Corteva, Inc.

Good morning and welcome to Corteva's second quarter and first half 2023 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, everyone, and thank you for joining us. In the first half of 2023, Corteva continued to deliver top and bottom line growth, with over 180 basis points of operating EBITDA margin expansion driven by strong demand for Corteva's proprietary technology. This is translating to another year of anticipated growth and significant margin improvement as we remain on track to deliver the 2025 financial targets we laid out at Investor Day last September. SEED continues what can only be called a terrific performance in the first half of the year with about 240 basis points of operating EBITDA margin expansion and double-digit organic sales gains in corn. North America is benefiting from higher corn acres and pricing actions, both of which offset higher input costs. Our market share in seed remains strong. In the U.S., the first half of the year saw double-digit revenue growth in Pioneer and Brabant, as customers recognize the value our products provide. We are pleased to see Enlist E3 recognized by the market. This year, Enlist E3 is the number one selling soybean technology in the U.S. We expect E3 beans to be on at least 55% of U.S. soybean acres in 2023. Further strengthening our portfolio, we launched PowerCore Enlist Advanced RA for Corn. providing farmers with the added flexibility of integrated refuge, along with advanced combination of above-ground insect control, herbicide tolerance, and industry-leading genetics. Available to farmers in 2024, this enhances the strong technology position for our leading seed brands, as well as creates new outlicensing opportunities. In crop protection, farmers continue to invest in products to enhance and protect crop yields. However, customers are adjusting their purchasing patterns to reflect the macroeconomic environment. A combination of factors, from interest rates to supply availability to working capital management, is motivating buyers, including retailers and distributors, to adjust the timing of their purchases to be closer to their intended use. We see these actions as a result of supply chain rebalancing and believe they could persist at least through the end of 2023. Our crop protection business remains resilient by focusing on levers within our control. The team is delivering on our strategy, including pricing for our new and differentiated technologies, as well as executing on portfolio and productivity actions. We have made excellent progress on building our biologicals business including the integration of our recent acquisitions, which are on track to deliver 90 million of EBITDA in 2023. And we continue to advance our pipeline of new AIs with the expected global launch of Reclamel Active later this year, pending regulatory approval. This is a first of its kind selective nematicide that targets harmful organisms while not impacting beneficial organisms in the soil. This reflects the continued journey of introducing new, sustainable, differentiated tools to the farmer. Agriculture fundamentals remain positive. Our products continue to be in high demand and we are laser focused on executing our strategy and becoming more efficient. At the same time, to reflect the current industry environment, we are adjusting our full-year net sales guidance down by about 4% versus the midpoint of what we guided last quarter, driven by muted sales growth and crop protection as the channel destocks. We are also modestly reducing the midpoint of our 2023 EBITDA guidance, reflecting the revenue reduction partially offset by strength of product mix, royalty reductions, and cost actions. Now let's turn to the market outlook. Recent USDA estimates have yields in the US to be below trend line for the third year in a row. Even with below trend yields, given forecasted production in the US and Brazil, ending stocks are expected to build, which may put pressure on prices. Commodity prices for the 2023 crop are expected to be down from recent highs, but still remain above historical averages. The continued impact of Russia's war on Ukraine, along with projected record demand for grains and oilseeds for food, feed and biofuels, are currently expected to keep prices at profitable levels. The demand for biofuels hit a record in 2023, with the expectation this will grow again in 2024. At the end of the day, the world needs to produce more crops with less land and a reduced environmental impact. This, we believe, is a recipe for our top-tier seed genetics and differentiated crop protection technology solutions. We're seeing strong demand for biologicals and biofuels, and we're investing in those areas. Therefore, our overall view is that we will continue to see favorable farm income and demand for inputs. In this environment, farmers are more incentivized to increase and protect their yields. Following a record year in 2022, 2023 is estimated to be in the top five on record for U.S. farm net income, allowing farmers, particularly in the Americas, to expand planted acres and also invest in proven technology to safeguard their profitability. Now let's take a look at the crop protection market in more detail. When we spoke to you in early May, we highlighted a change in buying patterns, driven by improvements in supply chain reliability as well as higher interest rates, particularly in Latin America, where we were expecting order patterns in the second half of 23 to look closer to pre-22. We also noted two weather-driven hotspots of elevated channel inventories, fungicides in Latin America due to drought and insecticides in Asia Pacific due to wet conditions. What became clear in the latter part of the second quarter is the combination of events that has caused orders to shift to a more just-in-time approach. This focus on inventory levels has resulted in a pullback in orders late in the second quarter, which was most pronounced in Latin America, followed by North America. Order books are closer to where we'd expect them to be in Brazil at this time of year based on historical patterns. We've included In our updated guidance, the push out of Latin America volume to the second half and continued destocking in North America. Against this backdrop, farmers continue to invest in top tier technology to drive productivity at the farm. For Corteva's perspective, we believe our renewed focus on differentiated and sustainable solutions makes us more efficient and better able to lead through these dynamic market conditions. The strategic and operational decisions we made last year have allowed us to get ahead of the crop protection industry-wide channel destocking and sets us apart from our peers. We continue to advance our strategy by strengthening our portfolio and investing in R&D to drive strong, sustainable growth. Our first half performance and continued demand for our differentiated technology provides confidence in our 2025 targets with clear value creation levers largely within our control. And now let me turn the call over to Dave.

Thanks, Chuck, and welcome everyone to the call. Let's start on slide seven, which provides the financial results for the quarter and the half. As Chuck said, and you can see from the numbers, we had a solid first half against quickly evolving market conditions. Briefly touching on the quarter, organic sales were down 4% compared to prior year with pricing gains in both segments more than offset by declines in volume and crop protection. Volumes were impacted by strategic portfolio actions and the exit from Russia, which combined represent an approximate 240 million headwind in the quarter. In addition, we saw delayed customer purchases due to weather, higher interest rates and supply availability, again, particularly in Latin America and North America. Despite the reduction in top-line growth, improved product mix and ongoing productivity and cost actions translated to earnings growth of 2% in nearly 140 basis points of margin expansion. Now focusing on the half, organic sales grew 2% with broad-based pricing gains. Global pricing was up 11% with strong execution in both seed and crop protection. Seed volumes were down 5% versus prior year, largely driven by the decision to exit Russia, with crop production volumes down 16%, which includes a 5% headwind from strategic portfolio exits. The top-line performance translated into operating EBITDA of nearly $3 billion for the half, an increase of 8%. Pricing, favorable product mix, and productivity more than offset higher input costs increased and volume and currency headwinds driving more than 180 basis points of margin expansion. So let's go to slide eight where you can see how the performance of our seed business offset the crop protection market headwinds in the first half for total company sales growth of 1% compared to prior year. Seed net sales were up 8% in the first six months to more than 6.9 billion. Organic sales were up 9% on strong price execution as we continue the price for value strategy and also offset higher input costs. Global seed price was up 14% for the half with pricing gains in every region led by North America and EMEA. Seed volumes were down 5% versus prior year. Gains in North America driven by increased corn acres more than offset fewer soybean acres. Volume declines in EMEA were driven by the exit from Russia and lower corn planted area, with Latin America and Asia Pacific volumes down due to delayed plantings and also seasonal timing shifts. And importantly, the exit from Russia represented a 3% headwind for the seed segment. Crop protection net sales were down 9% compared to prior year, to more than $3.9 billion. Organic sales were down 9% for the half with pricing gains more than offset by lower volume. Global crop protection pricing was up 7% for the half versus prior year, reflecting pricing for value of our differentiated technology as well as to offset higher raw materials globally as well as currency impacts in EMEA. Crop protection volumes were down 16% for the first half impacted by the shift in order patterns that Chuck referenced, as well as the roughly 240 million headwind from the strategic portfolio actions and exit from Russia. Currency headwind on both seed and crop protection was 3%, largely driven by European currencies. And finally, the biologicals acquisitions added 135 million of revenue since we closed on the deals in early March, which is reflected in portfolio and other. Taking a step back, the performance in the first half showcases the strength and complementary nature of our diverse portfolio. With that, let's go to slide 9 for a summary of the first half operating EBITDA. You can see the operating EBITDA increased approximately $220 million to just under $3 billion. Pricing and product mix, coupled with productivity and cost actions, more than offset declines in volume and higher costs in currency headwinds. And we took a significant step in the journey towards royalty neutrality, with more than $150 million of combined benefit from increased royalty income and a decrease in royalty expense driven by the continued penetration of Enlist. The nearly $450 million of net cost headwind was related to seed commodity costs and unfavorable yield impact, as well as crop protection inflation. Crop protection raw material costs were up about 5% versus the prior year as we sold through higher cost inventory. In total, market-driven cost headwinds and other costs were mitigated by the improvement in net royalty expense and 175 million of productivity savings. SG&A spent in the first half of the year was about flat versus prior year. It reflects the inclusion of approximately $50 million in SG&A from the biological acquisitions. So excluding the acquisitions, SG&A is down versus prior year as we maintain disciplined spending and execution on cost actions. Investment in R&D was up roughly $80 million for the half, aligned with the targeted spend increases to support our leading position in ag technology. Portfolio and other gains in the half were driven by the biologicals acquisitions, which contributed $22 million of EBITDA. Currency was a $228 million headwind, again driven primarily by European currencies. Turning now to slide 10, I want to take you through the updated full-year guidance, which reflects the current market dynamics. The change in order patterns in industry-wide stocking is reflected in the crop protection segment. We now expect net sales to be in the range of 17.9 to 18.2 billion, or 3% growth at the midpoint, roughly 700 million lower than the previous guide. This is largely driven by North America and Latin America crop protection. And consistent with the prior guide, we expect approximately 450 million of net sales for the full year from the biologicals acquisitions. Operating EBITDA is now expected to be in the range of 3.5 to 3.65 billion, 11% growth versus the prior year at the midpoint. The updated guidance is driven by lower top-line growth, partially offset by improved product mix, and greater than expected benefits from reduced net royalty expense, as well as productivity and cost actions. Importantly, with the strength of seed performance in the first half and crop protection's improved product mix, we now expect operating EBITDA margin of 19.8% at the midpoint of guidance, or more than 130 basis points of margin expansion over prior year, with growth in both seed and crop protection. Operating EPS is expected to be in the range of $2.75 to $2.90 per share, an increase of 6% versus the prior year at the midpoint. The change in guidance reflects lower earnings, partially offset by lower forecasted effective tax rate, and also a lower share count. Now, it's important to point out that the allocation of earnings between the third and fourth quarters Again, we expect order patterns to be more consistent with historical timing. This timing in Latin America sales, coupled with the seasonal patterns of the biologicals acquisitions, is expected to result in nearly all of our second-half earnings to be delivered in the fourth quarter. Free cash flow is now forecasted to be in the range of $1 to $1.2 billion. We expect share repurchases to be approximately $500 million for the year, including $330 million that we completed in the first half. And of course, we recently announced a 7% increase in the dividend, consistent with the dividend growth strategy. On slide 11, I want to remind you importantly of the value creation framework we introduced at last year's Investor Day. to accelerate our performance and deliver greater value to shareholders. The 2025 financial targets we presented included operating EBITDA of 4.4 billion or 22% margin at the midpoint. This slide includes those 2025 financial performance targets and it also reflects today's guidance for 2023. Execution on our strategic decisions including exiting low-margin commodity products while delivering a cumulative $250 million reduction in net royalty expense and disciplined cost actions. It's driving margin expansion while also enabling increased R&D investment. And while we're revising our 2023 revenue and EBITDA guidance, we're confident that we're on track to deliver the 2025 earnings targets. With that, let's go to slide 12 and summarize the key takeaways. Again, we believe ag fundamentals remain positive and demand at the farm level is stable despite the significant crop protection market pullback that we're experiencing. We believe Corteva is well positioned relative to the market despite the industry-wide destocking trends and some macro level headwinds. And our revised full-year guide is proof of the strength of our portfolio with continued sales and earnings growth in 2023. We believe this performance differentiates us from others in the industry. And finally, our expected 2023 performance supports our 2025 financial targets and provides us confidence that we're able to execute and grow. And with that, let me turn it over to Kim.