Corteva Inc (CTVA) — Q2 2021 Earnings Call Transcript

Good morning, and welcome to Corteva's second quarter and first half 2021 earnings conference call. Our prepared remarks today will be led by Jim Collins, Chief Executive Officer; and Dave Anderson, Executive Vice President and Chief Financial Officer. Additionally, Tim Glenn, Executive Vice President and Chief Commercial Officer; and Rajan Gajaria, Executive Vice President of Business Platforms will join the Q&A session. We’ve 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 for or statements 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 Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. On our Investor Relations website, you can find our earnings press release and related schedules, along with our supplemental financial summary slide deck, which is intended to supplement our prepared remarks for today's call. These items provide a reconciliation of differences between reported GAAP and non-GAAP financial measures and should not be considered a substitute for the measures of financial performance prepared in accordance with GAAP. It is now my pleasure to turn the call over to Jim.

Thanks, Jeff, and welcome to the participants joining the call today. Starting on Slide 4. We launched Corteva with a strategy grounded in building and delivering value to shareholders through new product innovation that drives organic growth and margin improvement, organizational efficiency and rigor, and disciplined capital allocation. As I speak to you today, I'm happy to say this strategy is working. Now that's a testament to the extraordinary efforts by our more than 20,000 colleagues worldwide over the last 5 years, beginning with the announcement of the intent to create Corteva. At its core, this team is focused on one thing: delivering. Time after time, they have demonstrated tremendous resilience and adaptability by pushing forward to bring our purpose to life, advance our strategy, and deliver our near-term business results, no matter the circumstances. So to them, I say thank you, as I could not be prouder of their relentless focus. Our first half performance is yet another solid proof point of our progress, with 6% organic growth and 17% operating EBITDA improvement compared to the prior year. In Crop Protection, we continue to build on our new product momentum and now expect to deliver $400 million in sales growth for this part of the portfolio for the year, up from our prior estimate of $300 million, a direct result of successfully advancing our pipeline. In fact, through June of this year, we have received nearly 90 additional new product registrations for our Crop Protection portfolio. Market fundamentals remain positive as growers look to best-in-class solutions to drive productivity and capitalize on what likely will be a record year for income levels in key markets such as the U.S. and Brazil. This helped drive pricing in Seed, specifically 3% increases in corn globally, as well as further penetration of the Enlist soybean system for 2021, now estimated to be on approximately 35% of U.S. soybean acres and that’s up from prior estimates of 30%. Execution is sound, and we are carrying substantial momentum. As a result, we are raising our guidance for full year. We now expect to deliver between $2.5 billion and $2.6 billion in operating EBITDA for the full year 2021, representing a 22% growth over the prior year at the midpoint. Importantly, we also expect to maintain the operating leverage we delivered through the first half, with an impressive 200 basis point increase in margins for the full year on the organization's continued agility in the face of ongoing supply chain volatility and cost inflation, which brings us back to value creation. In addition to strong earnings growth, we are also advancing our commitments on returning cash to shareholders. Specifically, Corteva returned approximately $750 million in cash to shareholders via dividends and share repurchases through the first half. And we recently announced a dividend increase of 7.7% and a new $1.5 billion share repurchase program. In total, we expect to return more than $1.2 billion to shareholders through dividends and share repurchases by the end of 2021. The bottom line: we are executing on what we said we would do. We are delivering operating leverage. And we are intently focused on advancing our strategy to deliver value for all of our shareholders. So looking at Slide 5, which has our financial results for the quarter and the first half. So quickly touching on the quarter. We delivered 6% organic growth on gains in both segments, led by North America and Latin America. This translated into earnings growth of 18% and margin improvement of more than 200 basis points, another solid quarter of continued growth and margin improvement. Now focusing on the half, sales gains were led by execution of our new product pipeline, where new Crop Protection products delivered $260 million in sales growth over the prior year. Additionally, Seed sales improved on increased planted area in U.S. soybeans and strong demand for corn in Latin America. We continued to deliver on our price for value strategy as global corn prices improved 3% for the half. Now Dave is going to provide you with much more detail on the earnings growth drivers for the half, but it's important to note the impressive level of margin improvement that we have delivered so far this year. Through the first half, we drove nearly 200 basis points of margin improvement compared to the prior year on price and volume gains across the portfolio, despite continued challenges on cost inflation that we and many others across various industries continue to face. Again, this first half performance is yet another important proof point that our value creation strategy is working, further reinforcing our updated guidance for the full year. So shifting to the market backdrop on Slide 6. Fundamentals remain strong despite volatility in the commodity markets. We believe global demand will ultimately drive growth into 2022 and beyond as local economies recover from the pandemic-related shutdowns. We're monitoring the impacts of the pandemic globally. And we'll remain agile to ensure we continue to support our employees, our customers, and our local communities. Now while the U.S. market remains attractive as we look to the near-term outlook, we see strong demand for best-in-class technologies in markets outside of the U.S. Take Brazil, for example, where demand for grain is leading to increased planted area and rising commodity prices. With our market-leading position for corn and one of the best new Crop Protection lineups, we are in a strong position to capitalize on above-market growth. While commodity prices will continue to react to short-term events in the industry, it's important to remember that the global diversity of our business is what provides an attractive outlook for growth. Together with sustained growth in global ag markets, led by robust global demand, we are pleased with the acceleration and opportunities to deliver value to our customers in these local markets through our best-in-class products and advantaged routes to market. Turning to Slide 7. I'll provide more detail on the balance and the diversity of our sales growth across the globe and provide further proof points for the half. In North America, organic sales were up 4% for the half. Seed sales benefited from increased planted area for both corn and soybeans, coupled with continued penetration of the Enlist E3 soybeans. As I mentioned, we now expect Enlist to represent about 35% of the U.S. soybean market in 2021, and that's up from our previous expectation of 30%. On seed pricing for the first half, competitive pressures in the soybean market were aligned with our prior expectations, with pricing down 2%. Corn price in the Pioneer brand was up about 1 point compared to the prior year. North America Crop Protection had a strong first half with 10% organic growth on continued demand for new technologies, including Enlist herbicide and solid pricing execution in response to rising raw material, freight, and logistics costs. Fungicide growth was also a highlight, up double-digits, as growers looked to take preventative measures to maximize yields. In Europe, Middle East, and Africa, organic sales grew 5% on strong pricing execution and record sunflower seed volumes. This growth was muted by an approximate $80 million to $100 million sales impact from corn supply shortages. In Crop Protection, our portfolio of new and differentiated products remains in high demand, including technologies such as Arylex herbicide and Zorvec fungicide, which enabled us to drive price and volume gains and gain market share in Europe despite the impact of product phaseouts. In Latin America, we delivered 23% organic sales growth on strong volumes and execution on our price for value strategy. In Seed, volumes grew 20% on share gains in the Brazil Safrinha and earlier shipments for the Brazil summer season. In Crop Protection, volumes grew 9% on significant demand for new and differentiated technologies such as Isoclast and Jemvelva insecticides. Pricing actions reflected strong product demand and helped to more than offset unfavorable currency impacts from the Brazilian real. In Asia Pacific, we realized 3% organic sales growth compared to the prior year on both volume and price improvements. Seed volumes were down, largely due to COVID-related demand impacts, primarily in Southeast Asia and India. Crop Protection organic growth of 11% was led by further penetration of our new products, including Rinskor herbicide and Pyraxalt insecticide. So Dave will now provide more detail on our first half performance and our upgraded expectations for the rest of the year.

Thanks, Jim, and welcome everyone to the call. Let's review our operating EBITDA performance for the first half of the year. For the first half of 2021, operating EBITDA increased by $335 million compared to the previous year, reaching nearly $2.4 billion, demonstrating our effective execution and ability to take advantage of strong demand for our products. The rise in operating EBITDA was driven by significant price and volume increases, which combined accounted for approximately $340 million, resulting from targeted commercial efforts and the introduction of new products across all regions. Sales of new Crop Protection products saw an increase of over $260 million from the prior year. We also achieved nearly 30% organic growth in seeds in Latin America, primarily due to strong corn sales in Brazil. Furthermore, we continued to leverage our yield advantage technology; global corn prices rose by 3% during this period. However, costs posed a $60 million net challenge to operating EBITDA, stemming from around $175 million in productivity initiatives and ongoing benefits from rationalizing our asset footprint, which helped mitigate $240 million in cost pressures, mostly due to market factors. We are operating in a landscape facing supply chain challenges and cost inflation. In the first half, we saw increased freight and logistics costs, a result of shipping demand outstripping supply globally. Prices for some active ingredients and intermediates, such as glyphosate, also continued to rise compared to last year. We are actively working to alleviate these pressures by passing on some inflation-related costs for our Seed and Crop Protection products while executing our productivity initiatives. Our disciplined approach led to over 190 basis points of margin expansion in the first half, with commendable contributions from our agile operations team. Moving to the Crop Protection segment, organic sales rose by 10%, despite a 4% negative impact from our strategic decision to phase out certain low-margin insecticide products. Strong demand for our new technologies resulted in significant sales increases, particularly more than $260 million from new product sales compared to the same period last year. Herbicides saw a 13% increase compared to the first half of 2020, thanks to the successful penetration of Arylex and Enlist. Fungicides grew by 26%, driven mainly by demand for Zorvec and Inatreq in Europe, the Middle East, and Africa. Insecticides increased by 3%, despite facing a significant 16% decline from discontinued products. The growth was primarily attributed to our differentiated Spinosyn technology, which saw a 14% increase during this period. Strategic price increases and favorable product mix led to pricing growth across all regions, particularly a 9% rise in Latin America and a 3% improvement in North America. Operating EBITDA for Crop Protection grew by 26% from the previous year, fueled by strong demand for new products and effective pricing strategies. However, this segment faced cost challenges totaling about $130 million during the period, which exceeded our productivity gains. These elevated costs appear to be establishing a new baseline, which we will continue to address through pricing strategies and ongoing productivity. Nevertheless, we achieved over 220 basis points of operating EBITDA margin improvement for Crop Protection in the first half, showcasing outstanding performance. Turning to the Seed highlights, organic sales increased by 4%, driven by solid pricing, market share growth in Brazil, early shipments for the Brazil summer season, and increased volume in North America due to higher planted areas in line with USDA estimates. We maintained our ability to extract value from our yield advantage technology, as corn prices rose by 3% from the previous year, with double-digit price increases in Latin America. Soybean volumes rose by 7% for the half, supported by approximately 5% growth in U.S. planted areas, while soybean prices fell by 2%, as anticipated due to competitive pressures in the U.S. Other oilseeds increased by 21%, largely owing to record sunflower volumes in Europe and higher canola volumes in Canada. Operating EBITDA for this segment improved by 13%, driven by effective pricing globally, ongoing cost management, lower royalties and bad debt, and favorable currency impacts. Despite higher input costs, our teams managed these challenges effectively, resulting in over 200 basis points of operating EBITDA margin improvement for the segment. Now, let's discuss our full-year 2021 guidance. Given the strong performance in the first half, we're raising our net sales guidance to between $15.2 billion and $15.4 billion, reflecting an 8% growth at the midpoint, with an approximately 2% boost from currency effects. We're also increasing our operating EBITDA guidance, now anticipating a range of $2.5 billion to $2.6 billion, indicating 22% growth at the midpoint. This adjustment reflects continued strong demand globally for our new products in both Crop Protection and Seed, alongside successful pricing execution in key areas and improved currency conditions. For the second half, we expect pricing to largely counter cost challenges, particularly in the Seed area, with volume growth, especially in Latin America Crop Protection, contributing to earnings growth. We will closely monitor exchange rate volatility, especially concerning the Brazilian real, where we anticipate a rate of 5.25 for the latter half of the year. In Crop Protection, we foresee a $400 million year-over-year increase in sales from new products, exceeding our initial estimations. This additional growth underscores the strong global demand for our technology. Regarding costs, the prevailing inflationary pressures are expected to persist through the year's end. As such, we now project a net cost headwind of around $125 million for the full year, reflecting $75 million in additional inflation costs from our earlier estimate, driven by higher input, freight, and logistics costs. We are vigilantly observing supply chain dynamics, while our operations team remains adaptable to customer needs. In terms of SG&A, we are maintaining disciplined spending and expect a 50-basis point improvement as a percentage of revenue for the year, despite increased commissions and variable compensation. Overall, this indicates a significant improvement and highlights our organization's strong commitment to executing our strategy. Moving on to cash flow, we estimate cash from operations to fall between $1.2 billion and $1.6 billion for the year, reflecting both increased earnings and investments in working capital to facilitate growth. We are focusing on improving cash cycle times, which is proving effective as we target enhancements in net working capital turns for the full year. We are also raising our CapEx spending target from $550 million to a range of $600 million to $650 million. This increase will support high-return investment opportunities and follows a comprehensive midyear review of our capital programs. We have seen a positive change in the funded status of the U.S. pension plan this year, thanks to both asset returns and discount rate adjustments, raising the likelihood of no required contributions to the plan in 2021 or 2022. Finally, as Jim mentioned, we are committed to returning cash to shareholders, with over $1.2 billion expected to be returned through dividends and share repurchases by year's end, including progress on our recently announced $1.5 billion program. Looking ahead to our planning for 2022, we anticipate continuing our momentum from 2021 with expected global organic growth, primarily through effective execution and further penetration of new and unique products. We are enthusiastic about the growth potential for Spinosyns, which we believe may approach $1 billion in sales for 2022. We expect seed pricing to contribute positively to earnings when offsetting the increased costs of goods sold stemming from higher commodity prices. Additionally, our transition to Enlist should lead to royalty improvements as we progress towards royalty neutrality by the end of the decade. Significant reductions in royalty costs are expected in 2023 and 2024, making next year a crucial step in our continuing enhancement of net royalties. We will also remain attentive to productivity as input costs adapt to the current market, emphasizing our commitment to execution on initiatives designed to partially mitigate any increased costs. This is our initial outlook for next year, and we will provide further details later this year. We see 2022 as a valuable opportunity for growth in earnings and margins as we implement our strategy and leverage our global presence and diversified portfolio. To summarize, our 2021 results feature nearly 200 basis points of operating EBITDA margin improvement in the first half and expectations of a similar improvement for the full year. Looking ahead to 2022, we foresee a positive setup, with growth across regions and a strengthening portfolio, thereby delivering strong operating leverage. I'll now hand it back to Jim.

Thanks, Dave, and that's a great summary. Before we get to your questions, I'd like to share a few final comments. Through our heads-down focused execution by an incredible global team, we've gotten through one of the toughest periods in the history of our industry. We emerged on the other side even better positioned to serve farmers and ensure the security of the global food supply and to deliver value for our shareholders. With our distinct competitive advantages, Corteva is positioned for long-term sustainable growth in a rapidly changing global agriculture marketplace. Now when I say sustainable, I refer to both Corteva's long-term growth and the way we will deliver it. As consumer preferences and environmental challenges change, farmers will need to adapt. And Corteva will be at the center of that relationship, deploying our knowledge, market presence, and industry-leading capabilities to assure the sustainable future of global agriculture by helping growers deliver more while using fewer resources. Our knowledge of farmers' needs comes from the relationship that we have built over decades through our advantaged route to market, which helps drive our grower-focused innovation. Now this is clearly showing up in our new product sales quarter after quarter and will continue to be one of our top priorities moving forward. And importantly, we have a number of exciting products that continue to progress through our pipeline in both segments. So finally, our first half performance and updated guidance for the year clearly demonstrates that all of the elements of our strategy that we built are working. Our team is advancing our purpose, driving a culture focused on our customers, delivering on our commitments through focused execution, building momentum on long-term value creation, and most importantly, growing progress for all of our stakeholders for years to come. So with that, I'll turn it back to Jeff.

Thank you, Jim. 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.

I appreciate the early look at 2022. You mentioned in the slide deck that you're on track with your midterm targets of 12% to 16% EBITDA CAGR between 2019 and 2022. I want to understand if that's accurate. This suggests an EBITDA range next year of $2.8 billion to $3.1 billion. Can you comment on whether you are comfortable being in that range next year?

Great. Joel, thanks for the question. And you're right. Our initial views on 2022 are, it's going to just be another great opportunity to continue to drive some really solid both top and bottom line growth. We think against what will be a really constructive market backdrop. The market could grow next year somewhere between 3% and 3.5%. And so we're carrying some fantastic momentum. And when you look at first half results, you look at the setup and the revised guide for the second half of the year, and we just believe we'll be carrying some really good momentum. That growth also, just to highlight, if you think about it, is very broad-based, right? We're leveraging a diverse footprint globally from a geographic perspective. But we're also leveraging a very diverse portfolio. And that's coming from the new product pipeline, but it's also coming from just great execution out there. So as we continue to not only drive productivity that will be constructive to margin expansion and also taking a really solid look at pricing going into 2022, I think when I step back, it's going to be very solid. And I believe it will be an opportunity for us to deliver above that market growth. That will be an opportunity for us to continue to deliver that margin expansion that you've seen. And then that entire framework then, Joel, if you step back from it, it really does align very nicely with those midterm target expectations that you and I have talked about before. So without going to a specific number, I believe we're well lined up here and that framework is right on track with those midterm expectations.

Maybe you could give us some early insight. I know your price cards are probably coming out later this month or so. If we look at sort of the pricing achievement that you had in the second quarter for South America in Seed, 10%-ish, is that a good proxy for how we should think about North American pricing for next year? Or do you think it could be better than that or will be a little bit less than that?

Thank you, Vincent, for your question. As we've discussed before, there are several factors influencing our seed costs as the season approaches and how they fit into our pricing model. The primary factor is yield, which includes our performance in seed production, the quality of the outputs from our production fields, and the amount of discard we have to manage. Growers secure their market prices for these production fields with a 12-month window, and this dynamic can fluctuate throughout the process. Currently, we are working with assumptions based on average commodity prices, yield, and quality. If I apply our current assumptions to our model, we estimate that our seed costs in North America could rise by approximately $175 million to $225 million. However, this is still subject to change as we await the maturation of the seed crop. We feel we now have a solid estimate of the expected increase in costs. As you mentioned, pricing is certainly our most significant lever to manage and absorb these cost increases. While I won't provide specific figures regarding our price cards, we plan to finalize and release those details later this summer, following our usual schedule. Rather than focusing solely on price specifics, I prefer to consider overall earnings. For 2022, I anticipate that our seed pricing strategy, after accounting for the cost increases I mentioned, should positively impact EBITDA. Ultimately, it's essential to look at our track record, including our successes in 2020 and our current performance this year, as we build momentum. The pricing results we’ve achieved this year through the first half, which reflect about 3% growth in global seed, demonstrate our team's focus and commitment to continuing this momentum.

Okay. And just as a follow-up, do you think this was the last year of sort of the soybean price competition in North America and that could turn positive next year? Or is there still some tussling to do out there?

Yes. It's always a really competitive market in that space. And clearly, we have a big technology transition going on. But maybe I'll ask Tim to say a few words about the soybean competition. Tim?

Yes, Vincent, as Jim mentioned, we are currently experiencing a significant technological transition in the industry. Enlist has made notable headway in the market, and new competitive products are also emerging. This has led to companies vying for the attention of growers with competitive pricing to encourage technology adoption, a trend we've observed over the last couple of years. It’s challenging to foresee the landscape for 2022. My perspective is that every year brings competition, but the focus has shifted more toward value rather than just price. In the soybean market, we will emphasize the value we provide, our position compared to competitors, and ensure our customers understand the benefits of our products and services. We have successfully positioned the Enlist system with our customers, who are realizing significant value not only from the Seed but also from the accompanying Crop Protection system. I am confident in our value proposition and optimistic that our contributions will be acknowledged in the market. Additionally, as Jim stated, we have a robust process for implementing and managing pricing that we will continue to uphold.

Yes. And Vincent, I'd just add that when I summarize that and discuss our pricing approach in Seed being beneficial to earnings, I'm referring to everything that includes corn and beans. It's basically the entire package. While we may have faced challenges in some areas, we will have opportunities in others.

Two-part question for you on the price cost spread. I guess the first part would be, with regard to the incremental cost pressure that you referenced, how much of that is occurring in Crop Protection versus Seeds? And then the second part would be, on the Crop Protection side, what is your outlook for pricing? You used the word agile a few times in describing the disposition. Maybe you could talk through where you're more confident or less confident in obtaining price, by region or product line, and how we should be?

Great, Kevin. So some of the numbers that I was talking about a minute ago answering Vincent's question were really focused kind of on Seed cost of sales flow-through. So we do have Crop Protection costs. And maybe I'll ask between Dave or Rajan to say a few words about the work that we're doing there as well. But you've seen good pricing already this year through the first half that's allowed us to go capture price to cover the raw material flow-through. And again, I'll have Dave share some of the specific numbers. And I think you just have to look at that momentum here in 2021 and that track record and know that we're going to continue to be aggressive as we go into '22 and beyond about how we think about that. So Dave, do you want to talk about?

Yes. I can share some insights about the market challenges. Specifically, regarding the $75 million increment you asked about, it's primarily divided into $50 million for Seed and $25 million for Crop Protection. Overall, a significant portion of this increase is attributed to freight and logistics costs. In detail, it includes expenses related to freight and logistics, along with Seed yield and commodity costs, glyphosate, and a slight adjustment in the updated figures for precious metals, primarily due to our operational strategies involving precious metals and the use of palladium. We have a solid understanding of these factors, and I commend our teams for effectively monitoring early indicators. From my viewpoint, considering my recent entry into the organization, it's quite remarkable to see the results achieved under these circumstances. Rajan, would you like to elaborate on the other aspect of Kevin's question?

Yes. Kevin, just to talk about CP pricing, talk about what Jim mentioned, the track record. Let's start with pricing for Crop Protection for the first half year. We had a significant price increase, 4%. And to give example, when you look at a product like Spinosyn, this is our differentiated product, we actually were high single-digit on pricing there. So when we look at our portfolio, the more we shift towards new and differentiated products, we've got around $400 million of growth this year, as Jim mentioned. We continue to see the momentum. That gives our commercial organization an opportunity to make sure that those products can get the value back. And that is consistent with our philosophy across both Seeds and Crop Protection. So have confidence on the productivity that was referred to by Dave. But I would say that our pricing philosophy continues to be strong. And we are delivering strong results in the first half, and we see that continuing next year, too.

It was interesting to hear about your royalty reduction comments, that begins next year. Can you talk about the bigger impact that happens in 2023 and 2024 in terms of your royalty reduction as well as some royalty income from in-licensing? And then why does it take until the end of the decade to become royalty neutral?

Thank you for your question, P.J. You're correct that we are beginning to see the impact of the reduction in royalty expenses. In the first half of 2021, we experienced a decrease in royalty expenses of approximately $40 million to $50 million compared to the previous year. This reduction is widespread across our entire portfolio of corn and soybeans, which is a positive development and represents significant progress towards our commitment to reducing royalties. As we consider how this will evolve over the decade, we have discussed previously the influence of the Enlist roll-off, which will contribute about half of the reduction needed to achieve our goal of royalty neutrality. By the middle of the decade, this will be closely linked to the ramp-up of the Enlist system as we reduce our use of Roundup Ready, allowing us to not only increase the volume of Enlist units but also enhance the proprietary value of those units. In the latter half of the decade, we anticipate a second phase of this process related to royalty income, which will help to offset some ongoing expenses that we will still incur. We will continue to license a few traits, and it's important to note that when we license a trait to a third party, it requires time for them to conduct their own breeding and integrate the trait into their products. Subsequently, there will be a delay before those units start to contribute to our royalty income, which is based on the number of units sold rather than those developed or licensed. Therefore, there will be a gradual buildup, and we see this as a long-term margin opportunity as we progress through the ramp-up associated with the initial phase of Enlist.

And just a quick question on FX. I was looking at your exchange gains and losses table. And a net loss of $15 million, would you consider that reasonable given the size of your company? I know you had a new FX strategy. So how much of your orders are for the upcoming Latin American season are hedged? Just talk a little bit about just sort of the new strategy and how is it working now.

Sure. Let me summarize that for you. We are essentially fully hedged for the second half of this year. Although we have some EBITDA exposure even with the hedge, we are assuming an exchange rate of 5.25 for the Brazilian real in the second half, while we are hedged at around 5.50. This results in a manageable exposure between these two rates. We are confident in our balanced outlook for the year, and we are employing a sophisticated, top-tier approach to handle this exposure. Thank you for your question.

Jim and Dave, just on the productivity savings. Looking at next year, should they be equal to above what you're realizing this year, which is, I guess, roughly $200 million?

Yes, Dave. This year, we are on track to achieve $250 million in productivity savings, which are helping us address many of the market-driven cost challenges we've discussed. Our productivity strategy aims to maintain this momentum into 2022, and we have a strong pipeline of initiatives. In Crop Protection, we will continue focusing on our footprint rationalizations. We've reduced our global manufacturing assets by 9, and these larger units require time to manage their supply chain effects and make necessary adjustments. There are still a few of these to address, and we expect them to impact us in 2022. We're also delving deeper into procurement now that Dave is here; he's brought valuable insights on our purchasing processes and how we source both intermediates and our various expenditures. Next year, we'll work on SKU rationalization to streamline our portfolio and introduce new products, while also reducing older SKUs to help with overall costs. Additionally, we are starting to apply advanced analytics to better understand our freight and logistics expenses, which have been significant this year. Leveraging these advanced tools will be crucial for improving our efficiency and driving productivity. On the Seed side, we're concentrating on increasing field productivity to maximize crop yield per acre. We have opportunities to educate seed producers and optimize our fixed costs across more output. Moreover, there are still seed conditioning facilities that may need to be streamlined in accordance with our growth areas; we've already reduced Seed assets by 34% since merging, a substantial figure, though some adjustments may still be needed. Lastly, I've always emphasized the importance of managing inventory and write-downs to ensure we produce only what is necessary for each season, avoiding excess that would lead to losses. I am pleased with our current plans and expect to see a positive impact as we move into 2022. What would you like to add, Dave?

I just want to mention that we will share details, Jim, about the ongoing productivity initiatives. We will provide more specifics as we approach the 2022 outlook and offer additional information on that. So, trust us on this. I believe it is a crucial matter.

I have a couple of questions around cash flows. Your cash flow from operation estimate is pretty wide, $1.2 billion to $1.6 billion. And so why is it so wide? Why is it so low relative to your EBITDA of $2.55 billion? So it's like 50% or 60% of EBITDA. On your cash flow statement, it looks like there's about $800 million that went out for pension and OPEB benefits, but your pension line just went down by about $400 million. So can you explain the cash flow constellation? What normally should be your ratio of operating cash flow to EBITDA?

Yes. No. It's a really good question. And it gets a bit confusing, because you may recall, we did a fairly significant change in our OPEB provision at the end of 2020, basically moving much closer, if you will, to market in terms of OPEB. And as a result of that, there's a flow-through of an accounting entry that we made at the end of 2020 that really affects the cash from operations presentation in the financials. So that's #1. And we can explain more of that offline if you'd like to go through it now in more detail. I think the important thing you talked about, which is really a key one, is just the range estimate that we're giving in the level of that range estimate in terms of cash from operations for 2021. It's reflective of a couple of things. Number 1, 2020 was really, in many respects, anomalous in terms of both cash collections and prepaying that we got from customers. And as a result of that, it's probably on a year-over-year basis somewhere in the neighborhood of about $600 million, if you will pull forward of cash or an increase in cash that benefited 2020. Now we're getting the benefit of that in 2021 because that's really helping us. One of the things we talked about is returning cash to shareholders. And if you look at our net debt, if you will, on a year-over-year basis, cash on hand minus debt balance, the numbers are actually quite attractive in terms of what we have there. And that's where the reflective of that very positive cash that we got at the end of the year. But the big difference, when you look at our guide this year versus last year, you look at the guide in terms of what you think of, is really that year-over-year change in working capital, mostly related to the timing of prepay as well as collections. And then the other part is we're building working capital right now. We're building working capital as part of the investment for growth. We're doing that in advance of what we see as a strong continued seasonal growth, LatAm, Europe, elsewhere. And the other thing that I would just add there, and I stated this, I think, in the prepared remarks, is the improvement we're seeing in operating working capital turns. So we've got the improvement of DSO, improvement in days sales inventory. And we're really tracking that very closely. So we're on top of this. Feel good about this, to understand the year-over-year difference that you're looking at.

All right. And then quickly for my follow-up. When you look at herbicides, fungicides, insecticides, is there a meaningful difference in operating margin between those 3 subdivisions? Or are they all the same?

Great, Jeff. As our pipeline starts to yield results and we are introducing new classes of chemistry, we are experiencing an improvement in margins within our insecticides portfolio, particularly with products like Isoclast. In herbicides, we have launched Rinskor and Arylex. We are also continuing to refine our offerings, including phasing out some of the oldest products as we mentioned late last year. Rajan, would you like to provide a more detailed summary on this?

Yes. I think, Jim, you are spot on. I think the biggest difference is not between the indications, but it is about the newness of the technology. So there is a lot of herbicides which would be 'commodity' type of businesses. And the margin there would be lower than the new products. With the new herbicides, like Jim mentioned, Arylex and Rinskor come, 2 examples, their margins would be as high as what a differentiated insecticide would be. But just the fact that there is a lot more herbicides which would be more commodity base, it might feel like the margins are lower in herbicides. So typically, across the industry, you would say that insecticides and fungicides have higher margins than herbicides, but that changes when you launch new products.

I wanted to discuss some of the factors influencing next year. You mentioned that pricing is likely to improve relative to costs if inflation stabilizes. Additionally, we have productivity enhancements and a robust new product pipeline. I believe that acreage will also contribute positively. Can you provide some insights on how we should be thinking about 2022?

Yes, I agree with your observations. We've discussed the improvements in pricing and the growth in our new product sales. Previously, we estimated about $300 million in additional year-over-year revenue from our new product pipeline for 2021, but we've revised that expectation to approximately $400 million. We plan to continue this positive momentum. The market should support growth moving forward, with overall market growth expected to be between 3% and 3.5%. Regarding acreage, we're monitoring that closely, particularly in Brazil, where we anticipate planted areas could increase by 4% to 5%. Demand for beans and corn in Brazil is strong, and growers have substantial resources and cash on hand, which they are investing into their operations, especially in the Safrinha market where we have a strong technological presence. Acreage in Brazil will be a key growth driver. In the United States, we may also see a modest increase in total corn and soybean acreage heading into 2022. While it may not be a significant rise of 5 million acres, there could be increases of about 1 million acres here and there. Overall, the U.S. market for 2022 looks poised for strong acreage as well.

Great. And just as a quick follow-up. On the raw materials side, have you guys looked into any strategic sourcing alternatives? I know that there are some issues on the chlorine side. But what can you share as far as raw materials and how those should evolve over the next couple of periods?

Yes. I'll have Rajan share some of the specifics. I just want to acknowledge the agility and the capability of our supply chain team through this year so far. As we came into late 2020, we saw these headwinds coming. We shared a lot of that with you as we set our guide for 2021. And we put our teams hotly focused on the agility of how would we alter supply chains, how would we make sure that we were understanding where we were going to be tight and get out ahead of some of these logistics. I think about what's going on in Brazil right now, we're a month or two earlier in our logistical supply chains of getting material to Brazil than we ever have been. And I think it's just a real testament to how quickly this team pivoted. But do you want to talk about some of the specific materials?

Absolutely, Jim. Arun, I just wanted to share 2 examples to reinforce what Jim said. And these examples are 2 that it's an ongoing process. But the first one that comes to mind is precious metals. So we use our key products manufacturing. And we were working with rhodium. And when we saw the prices of rhodium beginning to go through the roof, our technical teams worked very closely and made a shift to the catalyst they use to palladium. So that's an example. And that really helps does not only make sure that we have reliable supply and product, but also manage cost. Another example is in the broad category of co-formulants. We've had some co-formulants which essentially were a real challenge because of the Texas freeze. And our teams pivoted, have made some significant changes and ensured that there was no disruption of supply. So a short answer, yes, absolutely looking at that, but those are 2 specific examples here.

Yes. And I think we've got good visibility, Arun, of those as we're building our plan for 2022. We're going to continue to drive productivity to stay out ahead of a number of those. And as I said before, we've got that pricing lever well in hand as well to make sure we're covering these costs as they come.

Jim, it's a little early to wish you well in your retirement at year-end, but I wish you well. But could you give us an update on the succession process? And do you think you'll be introducing your successor on the next call?

Great, John. Thank you for those comments. I want to emphasize that I am fully committed to my role and focused on driving the business forward with my team. We are dedicated to delivering strong results for 2021, and I am determined to ensure we have a solid start for 2022. My primary goal at this moment is to support the organization through this transition. Our team is well-equipped to continue progressing the business, and I believe our performance in the first half reflects that. Our strategy is on track, and we are successfully increasing the adoption of new technologies. Additionally, as Dave mentioned, we have a clear understanding of our capital allocation model. While the timing has come sooner than I anticipated, it was crucial for any changes to occur when the organization is performing well. I am incredibly proud of and grateful for our team's commitment and focus. The Board is actively managing the succession process, and I can't comment on timing or potential candidates right now. I know the Board is dedicated to finding the right talent to ensure Corteva's continued success. In the meantime, I remain focused on making sure everything runs smoothly.

We thank you for joining our call today and your interest in Corteva. And we hope you have a great day. Thanks again.

Thanks, everybody.