Corteva, Inc.

Good day and welcome to the Corteva 4Q 2022 earnings call. Today's call is being recorded. At this time, I'd like to turn the conference over to Kim Booth, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to Corteva's fourth quarter and full year 2022 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 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 those 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.

Thanks, Kim. Good morning and thanks for joining us today. I hope everyone's year is off to a great start. There are several key messages I'd like to share with you today, including our strong 2022 performance, an overview of the market fundamentals, and an update on our value creation plan with a closer look at what's ahead for 2023. Corteva executed well amidst a dynamic market environment, delivering double-digit sales and operating EBITDA growth, as well as over 200 basis points in margin expansion. Enlist E3 soybeans reached about 45% market penetration in the U.S., and new product sales and crop protection reached over $1.9 billion for the full year, an increase of more than 30% over prior year. On capital deployment, we returned more than $1.4 billion to shareholders via dividends and share repurchases for the full year. Our 2022 results support the value creation plan presented at Investor Day, where we outlined a framework to achieve $4.4 billion of EBITDA by 2025 with a margin range of 21% to 23%. And we're on track to do just that. The framework is simple and straightforward and hinges upon four key elements, portfolio simplification, royalty neutrality, product mix, and operational improvements. The strategic and operational actions implemented since we announced the plan show that we are already making progress on accelerating our performance, and we were even able to achieve some of that value in 2022. We remain committed to our value creation plan, and 2023 is going to be a year largely focused on execution. As a reminder, a critical part of our refined strategy involves increasing investment in R&D. We're focused on delivering greater value to farmers through more differentiated and sustainably advantaged solutions and leveraging our pipeline to drive advancements in global food security and climate change. On the M&A front, we announced our intent to acquire Symborg and Stoller, two biological acquisitions which are both set to close in the first half of 2023. These acquisitions reinforce our commitment to providing farmers with environmentally friendly, sustainable tools with proven effectiveness that complement evolving farming practices and help them meet changing market expectations. As communicated previously, we expect that biologicals will be the fastest growing segment in the crop protection industry over the next decade. Turning to the outlook, we entered 2023 well-positioned with best-in-class technologies to continue to deliver market-leading value for our customers as we tilt our portfolio towards our differentiated offerings. This is a big step change year for our Enlist platform. We're expecting E3 U.S. soybean market penetration in the mid-50s and a royalty reduction benefit of over $100 million. Organic sales of new crop protection products, including our Enlist herbicide, are expected to grow by an additional 20%, and we're on track to cross a billion in annual sales with our Spinozans franchise. More broadly, we expect that favorable pricing and mix, in addition to productivity and restructuring benefits, will continue to outpace headwinds associated with cost inflation. We will also continue to monitor the effects of currency, which we believe will be a headwind this year. As a result, for 2023, we expect to deliver 5% sales growth in between $3.4 billion and $3.6 billion in operating EBITDA, translating into yet another year of impressive margin expansion. Now let's spend a few minutes on the market outlook on slide 5. Market fundamentals remain constructive as we enter 2023. Global grain and oilseed stocks are tight due to last year's below-trend yields, which were impacted by dry weather in the Northern Hemisphere and the war in Ukraine. Crop prices, which remain well above historic averages, are supported by tight supply-demand fundamentals globally. Farmers are financially healthy with strong liquidity, and they will continue to prioritize yield to meet market demand and offset inflationary pressures. Farm income is expected to be one of the largest ever, albeit below the record achieved in 2022. And demand for corn and soybean oil is expected to grow in 2023, supported by strong energy prices and policy adjustments focusing on low carbon energy sources. Crop area is forecasted to be up in most major crop producing regions in 2023. The USDA gave a January update indicating U.S. planted area is estimated to be 91 million acres for corn and 89 million acres for soybeans, both showing increases versus 2022. We continue to monitor the effects of weather around the globe, including the drought conditions in Argentina. Brazil is projecting that national grain output for the 22-23 crop season will be a new record, translating to low- to mid-single-digit growth. We expect these positive market conditions to continue throughout the year and could extend well past 2023, depending on supply demand dynamics, which is consistent with our previous messaging that global grains and oil seed inventories need to be rebuilt over at least two years. And with that, let me turn it over to Dave to provide details on our financial performance, as well as updates on the 23 outlook.

Thanks, Chuck, and welcome everyone to the call. Let's start on slide six, which provides the financial results for the quarter and full year. You can see in the table we finished 2022 with another quarter of strong performance. Quickly touching on the fourth quarter, organic sales were up 11% versus prior year, led by Latin America and North America. The strong organic sales translated into earnings of $370 million for the quarter, more than 200 basis points of margin improvement. Turning to the full year, organic sales grew 15% versus 2021 with broad-based pricing and volume gains. Global pricing was up 10% over prior year with notable gains in both seed and crop protection. Seed volumes were flat due mostly to lower planted area in the U.S., canola supply constraints, and the impact of a Russia exit in EMEA. Crop protection volume was up 9% for the year, driven by strong demand for new products. These new products delivered over $475 million of sales growth year over year, an increase of more than 30%. We delivered $3.2 billion in operating EBITDA for the year, an increase of 25% over the prior year. Pricing, product mix, and productivity more than offset higher input costs and currency headwinds. This earnings improvement translated into more than 200 basis points of margin expansion year over year, reflecting the strength in execution by our organization. And as Chuck said, 2022 is an early installment on our multi-year performance goals that we shared with you at Investor Day. So let's now go to slide seven. You can see the broad-based growth with strong organic sales gains in every region for the full year 2022. In North America, organic sales were up 10%, driven by crop protection on demand for new technology, including Enlist herbicide. Seed volumes were down versus prior year, primarily due to a reduction in U.S. corn acres and supply constraints for canola in Canada. Soybean volumes were up 7%, driven by penetration of Enlist. Both seed and crop protection delivered pricing gains, with pricing up 6% and 14% respectively. In Europe, Middle East, and Africa, we delivered 18% organic growth compared to prior year, driven by price and volume gains in both segments. Seed pricing increased 11% and helped to mitigate currency impacts. In crop protection, demand remains high for new and differentiated products, driving volume growth of 15% for the year. In the fourth quarter, volumes were muted by approximately 50 million related to the war in Ukraine and our previously announced exit from Russia. In Latin America, organic sales increased 23%, with notable gains in both price and volume. Pricing increased 16% compared to prior year, driven by our price for value strategy, coupled with increases to offset rising input costs. Seed volumes increased 4%, with some pressure due to tight supply of corn, while crop protection volumes increased 10%, driven by demand for new products. Asia Pacific organic sales were up 9% over prior year on both volume and price gains. Seed organic sales increased 23% on strong price execution in the recovery of corn planted area. Crop protection volume was down 1% due to wet weather and low pest pressure in certain areas, partially offset by demand for new products. So with that, let's go to slide eight for a summary of 2022 operating EBITDA performance. For the full year, operating EBITDA increased approximately 650 million to 3.2 billion. And as I covered on the prior slide, strong customer demand drove broad-based organic growth with price and volume gains in all regions. And we particularly benefited from the strong finish to the year, including favorable year-over-year performance in our functional spend. We incurred approximately 1.2 billion of market-driven headwinds and other costs over the course of 2022 driven by higher seed commodity costs, crop protection raw material costs, and freight and logistics. We delivered approximately $250 million in productivity savings, which helped to partially offset these headwinds. SG&A as a percent of sales was down more than 230 basis points versus prior year as we maintained disciplined spending and accelerated execution on certain cost actions. Currency was a $290 million headwind, driven primarily by the Euro and other European currencies. Standing back, the performance in 2022 is a result of strong execution by the organization, demonstrating our ability to meet increased customer demand while effectively managing costs through pricing, product mix, and productivity. Turning now to slide 9, I want to provide an update on our full-year pre-cash flow performance. Pre-cash flow for the year was approximately $270 million compared to over $2 billion in 2021. Their year-over-year decrease is driven by higher working capital balances, primarily accounts receivable and inventory. Receivables increases were largely due to higher sales, reflecting both volume and pricing. Importantly, DSL metrics remain healthy, benefiting from the strength of farmer incomes and also customer collections. In the case of inventory, you'll recall we had significant drawdowns in 2020 and 2021, particularly in crop protection. This inventory drawdown was driven by significant customer demand in the face of supply chain challenges, product availability, and shipping and logistics issues. This set of challenges was obviously not unique to Corteva and affected broader industry. In 2022, inventory increases reflect a rebuild of safety stocks to support growth, higher input and commodity costs, as well as the impact from market volatility. We have now been able to rebuild our inventory levels. We believe we have about the right balances at this time. Due to supply chain dynamics and their impact on working capital over the last few years, it's meaningful to look at the free cash flow to EBITDA conversion over the most recent two years rather than either year in isolation. Free cash flow conversion averaged 42% in the two-year period from 21 to 22. In 2022, we returned $1.4 billion to shareholders. including $1 billion in share repurchases, a clear commitment to deliver value for our shareholders. Our pension liability continues to be well managed despite volatility in both equity and bond markets. As of year end, the funded status of the U.S. plan was 92%, and we do not anticipate cash contributions to the U.S. plan in either 2023 or 2024. Let's now transition to a discussion on the guidance for 23 on slide 10. We expect net sales to be in the range of $18.1 and $18.4 billion, representing 5% growth at the midpoint, driven by pricing and strong customer demand for differentiated, best-in-class technology in increased U.S. planted area. Keep in mind that this growth is muted by approximately $600 million of product and geographic exits. 2023 operating EBITDA is expected to be in the range of 3.4 and 3.6 billion, a 9% improvement over prior year at the midpoint. Margins are also expected to improve with pricing, mix, and productivity actions more than offsetting further cost inflation and currency headwinds, translating to roughly 70 basis points of improvement at the midpoint. Operating EPS is expected to be in the range of $2.70 and $2.90 per share, an increase of 5% at the midpoint, which reflects earnings growth, lower average share count, partially offset by higher effective tax rate and interest expense. We expect our 2023 tax rate to be in the range of 22% to 24%. an increase from the 2022 rate of 20.6%, largely driven by U.S. tax law changes impacting foreign tax credits and the treatment of R&D expenses. Higher interest expense is driven by higher borrowing costs and higher debt balances. As you know, we carry significant commercial paper balances throughout most of the year to fund cash needs. Our 2023 guidance assumptions include a higher average interest rate on the commercial paper balances, as well as higher borrowing to finance growth, including the biologicals acquisitions. We expect that free cash flow will be in the range of 1.1 to 1.3 billion, with higher earnings partially offset by the higher cash taxes and higher interest expense. At the midpoint, this translates into a free cash flow to EBITDA conversion rate of roughly 34%, or approximately 40% over the last three-year period. On slide 11, I want to remind you of the value creation framework we laid out in September to accelerate our performance and deliver greater value to shareholders. The growth targets we presented included a 2025 operating EBITDA of $4.4 billion, or a 22% margin at the midpoint. This slide includes our 2025 performance targets from Investor Day, and it also reflects our actual 2022 performance and today's guidance for 2023. Execution on our strategic decisions, including focusing on core crops and markets, pricing for value, being disciplined in costs, is driving margin expansion while also enabling increased R&D investment. Again, our performance in 2022 was a major installment on the path toward 2025 financial targets. Coupled with our guidance for 2023, we're confident we're on track to deliver those targets. So let's now go to slide 12 to discuss the operating EBITDA bridge for 23. You can see the pricing in 2023 will be in the mid single-digit range, which will more than offset the impact from higher commodity costs and raw material inflation. Increased planted area in the U.S. and demand for our best-in-class technology, including continued penetration of Enlist E3 soybeans, are expected to drive volume increases in North America. Latin America seed volumes are expected to be up for the full year with the increase weighted to the second half due to supply constraints early in the year from last season's dry weather. Volume growth in North America and Latin America will be partially offset in EMEA, driven by lower expected corn planted area and an approximate $200 million impact from our decision to exit Russia. Demand remains strong for differentiated technology, which will drive increased volume in crop protection. Sales of new crop protection products will add approximately $300 million of incremental organic revenue, will benefit from the ongoing Spinoza capacity expansion, as we expect the franchise to generate more than $1 billion in sales in 2023. Volume growth will be partially offset by the approximately $400 million impact from our previously discussed product exits, including commodity glyphosate. And while we're seeing some slowing in the rate of inflation, as well as overall supply chain improvements, the operating environment is still dynamic. For the full year of 2023, we expect approximately 6% increase in market driven cost headwinds, including higher commodity prices, input costs, and freight and logistics. This impact should be largely weighted to the first half of the year, reflecting seed commodity cost impact and the sell through of higher cost inventory. This translates into high single digit rate of inflation in the first half of the year, dropping down to low single digit in the second half. In addition to these market driven costs, we expect additional headwinds on other costs of sales. Importantly, the outlook includes approximately $100 million reduction in royalty expense and an additional $300 million of productivity and restructuring benefits. Another key element of our cost structure and consistent with our multi-year plan, we are increasing our investment in R&D in 2023. Regarding currency, we expect continued headwinds. Our assumption is for a weaker exchange rate relative to the dollar for several key currencies, including the Brazilian Rai, the Euro, and the Canadian dollar. We estimate 3% to 4% currency headwind on revenues and low double-digit headwind on EBITDA. Now, it's important to note the guidance does not include the impact of the biologicals acquisitions, which are expected to close in the first half of the year. We'll provide an update for 2023 to include these acquisitions in the quarter in which they close. Let's now go to slide 13 and summarize the key takeaways. We had great performance in 2022 with 15% growth in organic sales, more than 200 basis points of margin improvement amidst a dynamic operating environment. We have favorable momentum and we'll carry that into 2023 and expect another year of strong performance and growth supporting our 2025 financial targets. And finally, we're investing in innovation in the future of Corteva. We remain committed to a disciplined capital allocation strategy that is a balance of investing for growth or returning cash to shareholders. Since 2019, our capital deployment was heavily weighted towards returning cash to shareholders as we returned more than $3.6 billion through share repurchases and dividends. In 2023, against a backdrop of M&A, this distribution will be tilted towards investing for growth as we close on the previously announced biological acquisitions in the first half of the year. And with that, let me turn it over to Kim.

Thank you, Dave. 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.

Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question also. Again, that is star one if you would like to signal with questions, star one please. Our first question will come from Vincent Andrews with Morgan Stanley.

Thank you and good morning everyone. Wondering if I could ask on the Value Creation Program, It looks like there probably was some upside from that in the fourth quarter versus expectations, just given how strong the quarter came in and what's normally a very weak quarter. Are you just finding that you're getting stuff done faster? Are you finding more stuff to do, or is it both?

Yeah, good morning, Vincent. That's right. So look, when we look at the performance for 2022 quarter, What I'd start with is we're very pleased with the year, and we had a very strong year across the board and really focused on execution. Obviously, the market fundamentals are robust. We've said that. We believe that conditions are going to be constructive through 2023 and potentially into 2024, depending on supply-demand. And when it comes to the value creation framework, right now we'd say we're actually a little ahead of the plan. And that's really driven by we got after some of the portfolio decisions a little sooner than we thought, and we took some of the cost management actions, and you can see that hit the bottom line. You know, if you look back to the value creation framework that we proposed in September, we indicated somewhere between 100 and 150 basis points per year. In 2022, we hit 200 basis points. So there's some acceleration there. We are finding new opportunities every day. So we'll give the market an update at the right time. But what I'd say right now is we're very comfortable with the $4.4 billion in the 21% to 23% margins by 2025. And 2022 sort of was a reflection of that with a bit of an acceleration from some of the actions we took a little faster than we thought we could get after.

And our next question will come from David Beglier with Deutsche Bank.

Thank you. Good morning, Chuck. On 23 guidance, the low end $3.4 billion, I guess the question is why is it so low given the strong tailwinds we're seeing? I understand cost, FX headwinds, but how conservative is that low end of the guidance range in your view?

Yeah, good morning. Let me give you the high level view that I have, and then I'll ask Dave to talk about Well, the low end, but also the top end of the guidance range, because there's a pathway to the top end as well. So first of all, what we'd say is that the guidance range obviously fits nicely within the 25 value creation framework. And as I've mentioned already, we're on track and a little ahead of schedule. I'd say that the guidance range also reflects some of the headwinds from the portfolio changes. So this is a big year of finalizing a lot of the country exits and the AI rationalization. Last year, we were pretty aggressive, as I mentioned. We did over a dozen country exits last year alone, and we have a similar amount lined up for 2023. So there'll be a lot of the portfolio decisions made in this year. And then finally, from a guidance perspective, there's a bit of a disconnect, and Dave will explain it in detail. We obviously included the higher interest rates to finance some of the growth, particularly around Stoller and Symborg, but we did not include any of the earnings contribution from those acquisitions. So there's a bit of a mix there from a guidance perspective. Now, when you think about the guidance range, I'll have Dave talk about the specifics. Go ahead, Dave.

Sure, yeah. Good morning, by the way. And, you know, if you think about the high end of the guidance versus, you know, the midpoint of the guidance, you know, clearly more corn acres in the U.S. would be a positive favorable cost. Realization of price would be a positive. And then we're also looking at some upside potential in terms of Brazil. To your point on the bottom end, it really still is very much a focus on our part on – currency impacts and also just the dynamics in terms of the rate of inflation, which continues to be, you know, somewhat dynamic. We're seeing, you know, positives, early indications on that, but that continues to be something we're very, very focused on. So you can think of that. And then, of course, in this business, there's always, Dave, as you know, weather impacts that we would consider. Chuck mentioned Symborg and Stoller. Our expectation is, you know, run rate for 2022 on those businesses in terms of EBITDA collectively is in the range of $120 million. So depending upon the time of the close, and Chuck, you may want to comment a little bit about that, you know, you could think of something like two-thirds of that coming through and actually benefiting us. And that reflects the fact, as you know, Stoller, with being Latin America focused, that would be towards the end of the year. Symborg, really Europe, some of that performance in earnings we won't really capture in 2023. But in 2024, in terms of run rate, you know, we're going to see some very attractive contribution from both of those businesses, which will be very additive, both, you know, obviously revenue additive, but EBITDA and EBITDA margin, additive for the company. Do you want to talk a little bit about timing?

Yeah, David. So if you recall in the prepared remarks, we mentioned closing the deal in the first half. Well, we've got a bit more of an update. We've seen some of the regulatory filings come in So what we can say right now is that we've received all the pre-closing regulatory approvals that are required for Symborg, so that's very good news. And we expect that to be in a similar position with the Stoller transaction very soon. So now we're thinking that we'll be able to close both of these acquisitions in Q1. So a little earlier than we thought, and of course, good news, as Dave indicated, These are going to be good earnings contributions and will be accretive to EBITDA and certainly even accretive to margins. And as we look at it, you know, we're pretty excited that this is a biological platform now that we'll be able to continue to grow. So we've got high aspirations for this part of our portfolio. And it looks like we'll be able to close both of these transactions in Q1.

Thank you. And our next question will come from Kevin McCarthy with Vertical Research Partners.

Good morning. This is Corey on for Kevin. In coming up with the 2023 free cash flow range of 1.1 to 1.3 billion, what are your assumptions for working capital in 2023?

Yeah, especially what we've assumed, particularly very importantly, a good question around inventory is our inventory levels in terms of inventory to revenue or inventory to sales. be basically a constant so in other words that would end up then being inventory would be a contribution of the change on the change would be a contribution to cash in 2023. two of the key items beyond working capital they're very important and and somewhat embedded in my prepared remarks earlier one was the expectation for higher interest expense obviously both amount of debt but also the rate on that debt in 2023. That'll flow through as a cash use for incrementally, 23 compared to 22. And then the other one is higher cash taxes. That's predominantly related to the R&D tax credit phenomena, if you will, the capitalization, amortization as opposed to expense benefit that we've been receiving. We're not unique in terms of that challenge, and of course, that's something that's gonna continue to be very much the focus of legislative lobbying, because it's really, we think, highly punitive. So it's really working capital actually ending up net of increase in receivables being a source of cash, and then higher usage of cash on both the interest and on the tax side.

David, maybe it's a bit more instructive to talk a little bit about working capital and specifically the inventory. If you go back to 2020 and 2021, obviously the entire industry, Corteva included, had significant supply chain challenges right across the board. We saw raw material shortages, logistics challenges. And as a result, we were forced to draw down our inventories to what we would consider to be unhealthy, unsustainable levels. And our service levels for our customers, especially around some of the products that are very unique to Corteva, so think about our seed portfolio, but also think about the Enlist platform, these service levels became unacceptable. So last year, we saw an opportunity to rebuild those inventories. We feel now that we've got the right service levels in place to support our customers. And don't forget, the global CP market is expected to grow mid-single digits this year. So we're preparing for another good year in agriculture. We're preparing for another good year of growth. And we feel we've got the service levels now to support our customers. Very important.

And our next question will come from Joel Jackson with BMO Capital.

Hi. Good morning. Just want to ask a question on free cash flow conversion. So... think you've been targeting about 50%. You talked about getting a 42% average across 21 and 22. Can you talk about why the free cash flow conversion is a little bit lower in 23? And then, you know, thinking about that question and thinking about some of your acquisitions this year, what kind of share buyback capacity do you have this year?

Sure, Joel. The sort of the short answer on the free cash flow conversion for 2023 relates to the points I made in the previous question, which really have to do with the higher, on a year-over-year basis, higher cash taxes and higher interest. There's some other factors in there, but those are the biggest components of that. In terms of capital allocation, as you know, and we've really demonstrated that balance in terms of our overall capital allocation, with history, if you will, up through 2022, very much, of course, weighted towards returning cash to shareholders. And that was, you know, I think very, very smartly executed during that period of time. 2023 is gonna be much more significantly tilted towards growth and specifically M&A with the Stoller and Symborg acquisitions. We anticipate continuing on our share buyback, but that's going to be at a – likely will be at a reduced level just given the significance of those acquisitions.

And our next question will come from Christopher Parkinson with Mizuho.

One of the best success stories, I think, Corteva in 22 was just the progress you've made in CPC margins. You know, you laid out some helpful framework in the PowerPoint, but if you could just offer some further color on, you know, first of all, just obviously the price cost environments, new product growth, exit of certain business lines. It seems like things are probably ahead of schedule as it pertains to your longer-term margin guidance. So just any additional framework you could offer them, that would be very helpful. Thank you so much.

Let me introduce very quickly, and then I'll turn it over to Robert for his comments. You're exactly right, Chris. I mean, it's the combination of of those things, the focus on differentiated products, new products, what we've been able to do in terms of managing headwinds associated with, by the way, not only cost inflation in terms of material costs or market-driven costs, but also currency. It's been a big headwind for both businesses to include crop. So the setup right now, I think, for 23 is positive. The thing to keep in mind, of course, And Chuck mentioned that. I mentioned it in my prepared remarks, is the headwind, just the volume headwind that's associated with the product and geographic axis, particularly the product axis for crop in 23. Robert, you want to talk a little bit about some of the formula?

Sure. Yeah, Chris, when you look at 22, just a quick recap on how do we do it and what were some of the key drivers there. Dave hit on a few of them, but it really starts out with our strategy around price for value and productivity. We continue to be able to offset inflation in that year. Inflation was about 10% as you roll the year up, and yet we were able to continue to put new technology on the ground, and the demand for it continues to grow up, continues to go up with the growers. Our new product growth finished up about 33%, as you've seen, and this is really a good story around that technology that continues to be a pull into the market. So, you know, these types of things with our supply chain becoming more resilient, you know, we delivered nearly 10% more volume last year. This will be the continued story into 2023 as we begin to look at, you know, how will we manage margins, what's that look like, and how do we get through the year? We're going to continue to follow our price for value strategy. We do expect we'll have a little headwinds in the first half of the year for inflation, and we'll work with that and productivity to continue to offset that. And then really what you look at in 2022 is structural changes that we're making. And with the exits that have started, we will finish up and we'll be about 70% done with all of our AI exits in 23. So 23 really becomes a transformation year that we begin to change our portfolio and position us for even better margin accretion as we move forward into the future.

Thank you. And our next question today comes from PJ Jukar with Citi.

Hi, good morning. This is Patrick Cunningham on for PJ. In crop volumes in the quarter, crop protection were down outside of North America, and it seems like fungicides took a pretty big hit. Can you walk us through why the crop chem volumes were so weak in the quarter? Thank you.

Sure. Q4 is one that played out really in South America for us, in Latin America. As you look at the big volumes, we have a strong northern hemisphere with Enlist continuing to go to fill tanks and took over a lot of tanks this Q4. But in Latin America, the drought is really bad when it comes to Argentina and southern Brazil. And so the fungicide growth that we typically would see there or we thought we would see didn't come through just recently. Wasn't a demand. And so that's really what the difference was in Q4 when you look at volumes. The other thing I would mention is roll back to Q4 2021. Brazil had mid-20s growth in that quarter alone. And so had a huge, huge mountain to compare against as well when you begin to look at Q4 versus Q4.

And we have a question from Steve Byrne with Bank of America.

Yeah, thank you very much. This is Salvatore Tiano filling in for Steve. Just wanted to ask about the settlement charges you're taking on Lorsban. I think this was the third quarter this year that you took a charge. And even that, can you start providing a commentary on what to expect next year for any charges? And what is, as we think about that, I think, $7 million this year, what is the cash flow impact from these settlements? Are they mostly for future cash flow impacted? Have you already paid these settlements? How should we think about that?

Yeah, this is Dave. So, you know, as you know, we really have not provided, cannot provide any kind of forward view. There's just no estimate that's available. that would allow us to do that. We do, will have an $87 million charge for the full year of 2022. You know, there's just, at this time, limited forecast visibility as to what that would translate to in terms of 2023. And we're really just not, you know, prepared to comment on that. In the same way on the cash side, I mean, I think that's very, very much a TBD, will obviously update as actuals occur and actuals progress.

And our next question will come from Frank Mitch with Fermium Research.

Yes, good morning. I wanted to follow up on the crop protection chemical growth that you saw in new products. Obviously, that was a nice success story for 22. The original guidance was for $300 million increase in 2022, and you came in at $475 million, and you're guiding again for $300 million in 2023. So I'm wondering what went right in 2022 and what could go right in 2023 or what could go wrong in 2023?

Frank, thanks. Hopefully more goes right than wrong in 23. But as you begin to look at new products, yeah, we had a great year, finishing up about $1.9 billion for the year in the sales of those products. And as you stated there, $475 million increase. The strengths around that really centered around technology. Three big molecules that led this. Enlist, primarily with the demand that we're following with Tim and the seed. And we're 80 plus percent at our last estimate now of acres over the top spray with Enlist. Arlex in Europe was a strong performer as well. And as you know, this herbicide is one that has a growing demand also. And then finally, I would say our insecticide of Inotrek was the third one that was a standout there, helping us grow this. When you begin to roll that now forward to 2023, we expect that our new products will continue to see high teens growth. You know, it's going to have three – those three products will be well over $300 million each in total revenue. And, you know, the upside there is that it's going to depend on more demand from our technology. It's strong. And we don't see a whole lot of downside from the new products primarily because, you know, farm fundamentals are healthy. Growers are setting on good profits. And then with that, you know, they're trying to maximize value. And to do that, you turn to new technologies to do that. And that's where we come to play in this area. So, you know, this is a good story that really helps us play out, I guess, a proof point of our strategy to build more differentiated portfolio. And these new products are a key piece of that.

Yeah, Frank, maybe I'll add one other point. It's not necessarily a new product, but we've got the new Spinozan franchise capacity now. that will come into the market in 2023. So beyond what Robert said around that existing portfolio, we've got a capacity expansion in one of the most profitable franchises we've got with Spinoza, and that'll start to go into the market, the new capacity, this year. So we're looking forward to good things from that franchise as well.

And moving on to Arun Viswanathan with RBC Capital Markets.

Great. Thanks for taking my question. So, just looking at the guidance, it looks like, you know, you've noted that the cost headwinds are largely weighted to 1H23. Is there any potential for maybe cost to surprise to the downside or upside? How would you kind of look at that? And if so, is the pricing that you have in place sufficient to offset some some higher costs if there is any possible, you know, increase, or would you be able to enact pricing to offset that? I'm just wondering, you know, what drives kind of the lower end of your range there?

Maybe I could just introduce, and then Tim and Robert, you guys can comment respectively on your businesses. We said, you know, and you correctly stated it, that, you know, the majority of our, call it market-driven headwinds, so think of that as commodity-driven and input costs as well as freight and logistics, the majority of that on a year-over-year basis will occur, about 80% of that in terms of our forecast is going to occur in the first half. And we'll see, you know, improvement slash, you know, relief still. We've got those costs going up, but at a much more modest rate in the second half of the year. And the big picture on the pricing, is we expect, as we did in 2022, that we'll see seed pricing more than offset those commodity costs increases, and our crop protection will see the ability to cover those costs. And by the way, it'll also offset the currency impacts that we've built into the guide and the EBITDA operations I shared with you earlier. Tim, you want to comment a little bit more about seed?

Yeah, Dave, you know, on the seed side, I'd say for the first half, we have a very good understanding of what our seed costs are, that seed we would have produced last year. And so considered in the barn and well understood in terms of the costs that we have there. And we've been live in the marketplace with pricing for really since August in North America. And, you know, given the where we're at in the market. We've got great performance, very good demand for our technology, and I would describe our pricing as being well accepted in the marketplace. And again, that's largely driven by good value proposition, our ability to go out there and demonstrate value to our customers. So North America in a great spot. We've been live in Europe for about three months and, again, understood what our cost position was, and, again, pricing. I was in Europe last week, and our pricing is holding well in the marketplace and great implementation. You think about exposure for the rest of the year on seed. Latin America, you know, we're still in the field producing our seed, in Brazil especially, but also Argentina. And so, we have a little bit more exposure, if you will, in terms of those costs. But obviously, we're working hard, and we factored that in, I think, to our guide so far. And in terms of pricing, we still have flexibility there. We're not live in the marketplace, per se. And so, we're going to continue to evaluate where we're at there. We've got a great track record of capturing value in Latin America. We believe we're positioned very well for value, strong value proposition. Again, we've got an excellent track record in terms of being able to capture value and confident that we're going to be able to more than offset what that inflation pressure is.

Then in crop protection, just to add a little bit to that, is that we continue to see, as I said before, mid-single digits inflation that will continue with us. It will be heavier in the first half than the second half. But our price for value strategy and productivity will continue to help offset that. So far, we're seeing good progress in all of our markets with what we're doing and what we're going to market with. And the other thing I'd say is just a comment that, you know, one of the key indicators for us is what's going on in the generic market and how is pricing holding there. And all the leading generic producers have come out and said that prices are stable for the first half of the year from what they can see so far. And so that's always a good indicator for us as well as what's price going on there. So we expect we can offset the costs using the same strategies that we've used in the past for crop protection.

And our next question will come from Joshua Spector with EBS.

Good morning. This is Lucas. I just wanted to go back to the path of the 2025 target. So looking at your EBITDA for this year, I mean, that seems to be progressing pretty rightably. You sort of highlighted why your free cash flow is going to be depressed in the next year. So you're kind of looking at like a, mid-30s conversion versus the 55 to 75 target. So could you just kind of help us bridge how the free cash flow is going to converge there towards the target range, and if you see any risks there now, given it's sort of more back-weighted versus what's happening with EBITDA?

I think I would just comment that we've got on a year-over-year basis, obviously, those additional headwinds that I mentioned to you. The other thing that I would mention is that we will get the cash contribution over time from acquisitions. It's not going to be significant, but it'll be important to the overall equation. But the other thing is just the growth in EBITDA that's going to occur over that period of time. So we also see some, call it, improvement as we look to more normal patterns in terms of the costs and inflation issues and some of the supply chain issues that we've been dealing with and industry have been dealing with in general. All of those are gonna be able to be contributors towards the targets that we've talked about. And by the way, just to reinforce again, the 22 performance combined with the 23 guide is, again, a very important statement we think we're making about the attainment of those 25 numbers.

Yeah, Dave, maybe just a couple more minutes on this topic. Look, when Dave and I look at the free cash flow conversion, it is obviously a focus for the company. So if you think about what we've done as an organization, we started with the portfolio and the strategy and then the operating model for Corteva. And I think we've made a lot of progress in 12 months in those areas. So now the next level of focus obviously is looking at the cash conversion. It is a high priority for the management team. It's a complete focus for us. And as we make the structural changes to the portfolio, I mentioned we still have some country exits, some AI exits. That's going to be looked at through the lens of earnings, of margin, but also of cash generation. And that was always the plan. So what I'd say is we're very comfortable with the path that we're on. And by the time we get to the end of 23 from a margin and EBITDA perspective, we're going to be halfway through this journey. And we believe that there's a pathway to get free cash flow conversion sort of north of where it is today as well. And that'll be a primary focus as we look through the rest of the portfolio changes that we're planning to make.

And moving on to Adam Samuelson with Goldman Sachs.

Yes, thanks. Good morning, everyone. I wanted to maybe come into some of the market assumptions that you have both at the industry level and at the Corteva level for 2023 and just maybe on the crop protection side. And I know there's some noise related to the portfolio exits, but mid-single-digit kind of market CPC growth, Help me think about Corteva volumes organically for Corteva in that context and any maybe differentiation by region and along those lines where you see channel inventories going into 2023 in your key operating regions.

Adam, thanks for the question of what's going on in the market. It's going to be a dynamic year, but as we look at it, we're expecting the market organic growth to be in the mid-single digits, call it 4% to 7%. With biologicals outstripping that, it'll be the fastest-moving segment. Overall, the demand continues very strong across all regions, and again, it's Growers are chasing yield, and that's our sweet spot, I guess is what I would say, with the products we have. You asked about channel inventory, and right now we see inventory to be about normal across China. regions with a few hot spots around some pockets that we're going to have to watch one being we talked about earlier the fungicide in in Latin America is is elevated a bit to a lesser extent Europe not not near as much but when a couple of areas in Europe and then insecticide in Asia is elevated as well because it's just been wet not had pest pressures But you roll all that together, those inventory levels, what we see in the channels is very manageable across the year, across the seasons. No issues there from a standpoint of will it work itself out. We do see that the pace of price for the year flattening as compared to a year-over-year comparison. But like we said before, mid-single digits inflation, we're still expecting for crop protection inflation. Again, more weighted towards the first half. I think the thing to watch is the global supply chain. So all things are trending in the right direction if you look at all the key indicators for the global supply chain market. But what I would say is it's stable. It's not getting any worse for the first time in a while. And, you know, I guess I'm cautiously optimistic that that continues to improve. But that's one to watch as well to see how does that drive the market as we move into this year. So overall, you know, from a market standpoint, it's poised to have a really good year. And we think we're sitting in a pretty good position across all levels there as well. Maybe a couple of comments on seed.

Yeah, go ahead, Tim.

Yeah, I think, Adam, when you take a seed this year, one of the big movers, obviously, is the shift back towards corn here in North America. We believe we'll have an increased area in both corn and beans, but that tilt towards corn is very important, clearly for us. We were still operating in a very healthy environment as well. Customers are are generally good in terms of what their farmer income is. And there's certainly, as always, demand for the latest and best technology that's going to help them be most productive. You know, the dynamics between corn and soy, you know, we watch that all the time up through, you know, final decision making, and it continues to tilt towards corn. And And I'm comfortable with that current $91.89 as a reasonable assumption. Around the world, certainly dynamics are different than what we see here in North America. In Europe, I'd say that we're probably more expecting corn to be flat-ish in the marketplace. And that's driven by a couple markets, including Ukraine, impacting that. Latin America, still strong momentum there. Certainly, we're in the midst of planting this safrania season. And here in a few months, we'll be out selling next summer corn as well as soybeans and then on to safrania. That all comes very fast, but still tremendous growth. growth across Latin America and no reason to see that Hector's won't be up, not just this season, but also in the coming seasons as well for Brazil in particular.

And we will go to John Roberts with Credit Suisse.

Thank you. Good morning. Actually, this is Edlin Rodriguez. Quick follow-up on seed for Tim. I mean, this is the first time in a long time where the seed business has a positive EBITDA in the fourth quarter. Can you talk about how sustainable that trend is going forward and also remind us what's driving that change?

Yeah, I mean, I'd say fourth quarter for us, it's our second smallest quarter. Let's not forget that. We're heavily, heavily weighted towards the first half of the year, and the big driver in the fourth quarter is certainly Latin America, that live market that we have, and that tends to be somewhat... It can change between fourth and first quarter, depending upon how timely that that Safrania season starts. And this year, I'd say we had a timely start to the season and very strong demand for product in Latin America. I think you're also seeing, you know, here in North America. You know, our business, we don't move a lot of Pioneer through the rep model because that business is direct-to-farmer, and so very little of that is taking place at this time of the year. But we are seeing, you know, an increase in the importance of Bravant in our multichannel business. And we would expect that to continue on. So it's never kind of set in stone. There's still some seasonality elements, depending upon how the year is going. But obviously, you know, part of it was pricing, part of it was volume, and certainly those are healthy factors. Those are healthy factors, and we expect to see Latin America business continue to grow over time. So that late end-of-the-year business is going to be there, and we expect our multi-channel and Vermont business to continue to grow. So that's certainly a factor that supported the fourth quarter. But it's a little bit of luck and obviously good execution here because it was driven by customer demand.

Thank you. That does conclude the question and answer session. I'll now hand the call back over to Kim Booth.

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.

Well, thank you. That does conclude today's conference. Thank you for your participation and have an excellent day.