Corteva Inc (CTVA) — Q4 2021 Earnings Call Transcript

Expectations and assumptions 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 is now my pleasure to turn the call over to Chuck.

Thanks, Jeff. Good morning, everyone, and thank you for joining us on the call and webcast today. Corteva executed well in 2021 as ag fundamentals drove strong customer demand. For the full year, the company delivered double-digit sales and earnings growth, meaningful margin expansion, and improved free cash flow. This included impressive performance out of Latin America, where the team delivered 27% organic growth on double-digit volume and price gains. In addition, we continue to advance our technology pipeline, where Enlist E3 soybeans reached 35% market penetration in the U.S. and new product sales in crop protection reached over $1.4 billion in total, an increase of more than 40% over the prior year. Our capital deployment returned more than $1.3 billion to shareholders via dividends and share repurchases for the year. This past year was certainly not without its challenges, including a dynamic operating environment that impacted most global industries and manifested as supply chain disruptions, raw material and labor shortages, and cost inflation. At the same time, the agricultural industry experienced significant demand for grain and oilseeds that easily outpaced supply, supporting crop prices and farmer income levels. Again, our teams executed very well in this environment. Turning to the outlook. We enter 2022 from a position of strength and look to carry forward our execution with best-in-class technologies to deliver value for growers and Corteva. This is overlaid against a market backdrop where solid ag fundamentals will drive customer demand and challenges from supply chain disruptions and inflation will persist. As a result, we expect to deliver 8% sales growth and between $2.8 billion and $3 billion in operating EBITDA for the year. Our priorities for 2022 are straightforward. We are going to focus on what we can control and execute on a balanced plan that is expected to deliver both growth and margin expansion. This includes continuing the penetration of new and differentiated products globally, capturing price aligned with the value of our products created for our customers, and delivering on cost reduction initiatives. To achieve our full performance potential, we have begun a fresh look at various ways to unlock value at a faster pace, including our global product portfolio and operational footprint. I look forward to sharing more of these reviews as we progress this work. As I've shared with many of you already, I am very pleased with Corteva's balance sheet and cash flow potential. We have the financial strength to execute on a disciplined capital allocation strategy and we'll focus on funding high-margin growth opportunities and returning capital to shareholders. Now let's go to slide five where I will provide a bit more detail on the market outlook and some of our assumptions for 2022. Similar to 2021, agricultural demand remained solid as economies around the globe continue to recover from COVID-related shutdowns. This is expected to drive record demand for grains and oilseeds in 2022, which we believe will keep commodity prices at the elevated levels we are seeing in the market today. Over the medium to long-term, we see constructive fundamentals continuing as possible new demand to support renewable fuels such as bio-based diesel will likely support healthy agricultural commodity price levels. Production will be vital in 2022 to balance supply and demand. For the U.S., planted area is expected to be 90 million acres for both corn and soybeans. Given the current relative economics of commodity prices, our assumption reflects some shift from corn into soybeans as fertilizer prices remain high and some growers may be inclined to rotate into beans. This provides further support for systems like Enlist, where customer demand and industry-wide penetration remain strong, and we anticipate it will grow to at least 40% of total U.S. soybean acres in 2022. Current weather conditions in Latin America remain something we continue to monitor given the potential for risks around production and grower planting decisions. That said, Brazil continues to be a very attractive market for growth, and Corteva has an increasing market position given our portfolio and farmer relationships. Planted area in Brazil for the 2022-2023 season is expected to increase mid-single digits, and growers will remain focused on best-in-class technology in both seed and crop protection to drive yields and maximize profit in this market. Growers' balance sheets and income levels are healthy, and we believe that customers will look to prioritize technology for 2022 to maximize returns even with higher input costs across their operations. And lastly on inflation. We do expect raw material and labor costs to continue to increase in 2022. However, we are confident that our global pricing execution will keep pace and more than offset inflation for this year. And with that let me turn it over to Dave to provide details on our full year 2021 performance and our guidance for 2022.

Thanks, Chuck, and welcome everyone to the call. Let's start on slide 6, which provides the financial summary for the fourth quarter and the full year. We ended the year with another solid quarter of continued growth. Compared to the prior year, organic sales in the quarter increased by 9% with gains in both segments. Global pricing was up 8% by continued focus on our price-for-value strategy with double-digit pricing gains in seed led by Latin America. We delivered more than $260 million of operating EBITDA in the fourth quarter, an 11% increase from the same period last year. For the full year 2021, organic sales were up 9% to $15.5 billion. Crop Protection growth was led by continued demand for new products, which saw an increase of more than $450 million year-over-year. Seed sales improved on strong pricing execution, particularly in corn which was up 5% globally coupled with increased planted area in the US and strong demand for corn in Latin America. Full year operating EBITDA of $2.58 billion was up 23% over 2020. Pricing and productivity more than offset cost headwinds driving almost 180 basis points of margin improvement. This improvement is a result of focused execution by the team, while managing through challenging supply chain dynamics and also continued cost inflation. Let's go now to slide 7 where you can see the strong top-line results across every region. In North America, organic sales were up 4% for the year. Seed sales benefited from increased planted area for both corn and soybeans as well as the continued industry-wide penetration of Enlist E3 soybeans, which represented about 35% of the US soybean market in 2021. We finished the year with corn price up 2% in North America, while soybean price was down 2% driven by competitive pressure in the market. North America Crop Protection delivered organic sales growth of 6% on continued demand for new technologies including the Enlist herbicide. Both herbicides and fungicides finished the year with double-digit growth in the region compared to the prior year. Crop Protection prices were up 6% in response to rising input costs. Crop Protection volumes were flat year-over-year in part due to the phaseout of select low-margin products and an approximate $70 million sales impact in the fourth quarter from supply constraints. In Europe, the Middle East, and Africa, we had organic sales growth of 6% driven by strong price execution and record sunflower seed volume. In Crop Protection, demand remains high for new and differentiated products including Arylex herbicide and Zorvec fungicide, which enabled us to drive price and volume and gain market share in the region. In Latin America, we delivered 27% organic sales growth on strong volume and price gains. Execution on our price-for-value strategy, coupled with price increases to offset rising input costs, led to price gains of 10% compared to the prior year. Seed volumes increased 14% driven by market share gains in Brazil safrinha, while crop protection volumes grew 19% on strong demand for new and differentiated products such as Isoclast and Jemvelva insecticides. Asia Pacific organic sales were up 3% compared to the prior year, with both volume and price gains. Seed volumes were down largely due to COVID-related demand impacts and competitive dynamics primarily in Southeast Asia. Crop Protection organic growth of 4% was led by continued demand for new and differentiated products, including Rinskor herbicide and Pyraxalt insecticide, both of which had volume gains in the region of more than 40% versus 2020. Let's now move to slide 8 for a summary of our 2022 guidance. We expect net sales to be in the range of $16.7 billion to $17 billion, representing 8% growth at the midpoint driven by pricing and strong customer demand for new products and our best-in-class technology. 2022 operating EBITDA is expected to be in the range of $2.8 billion to $3 billion, a 13% improvement over the prior year at the midpoint. Margins are also expected to improve with pricing and productivity actions more than offsetting further cost inflation leading to an approximate 80 basis point improvement at the midpoint over the prior year. Operating EPS is expected to be in the range of $2.30 to $2.50 per share, an increase of 12% at the midpoint, which reflects lower average share count but also a higher effective tax rate assumption compared to 2021. Lastly, we expect free cash flow to be in the range of $1.3 billion to $1.6 billion, which reflects more normalized receivables assumptions and replenishment of inventory in 2022. At the midpoint, it translates to an EBITDA-to-free cash flow conversion of approximately 50%. Let me talk about now the phasing of the first half versus second half revenue and operating EBITDA for 2022. On revenue, we expect strong revenue growth in the first half with 9% to 10% recorded growth, which would imply mid-single-digit growth for the second half. However, given the slower pace of inflation in early 2021 versus where we are today, we're expecting approximately 70% of our 2022 estimated cost headwinds will flow through in the first half. This is largely driven by the seasonal timing of seed costs, associated with higher commodity prices, and the pace of cost inflation in Crop Protection in 2021, which was more than weighted to the second half of the year. As a result, we expect mid-single-digit growth in operating EBITDA for the first half compared to the prior year, whereas our full year guide for operating EBITDA growth is 13% at the midpoint. Let's now go to slide 9, where we'll provide some further detail on the key drivers included in the EBITDA guidance. Consistent with prior views, pricing in seeds will more than offset the impact from higher commodity costs. For the year, based on demonstrated value creation of our seed products, we expect a global price lift of mid-single digits in local currency. Partially offsetting this is approximately $375 million of commodity costs largely from the US and Brazil. And again, we expect the majority of the cost headwind in seed will be recognized in the first half of the year. Increased planted area in Latin America and global demand for our best-in-class technology, including continued penetration of Enlist E3 soybeans are expected to drive volume increases in this segment. In Crop Protection, demand for new products remained strong and is expected to drive an additional $300 million in revenue for the full year. In addition, we expect cost headwinds to be approximately $300 million as the complex supply chain dynamics and cost inflation will continue at least through the end of the year. Similar to seed, the majority of these costs are expected to be recognized in the first half as we lap a lower cost basis in the first half of the prior year. Price increases will help mitigate these cost headwinds, including another mid-single-digit price increase across the majority of our US Crop Protection portfolio that was implemented in early January. As it relates to SG&A, we're expecting $100 million in higher costs from investments to support growth and also more normalized bad debt accruals compared to 2021. In addition to pricing, we will continue to use productivity initiatives to drive margin improvement. For 2022, we expect productivity savings of approximately $200 million across both segments. And with a stronger US dollar, relative to other key currencies, on a year-over-year basis, we estimate a $200 million headwind from translation impact and hedging program costs. In addition to our implemented hedging programs, we'll continue to pursue local pricing where possible to mitigate this currency impact. Turning now to slide 10. I want to leave you with what we view to be the key takeaways from today's call. Obviously, we delivered and are very, very pleased with our 2021 commitments, including impressive margin growth and cash flow while navigating a dynamic operating environment. As Chuck mentioned, we enter 2022 from a position of strength. We expect a year of attractive growth supported by strong customer demand across the backdrop of solid global ag fundamentals. We remain confident in our disciplined execution including pricing and productivity, which will in turn drive margin expansion for the year. Our balance sheet is strong, which provides us flexibility with our capital deployment strategy and allows us to build our track record of returning cash to shareholders while also continuing to fund growth opportunities. This is bolstered by improved funded status in our US pension plan which improved to better than 90% at the end of 2021. In 2022, we expect to return $1 billion to $1.5 billion of cash via dividends and share repurchases. This is on top of the more than $1.3 billion of cash returned in 2021. And it's a clear indication of our commitment to deliver value to our shareholders. Combined, we believe this further differentiates Corteva as we're well positioned to deliver value in 2022 and the years to come. And with that, I'm going to hand the call back over to Jeff.

Thanks, 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.

Hi, good morning, Chuck and Dave. I understand that the $2.95 billion leaseholder target midpoint was just a placeholder. Now you're indicating that it's about $50 million less than what was mentioned. Can you discuss the $50 million difference in light of all the various factors you've outlined? Additionally, is most of this attributed to currency? Could you also provide some insight into the currency outlook for 2022 compared to what you anticipated three months ago?

Yes, good morning, Joel. You're correct. The new element we’re considering is currency. Let me provide some context regarding our guidance and the current market situation, and then I’ll hand it over to Dave for more details on currency. First, 2021 was a strong year for agriculture, with high demand for our products and increased prices across the board. Farmers’ financial positions are solid, and we anticipate a similar trend in agriculture for 2022. At the moment, our order book is full, which means that this market is focused on supply and price execution. Corteva is well positioned in both areas. The guidance we provided today of $2.8 billion to $3 billion in EBITDA reflects the current time of year. Keep in mind that crops haven't been planted in Europe or the United States yet, along with the market uncertainties we’re facing, particularly concerning costs and inflation. As for your question, our midpoint of $2.9 billion indicates double-digit growth and aligns with our previous targets, but it includes a new consideration regarding currency headwinds. What we are seeing now is our best assessment at this point. The Corteva team is concentrating on managing costs and reducing downside risks while enhancing our supply chain resiliency, aiming to optimize both pricing and supply execution. We’re optimistic about our position, but it’s early in the season, and this is our best thinking for now. As usual, we will adjust our guidance as we advance through the quarters and expect to narrow our range over time. Now, to address your specific question on currency, I will turn it over to Dave.

Sure, Joel. You're correct. As Chuck mentioned, currency is a key factor in our considerations and planning. Regarding currency, these are our current best assumptions. We utilize third-party inputs for this, and as you know, we have some hedged positions coming into the year, although most are cash positions. The translation hedging we do is quite limited but included in our assumptions as well. Comparatively, the difference from what we provided back in October is about $100 million, which highlights the variance against our previously issued guidance or reinforces our mid-term guidance range. To offer some perspective, if we look at 2022 and adjust for currency, instead of seeing an 11% revenue increase, we could anticipate a greater increase, potentially around $17.1 billion. Furthermore, in terms of EBITDA, instead of a 13% increase at the midpoint of our guidance, we would see around a 20% increase, putting us close to $3 billion for the midpoint of the guidance. This translates to a significant margin improvement, roughly 140% to 145%. While this is just straightforward math, I hope it provides useful insight into the point you're raising.

Thank you.

Thank you. Good morning everyone. Maybe you could speak a little bit to the incremental seed cost inflation versus what you laid out three months ago which I think is about $100 million higher? And I guess a couple of ways to go about this is first you're now anticipating a greater gross amount of inflation in 2022 than you estimated for 2021. And clearly the commodity price increases in 2021 are far more significant than in 2022. So, I wonder if you could just bridge that. And maybe if you can just also help us understand how much of this inflation is coming in corn versus soybeans versus the balance of your seed portfolio and if it's related to any particular geography or associated with the uptick in Enlist acres to that 40% penetration that you're looking for?

Sure. This is Dave. I'll take the first shot at that, and then maybe Rajan can add a bit more detail as well.

Absolutely, Dave.

Yes. The three main factors to consider are that our reference point in October for seed cost inflation was in the range of $250 million to $300 million, approximately $275 million. Currently, it has increased to $375 million, which is a $100 million rise. The significant impact is mainly from commodities in the EU, although there are other contributing factors. Additionally, we are facing some headwinds from yield, and freight and warehouse costs are evenly distributed among these three areas. Rajan, do you have any further insights on the commodity costs?

So just to build on that and Vincent to answer your specific question. The crop that we are talking about from a commodity standpoint in Europe would be gone I think. In fact, from a North America perspective, all the numbers were baked into the third quarter so nothing has changed. From a yield standpoint, we and the whole industry has had a tough thing with canola especially in Canada. And the yield impact there is increasing costs up versus what we had expected the last time we had said this. And the freight and warehousing this really goes across the board. We've got big increases not only in Brazil but also in North America. We've got some actions planned with advanced analytics et cetera to try and see what we can do to mitigate. But at this point of time that's where our cost increases versus the last time are coming in. That said, we feel very good about our ability to expand margins. The cost increases are here but the pricing actions we have and the productivity actions that we have planned should continue to drive margin expansion in the seed business, like we saw in 2021. I think we will reinforce that in 2022.

Yes. Just a couple of comments I guess for the company broadly speaking, Vincent. So the supply chain challenges are real. Any global supply chain operator like Corteva will have the same situation. We think we've done a really nice job of mitigating as much of the cost as we can. And we've got a full court press on just doing exactly that for 2022. At the same time, as I mentioned in my opening remarks, we are seeing very strong demand across the board for our products around the world. So from a pricing perspective what we've been able to do and if you look at 2021 and then you look at how we've guided for 2022, the pricing increases are offsetting the higher cost and we are driving margin. And I think that that is really important to set the stage. I know there's a lot of industries out there that were not able to do that. I think one of the good things about the agricultural industry right now is that, we're in a very attractive market. And I think growers need the products, they need the technology. And certainly, from a pricing execution perspective, I think we've demonstrated that we can move prices to cover costs and grow margins.

Good morning. Can you talk about the pricing outlook in crop protection chemicals? I think you had proposed a mid-single-digit price increase effective October 1. How is that flowing through? And related to that, if I look at Slide 29 of your deck, the crop protection chemical pricing in the quarter for herbicides and insecticides seems very different, with herbicides running 15% on price/mix versus negative 2% for insecticides. So could you perhaps unpack that for us, and speak to some of the swing factors there such as glyphosate and the incremental pricing that you're layering in?

Sure. Hi, Kevin. So you're right. There are obviously puts and takes. And it depends if we're talking about our commodity portfolio or our differentiated and new product portfolio. There are some differences there. But I'll have Tim just kind of walk you through a few of these, and that should hopefully set the context.

Yes, Kevin. You're correct about the Crop Protection side. In the US, we implemented a price increase in October. Traditionally, we have priced our products on a seasonal basis, starting at the beginning of the season, while actively managing through it. Currently, we are actively managing crop protection pricing. As mentioned by Dave and reiterated by Rajan, we are working hard to offset all our costs. In the US, we priced in October for the upcoming season, which is when we kick off our sales. In December, we announced an early January price increase across the board, which has already been implemented in the marketplace. We will continue to monitor this situation moving forward. This approach marks a significant shift from our typical practice. For our commodity products, we face even more frequent pricing adjustments due to substantial cost and price volatility. We are actively managing pricing across our entire portfolio and will maintain this commitment. This is not just a US initiative; it is taking place globally, and it will help us navigate through this year.

Great. Thank you very much for taking my questions. So just a corollary of some of the response you just had. There were some increases in the cost assumptions in CPC versus initial framework. I think most of us understand that. Can you just comment on some of the dollar delta versus your prior expectations? Obviously, some of the subs are herbicides, but presumably it's broadly transportation logistics the generic inputs for formulation and perhaps intermediate pricing. But can you just comment on how you think these trends are actually going to evolve throughout 2022 just given the current dynamics? Thank you very much.

Hi Chris, yes. So Rajan can maybe drill down on a few of the questions that you've got there. And then maybe Dave can wrap up with sort of the higher level how we did overall in 2021 and expectations for 2022?

Hi Chris. I think like you rightly pointed out between where we were last time and where we are now, the single biggest change is glyphosate. And I think that continues to be a big part of the cost increase. That said, like Tim mentioned we do cover the glyphosate cost increases with price. We did that in 2021. And so, we feel very confident about that in '22. On freight and logistics, there is an increase just based upon the inflationary cost that we are seeing there, the tightness of supply in freight etcetera. But the one element specifically I would point out is that, as supply chains become tight, we do have to plan for air freight type of things to make sure that we can get the high-margin products to the customers in time. And so that also is something that continues to evolve. From other raw material perspective, I think the increases are more or less in line with what we had said before. The inflationary trends continue. We do have some strong productivity actions with our procurement team to try and offset that, but that continues to be what we had planned for the last time we had mentioned this. So those would be some of the specific things that are driving the cost increases on the Crop Protection side Chris.

And Chris was the other element of your question to make sure, I'm answering it correctly. Let me just share with you 2021. And I think we had talked about this, but just make sure we've got these correct for you. Crop Protection 2021 full year, 11% organic growth. We had price gains in every region. We had 6% volume gain. And by the way that 6% volume gain is net of nearly a 4% impact from discontinued products so pretty significant performance. And then operating EBITDA was up 20%. Margins improved more than 100 basis points. So, I think that Rajan really sets the stage as we think about 2022. And again what we talked about and reinforced was the contribution of new products $300 million in terms of our planned number of our planned number of, guidance number for new product contribution revenue in 2022.

Absolutely. The new product portfolio continues to grow. And it will help us not only offset the cost increases but also from a pricing opportunity creates another opportunity for us to extract value and put that to the bottom line. So completely agree there.

Hi, good morning. I have a specific question on insecticides. Despite new products there, insecticide volumes were down in 4Q and for the full year. And I know that you stopped selling some low-margin products. Was that a big impact in insecticides? And then taking a step back on insecticides. I think there are new chemistries in insecticides that are becoming popular like biodegradable insecticides. And they're taking share away from older chemistries like carbonates and Chlorpyrifos. Can you talk about your portfolio and how much of that is in the older chemistries versus how much is the new chemistries? And what's the negative volume impact from the old chemistries? Thank you.

Yeah. Hi. P.J. why don't I take that? First and foremost, let's start with the big picture. I think if you take the products that we have discontinued like you pointed out, Chlorpyrifos is one of them, the low-margin products. Our insecticide business actually grew 14% year-over-year. So we have seen double-digit growth. And that continues to be a franchise that continues to do well for us. Related to the profile of the insecticide market how that is changing you're exactly right. And let me double-click on Spinosyns. And this is the world's largest selling insecticide which is naturally derived. And we are on track this year to get to about $1 billion on the Spinosyns franchise. Not only are we seeing increased volume from the capacity increases that we have built in, we continue to see price increases, and some of the productivity actions that we are taking are actually helping us even increase margins as the product continues to grow from a top line perspective. So, the Spinosyns business continues to be a big part of our portfolio. Talking about new products Isoclast comes to mind. Isoclast, again this is a product which is getting close to $300 million. And it's been a big part of what we are doing. Pyraxalt this is another product which we talk about in Asia Pacific. So the reason I'm walking you through all this is that, the patented and differentiated part of our insecticide portfolio is actually pretty large. And these are high-margin products which go through diverse crops. We have the balance that we see from natural products and products that continue to grow. So, we feel really good about the insecticide portfolio that we have. And the 14% just to underline that growth that we had despite the product phase out underlines that. And we continue to expect to see that same momentum in 2022 from a top line but more importantly margin expansion standpoint.

Thank you. Good morning. Chuck, you've now been CEO for three months of Corteva. What's your perspective on what Corteva does well? And what it could do better? You also mentioned some faster-paced growth going forward. Can you give a little more color on how you hope to unlock the value you highlighted? Thank you.

Thank you, David. I've been in the role for three months, and it's been a great experience so far, particularly in North America, although I haven't been able to travel internationally due to COVID. I'm pleased with the financial and operational performance in 2021 and especially how we concluded the year. I'm actually more optimistic now than when I started. There's substantial value in this company that we are currently working to unlock. It’s a bit early to provide specific numbers, but we need to focus on areas like price execution and supply chain resiliency. The company has made significant investments in these areas but there’s always more work to be done, similar to every other company facing these challenges. Our technology and innovation pipeline is a strong asset, and I believe we have some exciting future products that will drive long-term value, which I’m really encouraged about. We've also been examining our global portfolio and operational footprint to analyze profitability and expenditures candidly. We see a lot of potential in these areas, and our team is working diligently on these matters. While it's still early to discuss the outcomes, we are enthusiastic about the progress. We're planning to hold an Investor Day likely in late summer to share new financial and operational targets as well as showcase our technology pipeline. This will highlight our initiatives and their implications for long-term value creation for Corteva. The groundwork is being laid now, and I think there’s a lot of excitement. I believe this management team is ready for the challenges ahead, and we’ll reconnect with you around summertime for the Investor Day.

Thanks very much. A two-part question. Can you talk about how much your royalty payments decreased in 2021? And what were the factors behind that and what you expect for 2022? And secondly, your operating cash flow was higher than your EBITDA in part because you were able to elevate your level of payables by maybe $500 million year-over-year. Can you run with a much higher level of payables than you've been doing historically, so that your operating cash flow levels remain pretty high relative to EBITDA?

Okay. Why doesn't Rajan take the royalty question? And Dave you can handle the operating cash flow.

Sure.

Yes. Good morning, Jeff. On the royalties part we did see a step improvement in our royalty reduction in 2021. Some of that is the continued ramp-up of the Enlist portfolio. But we also had work done on the corn side with some non-assert that we've had negotiations done. So we did see a step improvement of about $80 million to $90 million on royalty reductions in 2021. We are on track for our long-term royalty to make it royalty neutral by the 2028, 2029 period. We see some marginal improvements in 2022, primarily continued to drive the Enlist portfolio. We are also beginning to launch Enlist in our own Corteva germplasm, which will be a further reduction of royalties in 2022. But the big step changes are going to come in from 2023. There are some offsets, where we do have some increased royalties for molecules for the traits that we use in soybeans in Latin America, et cetera. But all in all, we are on track for delivering against the commitment of being a net positive. We had a big improvement in 2021 and we'll see some changes in 2022 with step improvements in 2023.

Yes. And Jeff, I could take maybe part two of that, which – around the payables and the cash flow from operations as well as our free cash flow. So as you said, we had a lot of focus and a lot of positive that resulted from that focus in terms of our working capital initiatives in 2021. We had – as you said, we had the benefit of payables. And specifically, there we had a lot of focus around our days payables outstanding as well as our average weighted daily payment term. So that's just going to continue. The numbers that I think are really important here when we think about our 2022 guide really relates to receivables. So we had a significant benefit in terms of our receivables performance and our cash collections in 2021. We expect to continue attractive but not nearly to that level performance in 2022. That's the big variable as well as some change year-over-year in terms of the contribution from prepaid or deferred revenue, particularly in the US in the fourth quarter. So that's really the difference when you walk year-over-year in terms of our cash from operations. Cash taxes are essentially the same. Other elements in terms of the cash from operations are the same. And then when you look at the free cash flow, we are forecasting a slight up to $70 million uptick on our CapEx on a year-over-year basis.

Yes. And Jeff, just maybe a couple of comments. It's interesting how you put these two questions together. So, if you look at it from an operating perspective, what we're trying to do with royalties, our new CP products, driving some of the operational work I just described, that's going to drive enhanced margins. And then Dave and his team are really focused on cash, cash management and trying to get as much of that margin into the cash as we can. And I think that there's just a tremendous opportunity here for this company to generate more cash flow.

Yes, thank you. There's been some recent commentary from the EPA about Dicamba that suggests they might ban its over-the-top use in 2023. If that were announced sometime this year, how do you think that would affect penetration in 2023? Will you have any remaining capacity in your soybean seed platform for 2023? Also, regarding the previous legal settlement with Bayer, will there be any further payments on that after this year?

So, Steve, this is Rajan. Nice to hear from you. Well, the Enlist franchise continues to grow. And Enlist as a system actually this year, I think, we'll be crossing $1 billion in there. And the Enlist herbicide is a big part of it. Our estimate is that Enlist system when it crosses 40% this year, more than 80% of the acres that have the Enlist system actually use the Enlist herbicide. We do have a very strong asset and a strong supply chain. So, as opportunities come up to expand Enlist, I think, we have the flexibility and capability of growing the Enlist herbicide business. Also happy to say that, we did get the seven-year registration done. Our regulatory and R&D team did a fantastic job of getting that. So the customer demand gets the confidence in the system. And so we see continued growth of where the Enlist system would go. About dicamba, we'll wait and see how the market reacts. But I think we've got the flexibility and the confidence to be able to continue to grow the Enlist system franchise. And we do have the supply chain flexibilities to grow the Enlist herbicide as the need arises.

Thank you. Chuck, back to your first impressions. You bring a lot of experience in the retail channel and Corteva uses retail for pesticides and for some of the seeds like Brevant. Anything surprising in how Corteva uses retail or in the bundling programs or in the Pioneer brand's direct strategy?

Yes, hi, John. Based on my discussions with our major retail customers over the past couple of months, I've gained a lot of valuable insight. They were very open with me, and our conversations were productive. I still consider the Pioneer network to be a strategic asset for Corteva. It is unique and provides significant value. While there are certainly ways to enhance our engagement, I am generally pleased with what I have observed. I believe there is an untapped potential for Corteva to cultivate a stronger relationship with the retail channel. For instance, Brevant is a fitting example, as retailers are seeking more options, especially from companies that can deliver innovative technology. This helps them stand out to their customers. It’s still early in the process, but so far, we’ve had a successful year with Brevant. There seems to be good demand and enthusiasm for engaging with Corteva and our technology. Additionally, our differentiated crop protection products are in high demand within the retail sector. There is definitely an opportunity for a more strategic relationship with retailers. In virtually every conversation, we concluded that our interactions should go beyond mere commercial transactions; they need to be more strategic. It will require some time to define what that means, but I see a promising opportunity for Corteva to build deeper relationships with the retail channel, which I believe would be welcomed. Tim, could you share what you are observing with the retail channel regarding Brevant?

Yes. Absolutely, Chuck. And John great question. We've been talking about Brevant in the US for a little while here, but we got to remember that 2021 was really the completion of our first season of business with Brevant in the US. And the good news is, we met or beat our price and volume goals that we had. One of the things we talked about and your question really goes to it is building that credibility with our channel partners. And we needed this Brevant business to not only be good for us, but also good for their business. And that is very important for us. And finally, we obviously needed to satisfy our farmer customers. The good news coming out of 2021 is we're happy with how it turned out for our business. Feedback we're getting from our channel partners is exceptional. And I had an opportunity earlier this week to meet with a couple of retail groups out of the Northern Corn Belt and got very good feedback from them on how we're doing and also product performance was outstanding. So farmers are very satisfied with how the Brevant business performed for them. So it really has translated into a much greater point of growth for our business in retail. I think over time, our objective is not to go out there and do cross-sells and things like that. It's to build these deep relationships with our retail partners on how we can go out and do good business together across both seed and crop protection and that's what's important. And as we go into 2022 year two of Brevant, we're expecting growth similar to what we had in 2021 in terms of volumes. So that's very good where we're at. And our order position supports that right now. And certainly, the strong feedback we've gotten from our channel partners supports their enthusiasm for what we're doing there. So it is a great story for our business. And also it is a very strategic action for Corteva as we build our relationship with our distributor and retail partners.

Good morning. I was hoping to get an update on South America in the second half of the year, specifically regarding Conkesta and your outlook for the acreage this year and in the next couple of years, as well as what this might mean for additional sales in West herbicides.

Tim, why don't you take that for Michael?

We're still finalizing the 2021-2022 season in Latin America and are pleased with its progress. As we look ahead to the 2022-2023 season, Conkesta plays a significant role—not necessarily in terms of immediate financial impact, but as a key strategic initiative. This year, we approached our Conkesta business as a pilot to help our customers gain experience with the technology in the marketplace. The crop associated with this will be planted in the latter half of the season, and we're focusing on scaling our efforts. We're still in the process of introducing the technology and expanding our portfolio so that farmers can choose varieties that best suit their needs. It's important for us that customers have a positive experience not only with insect control but also with weed management. We're currently in a gradual ramp-up phase, which is crucial and we remain dedicated to it. As we develop our portfolio further, we will ramp up our initiatives. The herbicide system is vital, especially with the significant attention on insect control in soybeans in Latin America and Brazil. We believe that integrating Enlist herbicide with robust insect protection will add new value and set Conkesta apart in the market. During our Technology Day, we will provide updates on what the potential growth trajectory may look like. For the next half of the year, we aim to expand on this pilot project to ensure the technology is well-established and comprehended in the market.

Thank you for taking my questions. I wanted to clarify that it seems you've included a $50 million currency challenge for 2022 in the guidance. What specific areas are you most concerned about? I understand you mentioned that there might be some pricing actions to counter that. Where do you believe you could be successful in achieving price increases to address the currency issue? Additionally, could you provide some insights on channel inventories in certain regions? Thank you.

I will address the currency aspect first, and then Tim, you can discuss the channel inventory. Thank you. Regarding currency, we have estimated a $200 million EBITDA impact when comparing the midpoint of 2021 to 2022. This forecast encompasses a variety of currencies we are affected by, including our hedged positions, particularly with the Brazilian real. We plan to assess pricing in every market where opportunities arise, which will unfold throughout the year, just as our currency projections are preliminary and will evolve as the year progresses. Additionally, we have natural hedges through some local currency expenses, which will aid us throughout the year and will be considered in our overall strategy. Overall, we believe the situation is manageable and we will put forth our best efforts across all areas. Tim, would you like to address the channel inventory aspect?

Certainly. In 2021, our business experienced very strong sales right from the start. While it's great to achieve those sales figures, our field sales team's primary focus is ensuring that the product reaches the ground, is sold to the distributor, moves through the channel, and ultimately gets into the hands of our customers. We monitor this closely throughout the season and as each season concludes to assess our position across the entire portfolio. Overall, we feel good about our inventory levels in major markets. We are nearing the end of the season in Latin America, and Brazil remains a key area of interest, particularly due to significant growth in crop protection there. Currently, we observe some increases in overall industry inventory levels in Brazil, although this can vary by segment and region. At present, we believe our inventory levels are lower than the market average and remain at a healthy level for our operations in Brazil. As the season progresses, we will continue to monitor this situation as business ramps up and shifts into the next season, but we feel confident about our position. In other markets, I would describe inventory levels as ranging from comfortable, indicating a normal amount in the channel, to potentially tight. We are managing a significant amount of business that is operating on a hand-to-mouth basis. There are challenges surrounding supply that go beyond just cost, including the timely delivery of products to our customers. Our teams are highly focused on these issues. Furthermore, in certain segments, we encounter very low inventory levels, which is concerning. We are closely tracking this situation. However, at this moment, we do not see inventory as a constraint for our business in 2022.

Thank you. It seems there are many positive developments on the profit improvement front in the coming years. With your strong balance sheet and guidance of around $800 million for buybacks this year, have you considered taking on some debt to increase the buybacks in anticipation of the profit growth being discussed?

So let me just give a little perspective and then I'll turn it over to Chuck for his commentary. It's a really good question. I think to give you some perspective and we just chatted about this a little bit earlier today in terms of just looking at the math. When you look at the cash flow over the last two years Frank, you've used the midpoint of our guide for this year, the $1.450 billion that adds to $3.6 billion. So in other words, the 21.50 from 2021 combined with the midpoint of our current guidance. If you use the midpoint again of our guide, you referenced $800 million of share buyback that would sum to a total of $2.55 billion over the two years, $2.55 billion when combined with $800 million of dividends. So $1.75 billion in share buyback, $800 million in dividend gives you the $2.55 billion, which is about 70% of the $3.6 billion. So it obviously reinforces what we've stated in terms of our commitment to return cash to shareholders. I'll let then Chuck really give a strategic lens against that backdrop.

Yes, Frank, that's a great question. When I consider the balance sheet, I see it as a strategic asset. We will be disciplined in our approach, but we intend to leverage it to create long-term value for our shareholders. As you mentioned, the balance sheet is strong. Considering the financial strength of this company, including our free cash flow, we have ample opportunities to invest for EBITDA and margin growth while also returning substantial capital to our shareholders through dividends and buybacks. We are collaborating with the Board to determine the optimal approach for this. Additionally, I believe it’s important for Corteva to enhance our M&A capabilities, which I am examining closely. We will be strategic in our M&A efforts to boost earnings, margin, and return on invested capital. As we review our global portfolio and assess our asset distribution, we will either develop or acquire what we need to fill any gaps. We have an exciting future ahead in terms of leveraging both our operational capabilities and our balance sheet.

Thank you. That concludes today's call. The Investor Relations team is here for your follow-up questions, so we look forward to those. We thank you for your interest in Corteva and wish you a great day. Thank you very much.