Corteva Inc (CTVA) — Q3 2022 Earnings Call Transcript

Good morning and welcome to Corteva's third quarter 2022 earnings conference call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer; and Dave Anderson, Executive Vice President and Chief Financial Officer. Additionally, Tim Glenn, Executive Vice President, Seed Business Unit; and Robert King, Executive Vice President, Crop Protection Business Unit, will join the Q&A session. We have prepared presentation slides to supplement our remarks during this call, which are posted on the Investor Relations section of the Corteva website and through the link to our webcast. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to, those discussed on this call and in the Risk Factors section of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in our earnings press release and related schedules along with our supplemental financial summary slide deck available on our Investor Relations website. It is now my pleasure to turn the call over to Chuck.

Thanks, Kim. Good morning, everyone, and thanks for joining us today. There are several key messages and updates we would like to share with you, along with our solid results for the first 9 months of the year, that demonstrate our strategic plan is really starting to come to life. Last quarter, you will recall we announced key actions associated with the completion of a comprehensive portfolio review. These actions include plans to exit nonstrategic geographies and product lines, emphasizing a strategy of differentiation to drive our competitive advantages, bringing unique, sustainable ag technology solutions to farmers to bring advancements in global food security, climate change and the energy transition. Today, we'd like to highlight a few proof points of our immediate execution of that strategy to accelerate performance and growth during the third quarter. First, let me reiterate that we are committed to disciplined and strategic portfolio management, prioritizing core markets, products and crops to simplify operations and to focus investment in differentiated and sustainably advantaged solutions. In terms of operational excellence, we are continuously evaluating our business to optimize manufacturing costs and streamline our supply chain. In that regard, we have decided to discontinue all U.S. commercial sunflower seed production servicing Europe by the end of 2022 crop production year. Given our previous announcement to exit Russia as well as various capacity expansions, we now have sufficient capacity to supply our European sunflower commercial seed needs from within the EMEA region. On the CP side, we announced last month that we signed a definitive agreement to acquire Symborg, a leader in microbiological technologies. As we've said before, we will be utilizing M&A to supplement our organic growth by focusing on adjacencies and utilizing it to fill gaps in our portfolio. We are able to accelerate advancements in technology and our speed to market. Corteva first collaborated with Symborg to scale up and bring farmers Utrisha N and BlueN, both nutrient efficiency products, as part of a distribution agreement between the two companies. Respected throughout the biologicals industry, Symborg possesses a diversified existing portfolio, an emerging biocontrols pipeline and a very skilled workforce. Biologicals are expected to represent about 25% of the crop protection market by 2035. This transaction reaffirms our commitment to biologicals and building a more differentiated and sustainably advantaged portfolio that provides cost-effective solutions for farmers as well as our commitment to forming strategic partnerships to help accelerate innovation and growth. As it relates to our AI portfolio, we sold our Methomyl insecticide business outside of Brazil in August. We also made the global business decision to exit commodity glyphosate products, meaning glyphosate not mixed with other herbicides. Lastly, on an operational front, we've decided to cease production of certain intermediary products at the Pittsburgh, California manufacturing site by the end of 2025, allowing us to streamline and simplify our operations. These moves enable us to redeploy capital for investment in growth markets to provide innovative and sustainable solutions for farmers. We also remain very focused on bringing global farmers differentiated, next-generation solutions to help them be successful in this volatile and dynamic environment. In Seed, our top-tier genetics continue to be in high demand as growers prioritize yields to help offset inflation. In Crop Protection, new product sales improved by almost 50% compared to prior year. This was led by products like Enlist herbicide, which has more than doubled in sales compared to the same period last year. The Enlist system continues to gain traction in the market given its superior performance and grower confidence, delivering approximately $1.1 billion in net sales during the first 9 months of the year, an increase of nearly 80% versus the same period last year. We expect 2023 Enlist market penetration in the U.S. to be in the mid-50% range, representing approximately 70% of Corteva's lineup. As I've said before, this is a remarkable feat considering this technology has only been in the market for 3 seasons. Our refined strategy in putting the farmer first has been quite successful this year. We have delivered double-digit sales growth and over 190 basis points of margin improvement so far. As a result of this momentum, we have raised the midpoint of our operating EBITDA guidance and now expect between $3 billion and $3.1 billion for the full year outlook, which Dave will address in greater detail shortly. Now let's spend a few minutes on the ag market on Slide 5. Ag fundamentals remain robust with commodity prices above historical averages. We are encouraged by resilient demand as well as healthy farmer income levels and see broad opportunities in both business units as customers drive farm productivity. Farm income levels are expected to remain strong in 2023, following 2 record-setting years. We continue to believe that global grains and oilseeds markets need 2 consecutive normal crop years to stabilize global supplies. And 2022 is not a year to rebuild stocks. For the upcoming season, we're expecting U.S. planted area to be up slightly with a bias towards corn. Outside of the U.S., market growth looks strong in key markets like Brazil, where planted area is expected to increase low to mid-single digits. Strong demand, combined with tight supply and weather-related reductions in estimated yields, have continued to drive low stocks-to-use ratios for both corn and soybeans during the '22-'23 crop year. North American harvest is nearly complete for both corn and soybeans with USDA crop progress in the high 70s for corn and high 80s for soybeans. While yields have been strong in the northern and eastern Corn Belt, they have been below normal in the western Corn Belt and plains where it has been dry. Overall yield estimates by the USDA have been in the low 170s for corn and about 50 for soybeans, keeping crop prices elevated and farmer income strong in 2022 and into 2023. We'll continue to monitor the ongoing effects of inflation and strengthening U.S. dollar while remaining focused on what we can control. With disciplined execution on our refined strategy, we expect price, mix and productivity actions to continue to outpace inflationary cost pressures. Given healthy market fundamentals, we believe farmers will continue to have strong margins and liquidity. They will prioritize investments in top-tier genetics and crop protection technology to maximize and protect yields. And with that, let me turn it over to Dave to provide details on our financial performance as well as updates on the outlook.

Thanks, Chuck, and welcome, everyone, to the call. Let's start on Slide 6, which provides the financial results for the quarter and year-to-date. You can see from the numbers, we had another quarter of strong performance. Quickly touching on the third quarter. Organic sales increased 22% compared to 2021 with double-digit growth in both segments and in all regions. This translated into earnings of $96 million for the quarter, growth of nearly 290% and margin improvement of more than 550 basis points. So another quarter of impressive growth and margin expansion. Now it's important to note that the third quarter includes some timing benefit from volume that was originally forecasted in the fourth quarter that shifted into the third quarter. This is incorporated in our updated full year guide, in the implied fourth quarter that we'll go through in a moment. This guide also includes third quarter performance favorability that lives through for the full year. Turning to year-to-date. Organic sales grew 16% over prior year with broad-based price and volume gains. Global pricing was up 10% through the first 9 months with notable increases in both Seed and Crop Protection. Volume growth in Crop Protection of 13% was driven by the strength of new products, which delivered more than $470 million of sales growth year-over-year, an increase of almost 50%. We delivered approximately $2.85 billion in operating EBITDA in the first 9 months, a 23% increase from the same period last year. This is impressive given the continued cost inflation, commodity price and currency volatility and the war in Ukraine. Pricing, product mix and productivity more than offset the higher costs incurred as well as an approximate $270 million currency headwind driven predominantly by European currencies. This earnings improvement translated into more than 190 basis points of margin expansion year-over-year, reflecting the execution, including the portfolio decisions that Chuck referenced earlier. So with that, let's go to Slide 7, where you can see the broad-based growth with double-digit organic sales gains in every region through the first 9 months. In North America, organic sales were up 11% driven by Crop Protection on demand for new technology, including Enlist herbicide. Seed volumes were down versus prior year primarily due to a reduction in U.S. corn acres and supply constraints for canola in Canada. Soybean volumes were up 5% versus prior year driven by continued penetration of Enlist. Both segments delivered pricing gains with 6% pricing in Seed, 18% in Crop Protection, more than offsetting higher commodity and input costs. In addition, we're confident that we gained market share in both corn and soybeans in North America. In Europe, Middle East and Africa, we delivered 21% organic growth compared to prior year driven by price and volume gains in both segments. Seed pricing increased 12% and helped to mitigate currency impacts. In Crop Protection, demand remains high for new and differentiated products, driving volume growth of 18% through the first 9 months. In Latin America, Organic sales increased 24% with double-digit volume and price gains. Pricing increased 14% compared to prior year driven by our price-for-value strategy coupled with increases to offset rising input costs. Seed volumes increased a modest 1% due to tight supply of corn, while Crop Protection volumes increased 16% driven by demand for new products. Asia Pacific organic sales were up 12% over prior year on both volume and price gains. Seed organic sales increased 27% on strong price execution and the recovery of corn planted area. Crop Protection volume growth of 2% was again led by demand for new and differentiated products. Let's now turn to Slide 8 for a summary of our operating EBITDA performance. Through the first 3 quarters, operating EBITDA increased $540 million to $2.85 billion. And as I covered on the prior slide, strong customer demand drove broad-based organic growth with price and volume gains in all regions. Year-to-date, we've incurred approximately $830 million of market-driven headwinds and other costs driven by higher seed commodity costs, crop protection raw material costs and freight and logistics. We've delivered approximately $175 million in productivity savings, which helped to partially offset these cost headwinds. We continue to maintain disciplined spending with SG&A down as a percent of sales, more than 200 basis points from the same period last year. Currency was a $270 million headwind driven primarily by European currencies. Standing back, you can see the organization's ability to meet increased customer demand while effectively managing cost headwinds through pricing, product mix and productivity. And again, we believe this performance really differentiates Corteva. Turning now to Slide 9. I want to make several points about the updated outlook for the full year. With the backdrop of our strong performance through the first 9 months, we're affirming our full year revenue guidance to be in the range of $17.2 billion to $17.5 billion or 11% growth at the midpoint, including approximately 3% headwind from currency. And as Chuck said, ag fundamentals remain strong as we finish out the year. However, we're monitoring supply availability as well as volatility in currency markets. We're raising the midpoint of our full year operating EBITDA guidance, now expected to be in the range of $3 billion to $3.1 billion or 18% growth at the midpoint. This updated guidance includes an estimated $50 million EBITDA favorability in the third quarter that is expected to carry through for the full year. For the full year, high single-digit pricing is expected to offset headwinds from higher input costs and currency. Lower spend driven by cost actions that we discussed and strong collections resulting in lower bad debt accrual also supports this outlook. The updated earnings guidance translates into approximately 110 basis points of operating EBITDA margin expansion for the year, again impressive in this environment. Our full year EPS guidance remains unchanged at a range of $2.45 to $2.60 per share, as higher operating EBITDA is expected to be somewhat offset by higher exchange gain and loss impact. On free cash flow, we continue to perform well against our working capital metrics, including our days sales outstanding and inventory days supply. DSO continues to improve, reflecting the strength of farmer income as well as customer collections. Inventory days sales is trending higher this year given the significant increase in seed costs and the replenishment of crop protection inventory. We're now expecting higher working capital balances in absolute dollars for the year, but working capital to sales relationship is tracking to prior forecast. Our current thinking is that these higher working capital levels will result in free cash flow closer to the lower end of our previous guidance range or roughly $1 billion free cash flow for the full year 2022. So now let's transition to a discussion on Slide 10 on the setup for 2023. You can see our initial planning framework. It's intended to provide key assumptions as we begin to transition. We see 2023 as a continuation of the momentum from 2022 while also balancing the uncertainty of the economic environment. Specifically, given the appreciation of the U.S. dollar in 2022 and continued volatility in foreign exchange markets, we expect additional currency headwinds in 2023. Now we're going to continue to use financial hedging to mitigate the risk from certain currencies and use local pricing in key markets to offset the impact wherever possible. Nonetheless, we see another year of foreign currency translation headwind in 2023. While we expect cost inflation levels to begin to moderate over the course of '23, we will see cost headwinds in 2023 in both Seed and Crop Protection driven by commodity costs as well as raw materials. Drought conditions in Latin America earlier this year have put pressure on seed supply in the region. This will be a headwind to our corn volume growth in the first half of 2023, but we expect inventories to recover in the second half of the year. Our current estimate for U.S. planted area is to be slightly up for the 2023 season with a slight bias towards corn acres based on the current relative economics for farmers. This is clearly a positive for Corteva. In addition, in Latin America, we expect corn planted area to increase low to mid-single digits. On price-for-value strategy, that continues to be a key lever to offset inflation. Pricing for our yield advantage technology and differentiated solutions is expected to more than offset higher cost of goods sold. And as Chuck said earlier, we're making progress on our portfolio simplification, exiting commodity glyphosate products among other non-strategic product lines and geographies will create a headwind to our base business volume growth. However, it will be accretive to margins, and the overall impact to operating EBITDA will be positive. We'll see an estimated $100 million reduction in net royalty expense next year driven by continued Enlist penetration and the increase of units in our proprietary genetics. Enlist E3 soybeans will represent approximately 70% of our U.S. soybean sales in 2023, and we expect about 65% of those will be in our own Corteva germplasm. This will support increased overall market penetration of the Enlist trait and will be, of course, a direct EBITDA lift. And finally, on our productivity and cost actions, the expected savings from our productivity work and restructuring programs will more than offset the increased investment in R&D for next year. So coupled with a strong market outlook and solid grower economics, we believe we're well positioned for another strong performance year. Let's now go to Slide 11 and just summarize some of the key takeaways. The company has taken very important steps in its strategic road map, including portfolio simplification and investing in growth. By exiting nonstrategic product lines, we can focus on key markets and provide differentiated solutions to farmers. And with the acquisition of Symborg, we've taken another important step building our biologicals business. It's clear that our organization is executing well. We're very pleased with the strength of our results through the first 3 quarters. The strong year-to-date performance gives us confidence to raise the midpoint of our full year operating EBITDA guidance. And let me just say a few words about capital deployment. As a reminder, we plan to repurchase $1 billion in shares in 2022 with $800 million completed through the third quarter. Since 2019, we've returned more than $3.3 billion of cash to shareholders through dividend and share repurchase, a clear commitment to deliver value to our shareholders. And finally, we believe that we've continued with this continued favorable momentum that will carry us into 2023 as we look to continue both performance and growth. So more to come as we make progress to advance our strategic framework and drive continued operating EBITDA margin expansion. We believe these strategies will further differentiate Corteva and deliver increased value for years to come. And with that, let me turn it back over to Kim.

Thank you, Dave. Now let's move on to your questions. I would like to remind you that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instruction.

Just wanted to see if you could give us any sense on inflation for next year in both crop chemicals and in seed, sort of any order of magnitude versus this year that we should start thinking about in the model? And maybe more specifically, in crop chemicals, could you talk about when you think raw material costs will peak and if there's the potential for any deflation at some point in 2023?

So Vincent, this is Dave. Thank you for joining us. I’d like to make a broad statement, and then Robert can provide more details about the crop side. Tim, feel free to add anything regarding the Seed side. Overall, this year is shaping up to be much larger than anyone anticipated. Currently, our implied numbers indicate an overall cost inflation of around 10% to 11% for the full year, which includes commodity costs, input or ingredient costs, and freight and logistics. It's remarkable. I want to emphasize what we've achieved this year in terms of execution, pricing, and productivity, thanks to Tim and Robert’s combined efforts. For 2023, as mentioned in our prepared remarks, we expect inflation to persist as a headwind, although we anticipate a moderation in its rate. It’s too early for us to specify or offer guidance on what that will be. We will provide more details along with our formal guidance for 2023. However, we do expect a moderation in the rate while continued inflation remains a challenge. That's our anticipation and planning going forward. Robert, would you like to discuss crop?

Sure. Thanks, Dave. Regarding the Crop Protection business, we are still facing significant cost inflation and supply disruptions. Currently, we do not anticipate much improvement in 2023, although we are learning and are better positioned to manage these challenges moving forward. Our approach to pricing products based on the value they provide to farmers and their productivity has been consistent, effectively offsetting the cost increases we are experiencing, and we expect this trend to continue. We anticipate maintaining this momentum into 2023. In 2022, inflation rates were in the low teens, but we expect them to stabilize in the Crop Protection area as we compare against previous quarters with higher inflation rates. It’s important to note that we are utilizing every possible resource to manage costs and inflation, with technology being our most effective tool. Our technology enhances farm productivity, enabling farmers to achieve higher yields and counterbalance rising input costs like fuel and fertilizer. We are seeing strong demand for this new technology, which will support farmers as we transition into 2023, and we believe we are well-equipped to handle these challenges.

Back in September, you set a 3-year EBITDA growth target of 13%. Considering the challenges expected next year from foreign exchange and costs, could it be reasonable to anticipate sub-13% growth in 2023, followed by growth above 13% in 2024 and 2025? Is that a sensible way to view the 3-year target?

David, I can start off, and Chuck can add to this. It's a great question. To clarify for everyone, the numbers David mentioned refer back to our Investor Day on September 13, where we indicated a projected 5% compound annual growth rate for revenue and around 13% for EBITDA from 2023 to 2025, at the midpoint. Looking ahead to 2023, we believe we have a favorable setup, as Robert highlighted with the actions we are taking and our expectations for the overall market in crops. We anticipate that 2023 will make a significant contribution to our overarching goal, so we view this as a positive start to the three-year period. Chuck, do you have anything to add?

Yes, David. We're currently focused on 2023, and I want to share our thoughts. We believe that 2023 will resemble 2022 in terms of setup. Based on early decisions made last year, we're optimistic about the upcoming year. The key takeaway is that we are on track to implement our value-creation plan laid out in September. However, there are challenges to consider. We have mentioned inflation and are monitoring it closely. Additionally, global currencies present another challenge. Dave can provide more details about that. On the positive side, the agricultural fundamentals are encouraging, with low inventories, below-average yields, and high crop prices. This positions the agricultural economy well for 2023, but we do need rainfall in North America, Latin America, and Europe. Assuming we receive some rain in the coming months, we expect the agricultural economy to remain strong. Regarding Corteva, as mentioned in September, many factors influencing our value-creation plan are within our control. We will see significant progress towards royalty neutrality in 2023, and we can discuss that further. We anticipate ongoing growth in our new crop protection products, which are proving valuable on the farm. Our new Spinosyns capacity will be coming online soon, and we will announce additional portfolio changes as we finalize those decisions—all within the context of our three-year strategy. Despite some challenges in the industry, we feel well-positioned.

There have been discussions in the markets regarding Enlist beans, indicating there might be a slight variation, possibly a 5% discount on certain beans as elevators assess their grading. Can you provide insights on this, its scale, and your strategies to address it?

This is Tim. I'll take a shot at this. So in terms of soybeans in general, farmers can and do see some variation in fields for any kind of soybeans. And the soybean-grading process allows for that color variation. The varieties respond differently to the environment. Certainly, there's a genetic component and other factors play in as well. In the case of Enlist E3 soybeans, color variation can show up as a light brown shadow on seed coat on the side of the hilum. And the variation is from natural compounds, and it's on the seed coat and does not impact nutritional composition or quality. We continue to answer questions and inquiries that come up, and we're very much connected to processors and end users as well as our channel partners and farmer customers. Demand for the technology remains strong, and farmers continue to get full value from the technology. And the grain is accepted in the marketplace. So there is no widespread discounting on Enlist soybeans. So I do want to reinforce that. And clearly, farmers continue to support the technology. The technology will continue to grow, and we're out there and quite active and visible in terms of answering questions or inquiries that may come up.

I have a question on your decision to exit glyphosate. I would imagine that it's based on how volatile glyphosate is, and you're focused on more sustainable products. Maybe you can comment on that. Where you do have a underpenetrate in some of your products. Do you expect that the generics will kind of fit in the gap? And you mentioned $300 million of sales. Was there an EBITDA number associated with that?

Yes. P.J., let me give you the overall strategic decision framework we used, and then Robert and Tim can talk the specifics around what's in and what's out in that decision and the impact to our Seed technology, which will be none, by the way, but we'll cover that in detail. So look, we just feel as an organization that we want to tilt our portfolio to solutions that are value-added and unique in the marketplace. And so these decisions are always difficult, but the decision for us is one of just providing very unique, differentiated technology to farmers that create long-term value. And that's really the simple part of it. The other point, though, is that we did run this through a financial lens. And the cold hard truth of our glyphosate commodity business is that we don't make a lot of money on it. So why allocate precious resources to this when we can put it to something else that have much higher margins and move the needle for farmers. So Tim, why don't you talk about sort of the thinking around Seed?

Yes. The Roundup Ready technology is a fundamental part of our current trade offerings and will continue to be so. There is no intention to change that. This technology remains highly valued by our customers, who find great utility in it. Additionally, as Chuck mentioned, farmers have many options for sourcing glyphosate. There isn't a direct link between what we provide in Crop Protection and what we provide in Seed; they are distinct offerings, and customers have no particular incentive to choose our glyphosate brand over others. Therefore, from a Seed perspective, everything remains stable, and we will continue to support the technology across various crops.

Yes. And then from the Crop Protection, just a little more specifics on the glyphosate exit. This really falls into what we shared at our Investor Day back in September, where we talked about one of the key pillars to our strategy is portfolio differentiation. And glyphosate is not one of those that fits that model. When you look at where we are today, this differentiated portfolio is going to continue to be led by improved market penetration by these new products. And that's going to be a key piece of us as we move forward. These sales can be around $2 billion this year. And we expect these to continue to grow in the high teens, low 20s this next year. Glyphosate is part of this exit plan of 20% of our AIs over time. And this is one of the first ones that you see moving out. The revenue number of that, around $300 million this next year, is what we'll lose to answer a specific question there. And from a margin standpoint, it's just part of that differentiation driving our margins better. We expect to have a favorable impact to the bottom line because of it.

You mentioned several factors that could impact CPC margins as we approach 2023 and 2024, including exiting certain business lines. I have a two-part question. First, is there anything else that you're currently evaluating within the CPC portfolio that could have margins similar to or potentially higher than the glyphosate business? Secondly, what is your current assessment and enthusiasm regarding some of the newer technologies you have launched, such as Inatreq, Isoclast, Rinskor, and Zorvec, which appear to be gaining traction? It would be very helpful if you could provide some insights on your outlook for these as we move into 2023.

Maybe, Robert, I could provide a brief introduction regarding the benefits for Chris. Firstly, it's essential to note that we will experience some volume challenges in 2023 due to these decisions, although this wasn't directly related to your question. Secondly, as Robert mentioned, while these changes are advantageous for margins and EBITDA, we also noted methomyl as one of the items we've considered. Although it may not be significant in size, it reflects our efforts in refining our portfolio. Robert, would you like to discuss anything further about the refinements we are making and also our growth plans?

Yes. Regarding the new products, we previously mentioned that we have released about 8 new products since 2017, with 2 more expected to launch in the next few years. This new technology is driven by demand and is helping growers address challenges that they have faced in the past. We anticipate this trend will continue. As Dave mentioned, glyphosate is one of the first products we are discontinuing, and Methomyl outside of Brazil is another. We have additional products planned for 2023 that will have similar effects, contributing to the revenue headwinds we expect as we progress through 2023. Overall, this is part of our strategy to shift our portfolio, enhance our margins, and achieve the goals that Chuck outlined for 2025.

Chuck, back at your Investor Day, you outlined tremendous growth potential that you see in biologicals and since then, you announced the Symborg deal. Can you just provide an update on the growth opportunities as you see them today for Corteva in terms of organic growth and how you think the pipeline of deals could evolve and support your growth in the years to come?

Certainly, Kevin. From a Crop Protection perspective, the demand for nature-based and biological products, such as biocontrols, biostimulants, and bionutritional products, is clearly increasing. As we mentioned in September, we do not see these products as a replacement for traditional chemistry, just to clarify. By 2035, we anticipate that biologicals will constitute a significant portion of our overall Crop Protection portfolio, estimated at around 25%. Our internal research and development, as well as our innovation efforts surrounding biologicals, are strong and progressing well, with a rapid increase in R&D investment in this area. However, as highlighted in today’s call and previously in September, we believe mergers and acquisitions will play a crucial role in establishing a world-class biologicals business within our Crop Protection portfolio. The acquisition of Symborg is one of the initial steps we've taken. We are also exploring other opportunities. Symborg is recognized as a leading global player in microbial products, and we are familiar with their operations and products, especially considering our existing distribution agreement with them. They possess an excellent skill set and are situated in Europe, a market poised to lead the biologicals movement. To answer your question directly about what’s next, stay tuned. We plan to leverage M&A to fast-track our R&D innovation and market access. Nonetheless, I want to emphasize that we have an excellent internal program currently in place. We reviewed our portfolio recently and have many exciting developments to share over time.

In Seeds, it's relatively easy to have an idea of what pricing will be like for 2023. We look at your Seed cards in September and then extrapolate into next year. But how is it best to think about pricing in crop chemicals? Is that something that plays out each quarter? Are your prices set for next year? Is it easy to estimate? Do you have a view on pricing in crop chemicals in 2023?

Jeff, you're absolutely correct that pricing in Crop Protection differs from Seed. However, we proactively plan for it rather than simply reacting. Looking at our current efforts, our strategy focuses on our differentiated products, and the adoption by farmers reinforces the value proposition we offer. We expect this trend to continue into 2023. Our history of pricing based on value, along with our consistent productivity, has allowed us to mitigate the impact of rising inflationary costs from raw materials. We anticipate raw materials won't slow down this year; rather, we expect them to stabilize but continue to increase. Therefore, we will need to manage that issue as well. For the year, we've seen a 13% increase in pricing compared to last year, and we believe that momentum will carry into next year. Regarding your inquiry about our pricing approach in Crop Protection, we categorize our products into three groups: differentiated products, next best alternative products, and close generics. Differentiated products are central to our strategy because they are inelastic and less price-sensitive, providing real value to growers by enhancing yields on a per-acre basis. The next best alternative products have more substitutes available, making them slightly more elastic, but they still don't compare to generics, which leads us to the close generics that we must navigate within the market’s commodity pricing. Overall, our emphasis on increasing differentiated products positions us well for value extraction in the market. As Chuck mentioned earlier concerning biologicals, this shift in our portfolio towards differentiation aligns with our future goals. I hope this provides clarity.

So if I understood you correctly, Chuck, you're aiming for the Enlist penetration in '23 for soybean seed to be around the mid-50s with 70% of your own offerings. This implies that approximately 30% of the Enlist seeds sold might come from other seed companies. Can you share how much of that 30% will produce a trait fee for Corteva? Additionally, could some of it bring in a germplasm royalty for you as you begin to implement your own licensing of Pioneer genetics through GDM?

Steve, let Tim walk you through sort of our thinking on Enlist market growth.

Yes. Steve, good to hear from you this morning. Obviously, we're wrapping up another strong season with Enlist and very outstanding performance of both the herbicide program. And as we roll through harvest, varieties that we had in the marketplace are performing well and strong satisfaction with our customers this year despite really variable yield levels and some challenging environmental conditions. And as you say, 2023 is a very important year for us because it's when our proprietary genetics really kick in and will have an impact. And what I would tell you is, in terms of our licensing focus right now, we see that as a very important longer-term opportunity. In the near term, it's most important that we convert our own branded business to our proprietary varieties. And so we're in that process right now. As you say, it's going to be a major ramp up this year. So I wouldn't expect in the immediate future to jump on or think about licensing opportunities as first priority. But as we convert over our own branded business, which is substantial, we have a major share of the market both in the Pioneer brand and our other brands. It's going to open the door for us to, I think, really participate and have a strong position in that licensing opportunity.

Yes. Just to add to that, Steve, when you think about our platform in the CP side, we are still the only Enlist manufacturer for the herbicide that can go on the top of these beans as well. So that will give us some uplift there as well depending on how this plays out.

Yes. Steve, the broader perspective is that we anticipate a reduction in royalties of about $100 million in 2023. This marks the first year where we will see significant value generated from the technology. As the market continues to expand, we expect that figure to increase to around $250 million by 2025. Therefore, we are looking at substantial value creation over the next three years with the Enlist technology platform.

I want to come back to Slide 10. And certainly appreciate the color that you've already provided in terms of the '23 outlook. But I want to come to the 3 buckets of concerns for next year between the FX inflation and Latin American seed supply. As we sit here today, how would you rank order those concerns into next year?

I would like to discuss the currency situation briefly and provide some context. Tim, you can then address the other topic. Currency continues to be a challenge for us. If we examine the current exchange rates of major currencies such as the euro, Brazilian real, and Canadian dollar, they are significant factors for us. Presently, the currency headwind appears to be similar to what we faced in 2022, where we mentioned a 3% revenue headwind. We expect a comparable headwind for the next year. Regarding inflation, as previously mentioned, we need to stay very vigilant. Aside from overcoming strong inflation from this year and some easing in the inflation rate, we do not foresee major reductions in costs for next year. Tim, would you like to cover some of the fundamentals?

Yes. Regarding the seed supply in Latin America, the season is progressing well, with timely soybean planting in central and northern Brazil, which bodes well for the upcoming safrinha season. Typically, planting starts in January. We've discussed the tight seed supply for some time, influenced by various factors, which will affect the first half of 2023. We are confident in our ability to serve the market in the fourth quarter, but expect tight supplies as we move into the mid to later stages of the safrinha season, and we are collaborating closely with our customers on this. Due to production challenges, our inventory is lower than we would like. This season, our focus is on capturing value rather than volume in the marketplace, which is crucial. Our team is dedicated to this strategy. We plan to rebuild our inventories as we progress in Brazil. Most of our sales will occur in the second half of 2023, and we aim to achieve a comfortable inventory level by mid-year to fully meet demand in that period. Overall, we expect to recover by the end of the year, and any impact from timing differences will not be felt as severely as in previous years.

Just your Enlist penetration comments on 2023, I mean you have the targets for '25. Is '23 now ahead of your plan? And does that change what you think the ceiling could be in 2025? Could you be above 60%?

Josh, a few months ago we communicated the potential for growth, and we've since raised our expectations. Currently, we're still in the discovery phase regarding the full scope of this opportunity, so I can't provide a specific update. This will depend on several factors, both within our control and outside of it. However, as we approach 2023, we anticipate that Enlist E3 will become the leading technology in the crucial soybean seed market. This represents a significant milestone for us. The success will ultimately be determined by the market, based on the performance of our technology and system, Seed and Crop Protection. We're confident about our 60% projection today and believe we will continue to have strong genetics, both from us and other market players. Furthermore, we possess the best crop protection system available, which enhances our optimism regarding our long-term prospects.

Congrats on the results. Just wanted to stay along the lines around the royalties and some of the planning framework as you've mentioned that your expectation is that corn is going to lead the planted area in the U.S. next year. Are there any signs that you've seen that from like farmers' demand? Because obviously, that would be supportive to your royalty reduction if there's more demand for corn versus soy. So just to put a little bit into perspective, what if farmers' decision switching back to corn? And how much is really would you improve by accelerating Enlist and drive more of your own germplasm?

Yes, I'll start off with that. Looking at 2023, it's still early from a North America perspective, but we anticipate approximately 180 million acres of corn and soy will be planted, which is a slight increase from last year. We hope not to see a repeat of the prevent plant area we had this year, which was higher than normal. The market is leaning towards corn based on fundamentals. A key indicator is the ratio of the November '23 soybean price to the December '23 corn price, which is currently around 2.15 to 2.2. This suggests a favorable environment for corn, likely the best we've seen in several years. In terms of customer signals, it's difficult to gauge from our current orders. We're engaging with customers, discussing their plans and seed bookings for the next season. Farmers will take a step back to monitor various factors, primarily the weather, which Chuck mentioned earlier. There's a long way to go before planting begins, and while the current dry conditions are concerning, we're hoping for more normal winter precipitation to improve crop conditions. Farmers will be attentive to the markets and the potential profitability of each crop, making individual decisions that often involve subtle shifts in acreage. It's not easy to capture these changes on a larger scale; it really varies by farmer. We'll continue to support our customers throughout this process and assist them with their hybrid and variety decisions. This is why we believe the market is currently leaning towards corn.

I just wanted to get your thoughts maybe on growth of top line and EBITDA into next year. So on the top line, if we look at the slide with some of the positives and negatives, it looks like we can get to about a mid-single-digit level of revenue growth. And given maybe the $100 million of royalty reduction and some of the other drivers, that could be levered to maybe high single-digit EBITDA growth. Is that the right way to think about what you're preliminary thinking about '23?

Let me share my perspective first, and then Dave can provide more details. Looking back to our September Investor Day, we presented a three-year plan aimed at significant value creation, targeting 21% to 23% EBITDA margins and projecting EBITDA to grow from $2.6 billion in fiscal 2021 to between $4.1 billion and $4.7 billion. We are currently very confident that we are on track with this value-creation plan, which Dave mentioned is very consistent. We will provide more specific figures in February when we give our full-year guidance. However, based on our current outlook, we feel assured that we are progressing according to plan. Dave, do you have any final comments?

I think that summarizes it very well.

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