Good day and welcome to the Corteva Fourth Quarter 2023 Earnings Call. Today's conference is being recorded. At this time, I'd now like to turn the conference over to Kim Booth. Please go ahead.

Good morning and welcome to Corteva's fourth quarter and full year 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 thanks for joining us. I hope your year is off to a great start. There are several key takeaways I'd like to share with you today, including an overview of the market fundamentals, our solid 2023 performance, and an update on our path to incremental value creation by 2025 with a closer look at what's ahead for 2024. First, I would say that our 2023 performance validates the effectiveness of our value creation strategy and its key levers of portfolio simplification, royalty neutrality, product mix, and operational improvements. At our core, we are a technology company and last year, we had more than 400 new product launches. In Seed alone, we introduced 300 new hybrids or varieties, two new product concepts, and 41 new trade or stack registration approvals. In Crop Protection, our team delivered and launched about 140 new products in two new actives, Adavelt and Reklemel, the latter being the first of its kind, selective nematicide that also has beneficial soil characteristics. The outcome of the strategic and operational actions implemented over the last two years demonstrates the significant progress we have made in converting every dollar of sales into more cash and earnings. With this solid momentum, we entered 2024 on well-positioned and are confident in our ability to deliver value to our customers and other stakeholders. As we look ahead, overall ag fundamentals remain constructive. Large global crop production is being met with rare demand for grain, oilseeds, and biofuels. In North America, corn production and yield for the 2023-2024 crop year is expected to hit a new record despite the productivity challenges that farmers must face related to weather and disease, a testament to the importance of ag technology. Brazil could be the exception with weather influencing crop stress…

Thanks, Chuck, and welcome, everyone, to the call. Let's start on slide 6, which provides the financial results for the quarter and full year. You can see from the numbers that both for the fourth quarter and the full year, we continued to deliver operating EBITDA growth and margin expansion. Quickly touching on the quarter, sales and earnings were largely in line with our expectations. Organic sales were down 8% compared to prior year with Seed pricing gains offset by volume declines in both Seed and Crop Protection. Seed volume gains in North America and Europe were offset by volume declines in Latin America and Asia Pacific. In Crop Protection, as expected, we saw continued inventory destocking in both Latin America and Europe. Importantly, we did see volume gains in North America as destocking in the region seems to be largely behind us. Turning to the full year, organic sales down 3% versus last year with pricing gains offset by lower volume. This includes a 4% impact from product exits. Total company pricing was up 7% with double-digit Seed pricing and price gains in all regions. Despite the reduction in top line growth, strong operational performance translated into operating EBITDA of nearly $3.4 billion for the year, an increase of 5% over prior year and margin expansion of 116 basis points. And finally, free cash flow for the year 2023 was approximately $1.2 billion or 35% conversion rate on EBITDA. The improvement in free cash flow from last year was driven by increased earnings and working capital improvement, primarily inventory and accounts receivable with a partial offset from accounts payable. Let's now go to slide 7 to review sales by segment. Seed net sales were up 5% to nearly $9.5 billion. Organic sales were up 7% on strong price execution…

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.

[Operator Instructions] And we'll go first to Vincent Andrews from Morgan Stanley.

Thank you and good morning. Could I ask on the Crop Protection business if you could just talk about volume and price in the following manner. From a volume perspective in 2024, could you talk about markets where destocking is still ongoing. How bad are you expecting the volume to be versus markets where you think it's sort of finished? What are you expecting from a volume perspective? And then likewise, on the price side of the equation, can you differentiate at all about how price is performing in destocking markets versus those markets that have made completed or closer to the end of it?

Yes. Good morning, Vincent, it's Chuck. What I'll do is I'll give you the overview and then Robert can talk about some of the specifics in the market, and we'll try to do this as quickly as we can. Look, if you think about the overall situation, last year was a pretty tough year in global CP. Where we think we are this year is that the CP market, what I'd say broadly speaking, they're still imbalanced but only in a few regions. So Brazil is still a market where we have ample supply. And there are pockets, I would say, in Europe. But the US, the destocking is largely behind us now. And the market is functioning quite normally and I'd say, is healthy. When you look at it globally, the situation that we see for 2024 is that the overall global industry most likely will be down low single digits. And that is, as you rightly called out, it's really a function of price. Volumes seem to be stable and growing, and we expect that in 2024 and then our early look -- so then if you think about this, the first half, I think, is going to be fairly tough in CP. Things should normalize and stabilize in the second half of the year, and this is a broad statement globally. And then as we look to 2025, we believe that 2025 will look more like the historical CP industry. So low single-digit, return to normal growth is how we're sizing up 2025. And then that growth will be off of a new lower base. So that's the setup for 2024 and a first look at 2025. Robert, do you want to just talk specifically around markets?

Add a little bit of color around markets and some of our product groups. Start with, as Chuck talked about, the industry being down overall, but growth in volume, and we will reflect that as you think about walk around the world with our regions that by and large, we're up everywhere on volume. Price will continue to be a competitive market in all of our regions, specifically in Brazil, where destocking, as you pointed out, still needs to take place. We'll be watching to see how the rest of the season works out to see, how are we positioned for that 2024-2025 season there. But as you look at our portfolio, we're able to really begin to use or leverage our differentiated portfolio, the new products and Biologicals. And as you'll have seen in 2023, new and differentiated products were up 5% on pricing with a market that was in very much a headwind of price. And so we expect that those products, the new products, Spinosyns, Biologicals are all going to see upward gains in price and volume over this next year. Specifically in our Biologicals, when you think about the acquisition and the pricing that, that part of the portfolio uses, our EBITDA actually is going to be up 2x on a year-over-year basis with Biologicals as you look at the second year of the integration of the acquisitions and coming to full fruition there. So we're working for great things out of those three areas of our portfolio. And then specific to pricing, we will continue to follow the strategy that we had of price for value. Yeah, it's competitive. There's always going to be a price volume pull, but like I said, when you think about our portfolio of new differentiated and Biologicals making up nearly a majority of our entire earnings, we think we're in a pretty good position to be able to price through this as we continue to work through the year.

I'll go next to David Begleiter from Deutsche Bank.

Thank you. Good morning. Chuck, on your 2024 and 2025 guidance, you're expecting the midpoint EBITDA of $200 million in 2024, but up $550 million in 2025. Can you discuss why the accelerated growth in 2025 versus 2024 on EBITDA? Thank you.

Yeah. Good morning, David, and Dave can give me some perspective as well here. But if you start thinking about the situation, just the way we've looked at the market, the Seed market remains very healthy, and we've talked about sort of on-farm demand for top technical and Seed, but also for CP being very stable and very steady. So that is the backdrop, and then when you consider the fact that you've got the CP industry and if you take the comments we've just made, where we still have some destocking in 2024, that's going to impact our business. And that's reflective in how we've set up the guide and then where we believe we can hit in 2025 is really the impact of having that global CP market stabilize and then start to go again in 2025. And then there's this large bucket of sort of value creation, which is, we call it, controlling our controllables, it's self-help, it's cost, it's productivity, it's the royalties that we've seen improvement in expenses in our out-licensing royalty growing. If you think about that, in 2023, that number was approaching -- well, it was over $500 million. And we're going to see now going forward in 2024 and again, in 2025, somewhere between $350 million and $450 million of sort of self-help controllables, and that has some deflation. But that's really -- one of the big issues here is we're starting to see deflation move through our P&L, primarily now in CP. And because of how we manage risk management and hedging in our Seed business, there's going to be even more benefit as we get into 2025. So to your specific question, some of it has to do with just the rate and the timing of seeing some of the deflation come through the P&L. And then there are some accounting normalizations, Dave, that you should hit.

Yeah. I think the other key thing, David, related to this, is in 2024, we've got some assumed headwinds and really known headwinds. We've got those, particularly in SG&A as we lap 2023 where we had benefits of lower incentive compensation accrual, we've also got increased in our assumption in terms of merit and then there's just a number of other sort of discrete items that affect 2024. And as a result, 2025, when you look at 2025 compared to 2024, you won't have those same increments facing us. So that provides some of the lift as well in addition to the controlling the controllables that Chuck referenced.

Yeah. And maybe one last point here, David. If you think about the last two years, Corteva actually grew by about $800 million of EBITDA. That's the same plan for 2024 and 2025, a little less in 2024, more in 2025, but we saw that in 2022 and then a little less in 2023. So it should give -- at least when we look at it, it gives us some comfort that this path that we're on to 2025 with the adjustments we've made, and by the way, we did not adjust the margin. We're feeling very comfortable about that. We feel we are on the right path here.

Thank you. We'll go next to Joel Jackson from BMO Capital Markets.

Hi. Good morning, everyone. I want to go back to slide 10, which is the 2023 operating EBITDA bridge. So looking at the bridge, looking at the drivers, the tax over hand side, the cost component we're talking a lot about controllables and costs but actually, your bridge is showing that net-net costs are not driving any of your growth and even earnings in 2010. So you've got all these cost benefits, cost programs, lower seed royalties paying out to also have I -- guess, higher cost in SG&A and R&D. Can you explain that a bit and trying to put this all together why net-net high level, you're showing cost is not driving growth, but as far as your talking points on the right-hand side?

Yeah. It's a really, really good question, Joel. It really plays into the response that I gave to the prior question. But let me give you a little bit more color. Number one, the cost benefits, we think, are really very much there. We're going to get in CP manufacturing as well as overall productivity between both businesses. We've got an important contribution coming through. So, probably, let's call it, around $250 million of benefit of goodness, another $100 million in terms of net royalties. Now offsetting that, we've got higher R&D. And I'm talking now just the cost lines, some of the benefits and some of the self-help shows up in price or volume. But just on the cost piece of the walk, which is reflected in the slide that you're referencing. So, $100 million of R&D and then over $200 million in SG&A. And that SG&A, again, is made up of merit incentive comp accrual. We've got some additional bad debt. As you know, we begin each year with a normalized accrual in terms of bad debt. That's about $40 million. And then we've got other items, including the annualization of the SG&A for the Biologicals business. And that's against the backdrop of what Robert referenced in terms of the significant increase in EBITDA that we believe will experience and deliver in 2024. And then we just have a lot of other things that comprise the tail. One of those prominently, which you would recognize is ERP in 2023 with our Latin America deployment, which is our last major deployment in the ERP sector having completed U.S. and Europe. We're now in Latin America. That will shift from capital in 2023 to expense in 2024. That's about $40 million. So when you add it all up, that's why the line shows optically what it is. So, significant self-help, some of that is outside the cost area, shows up in price and volume. That shows up in costs. We've got some headwinds as well. But importantly, and I referenced this in the earlier question, that if you will, increase for 2024, it becomes significantly less. In fact, that increase goes away for 2025. So looking at that lift, that's part of the lift from 2024 to 2025. I hope that helps.

Thank you. We'll go next to Kevin McCarthy from Vertical Research Partners.

Thank you and good morning. My question relates to your direct input costs for each segment. In Crop Protection, it seems to me that maybe you're baking in for 2024, about $100 million of raw material cost relief or 2% to 3%. Is that fair? And then on the Seed side of the equation, are you anticipating any cost relief in 2024, given the decline in commodity prices? Or is it really more of a benefit to you in 2025? Maybe you could speak to that flow through would be helpful.

Kevin, sure. So in Crop Protection, as we indicated, the anticipated benefit we're going to see on the direct material side. In terms of looking at really, call it, the addressable spend and the opportunity for improvement and what we're experiencing in the second half of this year. So that low single digits, I think is an appropriate kind of range to be thinking about for 2024. On the Seed side, as you know, what you have is you have a delay when you look at spot or commodity costs in the market versus what shows up in the P&L. It's associated with as Chuck said, and as you know, the commodity hedging strategy that we utilize. So for 2024, very important percentage of those costs in terms of that commodity cost is actually related to grower compensation and procurement activity that occurs in 2022 and 2023. The other part of it is the FIFO accounting, which also influences the numbers on the Seed side. There's a lot of other variables besides commodity costs. But as Chuck said, we don't anticipate -- aren't currently planned, haven't baked into our guidance, a meaningful change in terms of year-over-year cost of goods sold for the Seed business.

Thank you. We'll go to Frank Mitsch from Fermium Research. Q – Frank Mitsch: Thanks so much. I want to focus in on Latin America. Obviously, you had weather impacts, which you had kind of foreshadowed in the last conference call. I'm curious as to what you thought that might overall impact have been? And then just staying with that region, obviously, you're expecting destocking to continue into the early part of the year, but you also referenced market dynamics in CPC which I assume I was referring to generic competition. I'm wondering what -- if you could provide an update on what you're seeing there in terms of the generic impact in Brazil in particular? Thank you.

Good morning, Frank, so yes, let me give you the high level and then I think it would be instructive if Tim, gives you a situation that's happening in Seed and then if Robert has anything to add in CP. but look, you're right. So -- and I'll just zero in, Latin America is a big diverse region for us. But really, this is a Brazil phenomenon. And if you look at 2023, I'd call it the perfect storm, right? We had CP destocking was probably the most pronounced in that country. It was hit with pretty severe weather challenges, which actually slowed down the destocking and certainly has impacted planted acreage of the safrinha crop. And then you've got all the kind of macroeconomic conditions on top of that. So it is going to take some time to sort out. We do see that we are heading in the right direction. The positive, I think, comment I can make is the long-term trends in Brazil, the structural opportunity that we see in that country has not changed. This will be an ag growth market for the future. But there's been some moving parts in Seed and CP, and I'll turn it over to Tim now to talk about Seed.

Yes. Thanks, Chuck, and good morning, Frank. So yes, I mean, you go back to kind of the backdrop heading into the season, we saw a pretty significant rapid decline in the commodity prices that was a result of the big yields and the resulting high carryover stocks from the last safrinha season. And then when you couple that with the, I would describe as highly variable weather conditions that really delayed the start of the soy planting season in the key markets across the marketplace in Brazil. And in some cases, that was drought or lack of moisture early on or in some places, it was excessive moisture as you went further into the South. And what it ended up doing was pushing a significant share of the soy into later planning window that really impacts the ability of the farmer to follow up with a corn crop that falls into an ideal planting window. So as you said, we talked about that in November, and we were sort of at that call it at that critical point when we needed to get that crop planted. And my best guess is somewhere around 20%, 25% of the corn -- or excuse me, of the soybeans were planted in a window that was not ideal for following up with corn. And I'm not going to try to peg how much corn won't be planted at this point in time. I spent a lot of time in the marketplace over the last three months, traveling across the major safrinha growing areas, discussions with customers and channel partners and certainly, a lot of feedback from our frontline commercial team there. But as we sit here today, we believe it will be somewhere, call it, a double-digit reduction in terms of the area…

Yes, Frank, when we began to look at or unpack a little bit more of Brazil, what's going on there, I think it's fundamental to reflect on what Chuck said. Brazil will get back to growth. It's just going to take a little bit of time. From looking at 2024, this destocking is going to last a little bit longer. We need to work through the first part of the year to have a little better view. But overall, this next year, we see the industry down in low single-digits overall, but we expect to be up modestly, primarily due to further penetration of our new products, the differentiated products, and then adding in Biologicals there. Specific to your question, though, around generics and the pressure there of pricing and competitive environment. Off-patent and generics have always been part of this market overall in the global market. It is a little bit stronger in Latin America and in Asia, but we've not seen any further pricing degradation coming out of the generic manufacturers. Production capacity, we've not seen any significant changes there either. However, there have been some plants built of late that are focusing on big molecules that are coming off patent in the next few years that will play a factor there, none of which are any of our molecules. In the last half of 2023, Brazil imports began to slow overall. And we continue to see that the generic profits are struggling in this low pricing environment. So, we expect that there will be some changes there as we walk through this year and next year. Specific to the pricing pressure, yes, it is exasperated a little bit in Brazil due to the former profit environment and the macroeconomic factors that Chuck mentioned there earlier. What this does is farmers begin to look at what are the next best alternative to save on the input cost. But our strategy that focus on the higher value, the differentiated products and the higher service is one that we think is still a winning combination. These high-technology products and high-quality agronomic service being excellent in these areas is things that will differentiate us from the competition. And we think we're in a pretty good position as we head into 2024 and then 2025 with our strategy in those areas. So thank you.

We'll go next to Steve Byrne from Bank of America.

Yes, thank you. I assume your Seed order book for North America is full at this point. And just wanted to ask your view on within that, how much of an increase in Enlist are you expecting as a percent of soybeans for 2024? And can you partition that $100 million reduction in net royalty into the buckets. How much of it is trade fee versus germplasm fee, both out-licensing and in-licensing. Those are four buckets there. And can you split that $100 million, and do you see any risk of Seed pricing going into the spring with potential competitive actions?

All right, Steve. Hey, good morning. I'll take a shot at all those. It's -- we're going little bit of time on North America Seed here. So I'd say where we're at right now, you touched on it. I mean, we've been live in the market since August 1st, and we spend that August-December window, working closely with customers, building proposals and securing commitments, and we feel very good about where our order book sits today. And I'd say pattern -- order pattern in terms of timing was consistent with past experiences and our expectations, and we're not seeing any change in terms of the mix of technology. And so that feels like a good spot rate there. In terms of the question on pricing, it's always a competitive marketplace. And I'd say this year, I'd say soybeans are probably a little bit more competitive than maybe on the corn side and a lot of hooks battling for the spots there. But as we sit here today, and we're roughly 70 days out from the planting window opening in the heart of the corn belt. Our prices are holding and we feel good about where we sit there. Customers understand the value proposition, and our team is focused on staying close and executing our plan. And so you never know what's going to happen, as I said, 70 days until the season really breaks here. But I think we're in a positive spot in terms of, call it, the stability around price. When you get into E3, I'd say where we sit today, order position is tracking as expected and our best estimate in terms of the market right now is about 60%. We see the soy market at about 60% converted to E3 this year. And again, remember, we don't have full visibility to our licensees and there's over 100 other companies that are selling Enlist E3 soybeans. And so we don't have perfect visibility there, but I think that 60% level is confident. So no surprises and things are tracking as expected. In terms of that royalty bucket, I'd say this year, and I don't know if I can split it into four, I probably won't try to. But the majority of the benefit that we're getting this year would be from reduced payment of royalties, primarily in soybeans. So that's the -- think of that as the primary bucket. I think as maybe Chuck had said earlier in his comments, we're going to see that transition, especially beginning in 2025 and beyond where royalties and the benefit from royalties will be greater than what the benefit is from reduction of royalties paid. So a pretty significant -- that will be a significant milestone as we transition there. So I think I touched on all your points there.

Thank you. We'll go next to Adam Samuelson from Goldman Sachs.

Yes. Thank you. Good morning, everyone. I was hoping to maybe just get a little bit more color on the free cash flow outlook, both the out performance in the fourth quarter as well as kind of the cadence in 2024. How do we think about the normalization in crop protection production, which will -- should your payables balance increase? How -- just how is that working capital kind of inflection maybe work through the year and any differences you would call out in working capital trends between Seed and Crop Protection because, obviously, there's very divergent trends happening in those two businesses?

Sure, Adam. This is Dave. So as you know, in 2023, we benefited. We had a strong finish, particularly in receivables and also advanced payments, which, by the way, really underscores the health of the US farmer in terms of income as well as their liquidity. So we had strength in terms of collections, which really enabled us to achieve that round number of $1.2 billion in terms of cash flow for 2023. For 2024, what our guide includes is continued progress in working capital. Notably, though, the mix is going to be a little different. We had accounts receivable in terms of the change of change and the same with inventories were positive in 2023 and significant payables was a use net for the reason you cited in terms of just the reduced procurement, particularly in the Crop Protection side related to managing inventories. For 2024, we're going to see receivables and payables, both being again, change of the change, being contributors in terms of cash and receivables is going to go the other way. We've got a little moderation assumed in terms of the cash to credit ratio for the collections at year-end. And we've got just with some of the market conditions we think DSO is going to go up on a year-over-year basis, modestly still very healthy on a year-over-year basis. But that's essentially, that mix shift in working capital, but an overall theme is overall continued benefit from working capital in terms of cash contribution in 2024. So we're excited to be at near 50% conversion in terms of the guide that we're giving you, precise numbers more like 49%, but round numbers, 50% conversion cash flow to EBITDA for 2024.

Thank you. We'll go next to Aleksey Yefremov form KeyBanc Capital Markets.

Thanks. Good morning, everyone. Last quarter, you discussed an influx of generic crop protection imports into Latin America. Has situation changed at all in -- over the fourth quarter?

Yes. So I think Robert covered some of this already. Good morning. I'd say, look, what we saw in the third quarter was elevated imports from broadly speaking, from generics entering Latin America. What we've seen since then as we work our way through the fourth quarter and then so far in 2024, is that, generally speaking, imports into Latin America are down and they're trending -- they're slowing down, they're trending down, and that includes generics. So I think we commented that what we're seeing at a price level is that we didn't expect that what we saw at, I'll call it, the peak was sustainable. And that's exactly what we think is happening here is there is a rebalancing happening, I think there's kind of a view of that you need to be profitable when you're moving these products around the world and into these regions. And so that's exactly what we saw is a slowdown. But I will counsel -- generics a part of this market. They're not going away. They serve a role, but it's not the primary area. In fact, we've made portfolio decisions to move almost our entire portfolio away from these product lines, because we feel that where we want to add value is differentiated technology service with strong agronomic support, because I think that's what farmers need and they're willing to pay for that. But to answer your direct question, yes, we've seen a slowdown in imports into Brazil, including generics.

Thank you. And we'll take our last question from Josh Spector with UBS.

Yes. Hi. Thanks for taking my question. Just a quick one, if I could ask on, you didn't talk about a shift from corn to soy as being a negative in your EBITDA bridge. Just given where you're at from a profitability in soy and a higher and less share, is that a meaningful factor as you look at acres shifting between corn and soy or is that more neutral? What's the sensitivity we should be looking at? Thanks.

Hey, Josh, good morning. I'll take a shot at this. So yes, I mean, I don't think it's any secret that corn is always more profitable for us than soy in North America. I think what's changing is that first, we anticipated this. This isn't a shock. And so we've been planning for this, and it's baked into our numbers right now. And I think the other important part is it's still -- there still is a difference, but the difference isn't quite as great as it had been. And the reason is today, because we're not dependent on somebody else's technology on soybeans. So soy relative to where we would have been three, four, five years ago is much more profitable. So there is still a difference there. We factored it in, but it's not quite the difference we would have had prior to the significant shift Enlist E3 within our business.

Thank you. And I'll turn it back over to Kim for any additional or closing remarks.

Great. And that concludes today's call. We thank you for joining and for your interest in Corteva. And we hope you have a safe and wonderful day.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.