forward. There is a 30 basis point margin expansion in crop protection, and that is all a reflection of how we are managing our portfolio actively. So feel very good about the commitment we have made of 2% to 3% above market growth, which is going to be led by a rapid ramp-up of a lot of new technologies that cuts across all the segments. So no concerns there.

Our next question will come from John Roberts with UBS.

Thank you. Is Asia primarily a northern or southern hemisphere market for you? I should know that, but I don't. I don't know whether this quarter, and it was down meaningfully, is representative or is it seasonally low, and what's going on in there to cause that decline, especially in the crop protection chemical areas?

Yeah, John, thanks for the question. It primarily is a second-half market for us on a calendar year basis, which we kind of do group it with the southern hemisphere markets. type performance. Tim, do you want to share more specifics about what happened this year?

Yeah, I think Asia, we've had several years of very strong growth and we actually have business that transpires over the course of the year. It's hard to call it first or second. It really is seasonal business and you have multiple seasons in different markets so we actually do play in all parts. On the year, we did see overall growth in the region and growth in both seed and crop protection and continued strength in particular in the insecticide segment. So I think what hit us as we came through the year and maybe why we took a little bit off the top was, you know, you talk about the extended impact of the drought in Australia. That is significant. And we also had periodic droughts over the course of the seasons, especially in the ASEAN countries, so I think Indonesia especially. And at one point we did have a typhoon in the Philippines and all those things. do impact the seasonal business that we have. So it's not quite as, I guess, as tied to the calendar as... as we would have in another market. So it does play a little bit northern hemisphere, a little bit southern hemisphere, but throughout the year. So again, I think the highlight is we grew nicely in both seed and crop protection, you know, 3% overall in crop protection for the year. And again, double-digit growth in our insecticide portfolio, which again is is capped by our ability to supply those markets. So, you know, we're very satisfied. We believe we did outperform the market again, and, you know, we continue to have strong expectations for our business in Asia.

Yeah, a number of our new products that we're launching have real utility, as well as you've heard us talk about the insecticide expansions that we're making to continue to supply the Spinoza products, supply constraints that will really benefit Asia Pacific as we go forward as well.

Our next question will come from PJ Juvicar with Citi.

Yes, good morning. Morning, PJ. Yeah, hi, can you hear me? Yes. Yeah, thank you. So Jim, you have a lot of livers to pull in 2020. You have new products like Enlist E3 that will be on 20% of acres. you have Conquesta, Chrome, you have new products in crop protection, you have cost cutting, you know, you're addressing new markets. So when you look at all these levels, what are the most important levels for you in 2020 that could create potential upside? And then what are the big risks for you in 2020? Thank you.

Great, PJ. Thanks for the question. When I... think about the key other drivers of additional upsides to the plan that we have laid out. I think one of the areas would be pricing. We're basically priced through the first half with offerings that we have out there in the market. There'll be small opportunities here and there to make adjustments. But that second half pricing opportunity is ahead of us. And as markets unfold, we'll certainly have a very, very close eye on that. I think the second upside area revolves around route to market changes that we've been making. In the U.S., the multi-channel and multi-brand opportunities that you have there, and then in places like Eastern Europe where we launched the more direct approach and continuing to penetrate in Latin America, that's about driving share and margin going forward. And then finally, I think about the cost category. We're clearly laser focused on continuing to drive productivity. We're seeing that show up. You see good evidence of that in the fourth quarter. We're carrying great momentum going into the year. So we have a base plan, but with our Execute to Win initiative, we've got 20,000 employees now. all around the world, thinking like owners and bringing up ideas every single day about how to continue to improve productivity. So this will be another area where we're going to keep driving.

We'll go next to Duffy Fisher with Barclays.

Yes, good morning. Three questions around in lists. So Tim talked about your big Roundup Ready to Extend customer cutting price. Does Enlist have to match that in the market or can it move to more of a premium? Second, Greg talked about royalty costs increasing as you're ramping the Enlist trait. I think that surprises most people because you own the Enlist trait. So I think most people would have thought that was kind of a free on board. So can you talk about the mechanics of why the COGS increases as that goes up? And then your bump from 10% to 20% of Enlist this year, How much of that was driven by your own seed and how much of that was driven by third parties?

Great, Duffy. Thanks for the question. And you're right. There's a lot of moving parts within LIST. We're excited about the announcement and the ability now to talk about it at the accelerated pace that we promised you we'd be back to share with you as we closed out the year. Why don't I turn it to Tim and have you talk about The first and the third one, pricing and the improvement from 10% to 20%. Yeah.

Hey, good morning, Duffy. When I think about Enlist pricing today, I mean, this is – I think of this as really our first year of commercial sales. And so, you know, there's a tremendous amount of energy. And I wouldn't – I don't necessarily see Enlist E3 competing head-to-head with Xtend at this point in time. You know, there's, you know, significant – presence in the market from multiple brands selling the product as well as Corteva's brands. I would say what you're seeing is some companies are taking an approach around penetration pricing, really trying to go out there and drive trial and utilization from farmers. And as you can see, it's had a tremendous impact. So, again, I don't see it necessarily going head-to-head with the Xtend technology in the market per se. More about farmers excited to have a choice, a new option in the marketplace. And you're seeing those market dynamics where penetration pricing is really helping to create some strong momentum for adoption. When you think about the move from 10% to 20%, I think it's a combination of both. We're getting a very strong update on E3, particularly in our multi-channel business. And obviously, the many other companies who are in the marketplace today are seeing that same level of adoption. So I think it's broad and really reflects positive energy from from farmers, from retail channel and other seed companies for having that new choice, that new option available. So it's great to see that farmer interest really translate into orders at this point.

And then the other part of your question, Duffy, is yes, there are some short-term financial implications of the decision. that we've made, especially in the royalty area. We fully have dialed those into the plan that we have, the guidance we have. But, Greg, you want to share a little more detail around that?

Absolutely. Let me clarify a little bit that the royalty that's increasing is on the Xtend portfolio. So our 2020 royalty costs are expected to increase, as you mentioned, by $50 million. And this change, by the way, does not have a cash impact. This is related to a change for the rate at which we recognize per unit royalty expense for Roundup Ready to Extend. And this will require that we record per unit royalty expense associated with the Roundup Ready to Extend at the current rate rather than the average royalty rate over the life of the established contract since inception. So there's no impact to cash, as I mentioned, associated with this change. I'll also mention that there's a non-operating accelerated amortization expense associated with the prepaid royalties that we have reported on our balance sheet. Great.

We'll go next to Don Carson with Susquehanna.

Yes, a question on the current EBITDA walk versus what you've talked about in the past. As I see it, you're about $180 million lower on your EBITDA outlook. Is that all due to headwinds? In the past, you used to talk about perhaps $100 million of headwinds. In 2020 now, as I added up, you get about $250 million. And specifically, you used to talk about a $250 million benefit in 2020 from normalized North American market conditions. Is that still part of your assumption? And you also used to have $100 million benefit from new product growth. Is that now higher given some of these accelerations you're making?

Great, Don. Thanks for the question. As we built this 2020 plan, clearly it's aligned with our midterm guidance that we've been out talking about. This plan is absolutely aligned with that midterm. We put a plan together where we de-risked. We've got a lot of confidence in this plan. And we've got an opportunity, as you heard a minute ago, to drive for some upsides going forward. So I'm confident that we've appropriately considered the uncertainties as we see them today. And then the plan is consistent with some of the items that we have previously shared before. And the two broad categories, there's a number of growth items. The North America recovery is in there. The synergies and productivity are in there. and the new product portfolio driving forward. So all very consistent with what we've shared in the past. We've anticipated some headwinds, many of these very consistent with what we've also mentioned around soybean prices, higher COGS, some investments that we're making to drive growth. So, I don't know, Greg, do you want to maybe share a little more detail around those categories?

Yeah, Don, thank you for the question, and I'll just walk you through the numbers very quickly here. So you mentioned the North America market return of 250 due to normalized weather. We are positioned and ready to realize this effective rebound of the market year over year. New products, we're anticipating $100 million of margin improvement as we bring new technology to market. We talked about synergies and productivity. We're prepared and executing on projects to deliver that $230 million that we talked about. We also mentioned headwinds of about $100 million. Those do exist, and they're primarily related to lower yields than anticipated and increased commodity prices. That's all confirming information that we previously provided. So what's new? A couple things here. We talked about our global corn price increasing. We've got $100 million of global corn price that we've dialed in here. This is proof of the value of the innovation that we're delivering to the market and our ability to price for that value. We did talk about a $50 million potential reduction in soybean price. That's dialed in as well. We also mentioned $50 million cost for implementing our ERP system and then the royalty element that we just discussed of another $15 million. Additionally, we had some portfolio actions in the fourth quarter. As we executed our best owner strategy, those elements are not recurring, so we're not going to see those come back. And then finally, as Jim mentioned, investments in R&D and selling to bring our new products to market.

Thank you. And our last question will come from Adam Samuelson with Goldman Sachs.

Hello, can you hear me?

Yeah, we can hear you now, Adam.

Thank you. So a lot of ground's been covered here this morning. I was hoping maybe just to recap, the 100 basis points of anticipated margin improvement in 2020 Can you walk through the key kind of components, the pluses and the minuses there, and kind of where opportunities may exist or risks exist in your mind around that anticipated margin improvement? Thank you.

Great. Thanks, Adam. Clearly, a lot of that margin improvement is consistent with the new product launches that we've been driving, bringing new technology. So that would be one aspect. Second, you hear the strength of our corn portfolio globally and the pricing that we're really driving in that portfolio, and that's having a nice lift, kind of coupled with the new products. Chrome was the example that Tim mentioned earlier. And then finally, we continue to drive productivity. We've got the productivity related to the merger, the synergies that continue to flow through and finishing those out over the next two years. And then the new productivity that we're driving as a result of our execute to win work. So those are probably the three major drivers.

Okay. I think that's going to conclude actually the Q&A for the call today. We really appreciate everyone who joined the call.

That does conclude today's conference. Thank you all for your participation.