Corteva Inc (CTVA) — Q4 2022 Earnings Call Transcript

Good morning and welcome to Corteva's fourth quarter and full year 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's now my pleasure to turn the call over to Chuck.

Thanks, Kim. Good morning and thanks for joining us today. I hope everyone's year is off to a great start. There are several key messages I'd like to share with you today including our strong 2022 performance, an overview of the market fundamentals and an update on our value creation plan, with a closer look at what's ahead for 2023. Corteva executed well amidst a dynamic market environment, delivering double-digit sales and operating EBITDA growth, as well as over 200 basis points in margin expansion. Enlist E3 soybeans reached about 45% market penetration in the US and new product sales in Crop Protection reached over $1.9 billion for the full year, an increase of more than 30% over the prior year. On capital deployment, we returned more than $1.4 billion to shareholders via dividends and share repurchases for the full year. Our 2022 results support the value creation plan presented at Investor Day, where we outlined a framework to achieve $4.4 billion of EBITDA by 2025, with a margin range of 21% to 23%, and we're on track to do just that. The framework is simple and straightforward and hinges upon four key elements: portfolio simplification, royalty neutrality, product mix, and operational improvements. The strategic and operational actions implemented since we announced the plan show that we are already making progress on accelerating our performance, and we were even able to achieve some of that value in 2022. We remain committed to our value creation plan, and 2023 is going to be a year largely focused on execution. As a reminder, a critical part of our refined strategy involves increasing investment in R&D. We're focused on delivering greater value to farmers through more differentiated and sustainably advantaged solutions and leveraging our pipeline to drive advancements in global food security and climate change. On the M&A front, we announced our intent to acquire Symborg and Stoller, two biological acquisitions which are both set to close in the first half of 2023. These acquisitions reinforce our commitment to providing farmers with environmentally friendly, sustainable tools with proven effectiveness that complement evolving farming practices and help them meet changing market expectations. As communicated previously, we expect that biologicals will be the fastest-growing segment in the Crop Protection industry over the next decade. Turning to the outlook, we entered 2023 well-positioned with best-in-class technologies to continue to deliver market-leading value for our customers, as we tilt our portfolio towards our differentiated offerings. This is a big step change year for our Enlist platform. We're expecting E3 US soybean market penetration in the mid-50s and a royalty reduction benefit of over $100 million. Organic sales of new Crop Protection products, including our Enlist herbicide, are expected to grow by an additional 20%. We’re on track to cross $1 billion in annual sales with our Spinosyns franchise. More broadly, we expect that favorable pricing and mix in addition to productivity and restructuring benefits will continue to outpace headwinds associated with cost inflation. We will also continue to monitor the effects of currency, which we believe will be a headwind this year. As a result, for 2023, we expect to deliver 5% sales growth in between $3.4 billion and $3.6 billion in operating EBITDA, translating into yet another year of impressive margin expansion. Now let's spend a few minutes on the market outlook on slide 5. Market fundamentals remain constructive, as we enter 2023. Global grain and oilseed stocks are tight due to last year's below-trend yields which were impacted by dry weather in the Northern Hemisphere and the war in Ukraine. Crop prices, which remained well above historic averages, are supported by tight supply-demand fundamentals globally. Farmers are financially healthy with strong liquidity, and they will continue to prioritize yield to meet market demand and offset inflationary pressures. Farm income is expected to be one of the largest ever, albeit below the record achieved in 2022. Demand for corn and soybean oil is expected to grow in 2023, supported by strong energy prices and policy adjustments focusing on low-carbon energy sources. Crop area is forecasted to be up in most major crop-producing regions in 2023. The USDA gave a January update indicating U.S. planted area is estimated to be 91 million acres for corn and 89 million acres for soybeans, both showing increases versus 2022. We continue to monitor the effects of weather around the globe, including the drought conditions in Argentina. Brazil is projecting that national grain output for the 2022-2023 crop season will be a new record, translating to low- to mid-single-digit growth. We expect these positive market conditions to continue throughout the year and could extend well past 2023 depending on supply-demand dynamics which is consistent with our previous messaging, that global grains and oilseed inventories need to be rebuilt over at least two years. And with that let me turn it over to Dave to provide details on our financial performance, as well as updates on the 2023 outlook.

Thanks Chuck and welcome everyone to the call. Let's start on slide 6, which provides the financial results for the quarter and full year. You can see in the table, we finished 2022 with another quarter of strong performance. Quickly touching on the fourth quarter, organic sales were up 11% versus prior year, led by Latin America and North America. The strong organic sales translated into earnings of $370 million for the quarter with more than 200 basis points of margin improvement. Turning to the full year, organic sales grew 15% versus 2021 with broad-based pricing and volume gains. Global pricing was up 10% over the prior year with notable gains in both seed and crop protection. Seed volumes were flat due mostly to lower planted area in the U.S., canola supply constraints, and the impact of our exit from Russia in EMEA. Crop Protection volume was up 9% for the year, driven by strong demand for new products. These new products delivered over $475 million in sales growth year-over-year, an increase of more than 30%. We delivered $3.2 billion in operating EBITDA for the year, an increase of 25% over the prior year. Pricing, product mix, and productivity more than offset higher input costs and currency headwinds. This earnings improvement translated into more than 200 basis points of margin expansion year-over-year, reflecting the strength in execution by our organization. And as Chuck said, 2022 is an early installment on our multiyear performance goals that we shared with you at Investor Day. So let's now go to slide 7. You can see the broad-based growth with strong organic sales gains in every region for the full year 2022. In North America, organic sales were up 10%, driven by crop protection on demand for new technology including Enlist herbicide. Seed volumes were down versus the prior year, primarily due to a reduction in U.S. corn acres and supply constraints for canola in Canada. Soybean volumes were up 7% driven by penetration of Enlist. Both seed and Crop Protection delivered pricing gains with pricing up 6% and 14%, respectively. In Europe, Middle East and Africa, we delivered 18% organic growth compared to the prior year, driven by price and volume gains in both segments. Seed pricing increased 11% and helped to mitigate currency impacts. In Crop Protection, demand remains high for new and differentiated products driving volume growth of 15% for the year. In the fourth quarter, volumes were muted by approximately $50 million related to the war in Ukraine and our previously announced exit from Russia. In Latin America, organic sales increased 23% with notable gains in both price and volume. Pricing increased 16% compared to the prior year, driven by our price-for-value strategy coupled with increases to offset rising input costs. Seed volumes increased 4% with some pressure due to tight supply of corn, while Crop Protection volumes increased 10% driven by demand for new products. Asia Pacific organic sales were up 9% over the prior year on both volume and price gains. Seed organic sales increased 23% on strong price execution and the recovery of corn-planted area. Crop Protection volume was down 1% due to wet weather and low pest pressure in certain areas, partially offset by demand for new products. So with that, let's go to slide 8 for a summary of 2022 operating EBITDA performance. For the full year, operating EBITDA increased approximately $650 million to $3.2 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, and we particularly benefited from the strong finish to the year including favorable year-over-year performance in our functional spend. We incurred approximately $1.2 billion of market-driven headwinds and other costs over the course of 2022 driven by higher seed commodity costs, Crop Protection raw material costs, and freight and logistics. We delivered approximately $250 million in productivity savings, which helped to partially offset these headwinds. SG&A as a percent of sales was down more than 230 basis points versus the prior year as we maintained disciplined spending and accelerated execution on certain cost actions. Currency was a $290 million headwind driven primarily by the euro and other European currencies. Standing back to performance in 2022 is a result of strong execution by the organization, demonstrating our ability to meet increased customer demand while effectively managing costs through pricing, product mix, and productivity. Turning now to slide 9, I want to provide an update on our full-year free cash flow performance. Free cash flow for the year was approximately $270 million, compared to over $2 billion in 2021. The year-over-year decrease is driven by higher working capital balances, primarily accounts receivable and inventory. Receivables increases were largely due to higher sales, reflecting both volume and pricing. Importantly, DSO metrics remain healthy, benefiting from the strength of farmer incomes and customer collections. In the case of inventory, you'll recall we had significant drawdowns in 2020 and 2021 particularly in Crop Protection. This inventory drawdown was driven by significant customer demand in the face of supply chain challenges, product availability, and shipping and logistics issues. This set of challenges was obviously not unique to Corteva and affected the broader industry. In 2022, inventory increases reflect a rebuild of safety stocks to support growth, higher input and commodity costs, as well as the impact from market volatility. We have now been able to rebuild our inventory levels. We believe we have about the right balances at this time. Due to supply chain dynamics and their impact on working capital over the last few years, it's meaningful to look at the free cash flow to EBITDA conversion over the most recent two years rather than either year in isolation. Free cash flow conversion averaged 42% in a two-year period from 2021 to 2022. In 2022, we returned $1.4 billion to shareholders including $1 billion in share repurchases, a clear commitment to deliver value for our shareholders. Our pension liability continues to be well managed despite volatility in both equity and bond markets. As of year-end, the funded status of the US plan was 92%, and we do not anticipate cash contributions to the US plan in either 2023 or 2024. Now transition to a discussion on the guidance for 2023 on Slide 10. We expect net sales to be in the range of $18.1 billion and $18.4 billion, representing 5% growth at the midpoint driven by pricing and strong customer demand for differentiated best-in-class technology and increased US planted area. Keep in mind that this growth is muted by approximately $600 million of product and geographic exits. 2023 operating EBITDA is expected to be in the range of $3.4 billion and $3.6 billion, a 9% improvement over the prior year at the midpoint. Margins are also expected to improve with pricing, mix, and productivity actions more than offsetting further cost inflation and currency headwinds, translating to roughly 70 basis points of improvement at the midpoint. Operating EPS is expected to be in the range of $2.70 and $2.90 per share, an increase of 5% at the midpoint, which reflects earnings growth, lower average share count, partially offset by a higher effective tax rate and interest expense. We expect our 2023 tax rate to be in the range of 22% to 24%, an increase from the 2022 rate of 20.6%, largely driven by US tax law changes impacting foreign tax credits and the treatment of R&D expenses. Higher interest expense is driven by higher borrowing costs and higher debt balances. As you know, we carry significant commercial paper balances throughout most of the year to fund cash needs. Our 2023 guidance assumptions include a higher average interest rate on the commercial paper balances, as well as higher borrowing to finance growth including the biologicals acquisitions. We expect that free cash flow will be in the range of $1.1 billion to $1.3 billion, with higher earnings partially offset by the higher cash taxes and higher interest expense. At the midpoint, this translates into a free cash flow to EBITDA conversion rate of roughly 34% or approximately 40% over the last three-year period. On Slide 11, I want to remind you of the value creation framework we laid out in September to accelerate our performance and deliver greater value to shareholders. The growth targets we presented included a 2025 operating EBITDA of $4.4 billion or a 22% margin at the midpoint. This slide includes our 2025 performance targets from Investor Day, and it also reflects our actual 2022 performance in today's guidance for 2023. Execution on our strategic decisions including focusing on core crops and markets, pricing for value while being disciplined in cost, is driving margin expansion while also enabling increased R&D investment. Again, our performance in 2022 was a major installment on the path to our 2025 financial targets. Coupled with our guidance for 2023, we're confident we're on track to deliver those targets. So let's now go to Slide 12 to discuss the operating EBITDA bridge for 2023. You can see the pricing in 2023 will be in the mid-single-digit range, which will more than offset the impact from higher commodity costs and raw material inflation. Increased planted area in the US and demand for our best-in-class technology including continued penetration of Enlist E3 soybeans are expected to drive volume increases in North America. Latin America seed volumes are expected to be up for the full year, with the increase weighted to the second half due to supply constraints early in the year from last season's dry weather. Volume growth in North America and Latin America will be partially offset in EMEA, driven by lower expected corn-planted area and an approximate $200 million impact from our decision to exit Russia. Demand remains strong for differentiated technology, which will drive increased volume in Crop Protection. Sales of new crop protection products will add approximately $300 million of incremental organic revenue. We'll benefit from the ongoing Spinosyns capacity expansion as we expect the franchise to generate more than $1 billion in sales in 2023. Volume growth will be partially offset by the approximately $400 million impact from our previously discussed product exits including commodity glyphosate. And while we're seeing some slowing in the rate of inflation as well as overall supply chain improvements, the operating environment is still dynamic. For the full year of 2023, we expect approximately a 6% increase in market-driven cost headwinds including higher commodity prices, input costs, and freight and logistics. This impact should be largely weighted to the first half of the year reflecting seed commodity cost impact and the sell-through of higher-cost inventory. This translates into high single-digit rates of inflation in the first half of the year dropping down to low single digits in the second half. In addition to these market-driven costs, we expect additional headwinds on other costs of sales. Importantly, the outlook includes approximately a $100 million reduction in royalty expense and an additional $300 million of productivity and restructuring benefits. Another key element of our cost structure, and consistent with our multiyear plan, we are increasing our investment in R&D in 2023. Regarding currency, we expect continued headwinds. Our assumption is for a weaker exchange rate relative to the dollar for several key currencies including the Brazilian real, the euro, and the Canadian dollar. We estimate a 3% to 4% currency headwind on revenues and low double-digit headwind on EBITDA. Now, it's important to note the guidance does not include the impact of the biologicals acquisitions which are expected to close in the first half of the year. We'll provide an update for 2023 to include these acquisitions in the quarter in which they close. So, let's now go to slide 13 and summarize the key takeaways. We had great performance in 2022 with 15% growth in organic sales, more than 200 basis points of margin improvement, amidst a dynamic operating environment. We have favorable momentum and we'll carry that into 2023 and expect another year of strong performance in growth, supporting our 2025 financial targets. And finally, we're investing in innovation in the future of Corteva. We remain committed to a disciplined capital allocation strategy that is a balance of investing for growth or returning cash to shareholders. Since 2019, our capital deployment was heavily weighted towards returning cash to shareholders as we returned more than $3.6 billion through share repurchases and dividends. In 2023, against the backdrop of M&A, this distribution will be tilted towards investing for growth as we close on the previously announced biologicals acquisitions in the first half of the year. And with that, let me turn it 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 instructions.

Thank you and good morning everyone. Wondering if I could ask on the value creation program? Just it looks like there probably was some upside from that in the fourth quarter versus expectations just given how strong the quarter came in and what's normally a very weak quarter. Are you just finding that you're getting stuff done faster? Are you finding more stuff to do, or is it both?

Good morning Vincent. That's right. So, look when we look at the performance for 2022, what I'd start with is we're very pleased with the year and we had a very strong year across the board and really focused on execution. Obviously, the market fundamentals are robust we've said that. We believe that conditions are going to be constructive through 2023, and potentially into 2024 depending on supply-demand. And when it comes to the value creation framework, right now, we'd say we're actually a little ahead of the plan and that's really driven by – we got after some of the portfolio decisions a little sooner than we thought. And we took some of the cost management actions, and you could see that hit the bottom line. If you look back to the value creation framework that we proposed in September, we indicated somewhere between 100 and 150 basis points per year. In 2022, we hit 200 basis points. So there's some acceleration there. We are finding new opportunities every day. So we'll give the market an update at the right time. But what I'd say right now is we're very comfortable with the $4.4 billion in the 21% to 23% margins by 2025. And 2022 sort of reflects that with a bit of an acceleration from some of the actions we took a little faster than we thought we could get after.

Thank you. Good morning. Chuck on 2023 guidance the low end $3.4 billion. I guess, the question is why is this so low given the strong tailwinds we're seeing? I understand cost FX headwinds, but how conservative is that low end of the guidance range in your view?

Yeah. Good morning. Let me give you the high-level view that I have and then I'll ask Dave to talk about the low end but also the top end of the guidance range because there's a pathway to the top end as well. So first of all, what we'd say is the guidance range obviously fits nicely within the 2025 value creation framework. And as I mentioned already, we're on track and a little ahead of schedule. I'd say that the guidance range also reflects some of the headwinds from the portfolio changes. So this is a big year of finalizing a lot of the country exits and the AI rationalization. Last year, we were pretty aggressive as I mentioned. We did over a dozen country exits last year alone, and we have a similar amount lined up for 2023. So, there'll be a lot of the portfolio decisions made in this year. And then finally, from a guidance perspective, there's a bit of a disconnect, and Dave will explain it in detail. We obviously included the higher interest rates to finance some of the growth particularly around Stoller and Symborg, but we did not include any of the earnings contribution from those acquisitions. So there's a bit of a mix there from a guidance perspective. Now, when you think about the guidance range, I'll have Dave talk about the specifics. Go ahead, Dave.

Sure. Yeah. So – good morning, by the way. And if you think about the high end of the guidance versus the midpoint of the guidance, clearly more corn acres in the US would be a positive favorable cost realization of price would be a positive. And then we're also looking at some upside potential in terms of Brazil. To your point on the bottom end, it really still is very much a focus on our part on currency impacts and also just the dynamics in terms of the rate of inflation, which continues to be somewhat dynamic. We're seeing positive early indications on that, but that continues to be something we're very focused on. So you can think of that and then of course in this business there's always, as you know, weather impacts that we would consider. Chuck mentioned, Symborg and Stoller. Our expectation is run rate for 2022 on those businesses in terms of EBITDA collectively is in the range of $120 million. So depending upon the time of the close and Chuck, you may want to comment a little bit on that you could think of something like two-thirds of that coming through and actually benefiting us. And that reflects the fact, as you know, Stoller with being Latin America focused would be towards the end of the year. Symborg, really Europe some of that performance in earnings we won't really capture in 2023. But in 2024 in terms of run rate, we're going to see some very attractive contributions from both of those businesses, which will be very additive both revenue added EBITDA and EBITDA margin additive for the company. Chuck, do you want to talk a little bit about timing?

Yes. David, so if you recall in the prepared remarks, we mentioned closing the deal in the first half. We've got a bit more of an update, we've seen some of the regulatory filings come in. So, what we can say right now is that we've received all the pre-closing regulatory approvals that are required for Symborg. So that's very good news, and we expect that to be in a similar position with the Stoller transaction very soon. So, now we're thinking that we'll be able to close both of these acquisitions in Q1. So, a little earlier than we thought. And of course, good news as Dave indicated, these are going to be good earnings contributions and will be accretive to EBITDA and certainly even accretive to margins. And as we look at it, we're pretty excited that this is a biologicals platform now that we'll be able to continue to grow. So we've got high aspirations for this part of our portfolio, and it looks like we'll be able to close both of these transactions in Q1.

Good morning. This is Cory on for Kevin. And coming up with the 2023 free cash flow range of $1.1 billion to $1.3 billion, what are your assumptions for working capital in 2023?

Yes. We have assumed that our inventory levels in relation to revenue or sales will remain essentially constant. This means that inventory will contribute positively to cash in 2023. Two critical aspects beyond working capital, which I mentioned earlier, are the expected rise in interest expenses due to the increased amount of debt and its interest rates. This will result in a higher cash outflow in 2023 compared to 2022. Additionally, we anticipate higher cash taxes related to the R&D tax credit, specifically the capitalization and amortization rather than the expense benefit we have been receiving. This is a common challenge that many face, and we intend to focus on legislative lobbying as we believe this situation is significantly punitive. Overall, while working capital, after accounting for the increase in receivables, will be a source of cash, we will experience higher cash usage for both interest and taxes.

Yes, Dave, maybe it's a bit more instructive to talk a little bit about working capital and specifically the inventory. If you go back to 2020 and 2021, obviously, the entire industry Corteva included had significant supply chain challenges right across the board. We saw raw material shortages, logistics challenges and as a result we were forced to draw down our inventories to what we would consider to be unhealthy, unsustainable levels and our service levels for our customers, especially around some of the products that are very unique to Corteva. So think about our seed portfolio, but also think about the Enlist platform, these service levels became unacceptable. So, last year we saw an opportunity to rebuild those inventories. We feel now that we've got the right service levels in place to support our customers. And don't forget the global CP market is expected to grow mid-single digits this year. So we're preparing for another good year in agriculture. We're preparing for another good year of growth and we feel we've got the service levels to support our customers, which is very important.

Hi, good morning. Just want to ask a question on free cash flow conversion. So, I think you've been targeting about 50%. You talked about getting a 42% average across 2021 to '22. Can you talk about why the free cash flow conversion is a little bit lower in '23? And then, thinking about that question and thinking about some of your acquisitions this year, what kind of share buyback capacity do you have this year?

Sure, Joel. The brief answer regarding the free cash flow conversion for 2023 relates to the points I mentioned earlier, specifically the higher cash taxes and interest costs compared to the previous year. There are other factors involved, but those are the main contributors. Regarding capital allocation, as you know, we have maintained a balanced approach in executing our capital allocation strategy up to 2022, which was predominantly focused on returning cash to shareholders. That was a very effective strategy during that timeframe. In 2023, however, our focus will shift significantly towards growth, particularly through M&A with the acquisitions of Stoller and Symborg. We plan to continue our share buyback program, but at a reduced level due to the importance of these acquisitions.

One of the best success stories I think Corteva in 2022 was just the progress you've made in CPC margins. You laid out some helpful framework in the PowerPoint, but if you could just offer some further color on first of all just obviously the price/cost environment new product growth the exit of certain business lines. It seems like things are probably ahead of schedule as it pertains to your longer-term margin guidance. So just any additional framework you could offer on that would be very helpful? Thank you so much.

Let me quickly make an introduction before handing it over to Robert for his comments. You're correct, Chris. It's a combination of various elements. We're focusing on differentiated and new products while effectively managing headwinds from cost inflation related to materials and market conditions, as well as currency fluctuations. These factors have posed significant challenges for both our businesses, including crop. However, I believe the outlook for 2023 is positive. It's important to remember, as Chuck indicated, that there is a volume challenge connected to product and geographic exits, especially the product exits within crop for this year. Robert, would you like to provide some insights on the formula?

Sure. When we look at 2022, we can recap how we performed and identify some key drivers. As Dave mentioned, our strategy focused on price for value and productivity. Despite facing about 10% inflation that year, we successfully implemented new technology, and the demand from growers kept increasing. Our new product growth rose by approximately 33%, which highlights the market's interest in that technology. Additionally, our supply chain became more resilient, allowing us to deliver nearly 10% more volume last year. This trend is likely to continue into 2023 as we manage our margins. We plan to stick to our price-for-value strategy while navigating some inflation headwinds in the first half of the year. In 2022, we made structural changes and progressed with our exits, expecting to complete about 70% of our AI exits in 2023. Therefore, 2023 will be a transformative year for us as we adjust our portfolio to enhance margin growth in the future.

Hi. Good morning. This is Patrick Cunningham on for P.J. In crop volumes in the quarter, Crop Protection were down outside of North America and it seems like fungicides took a pretty big hit. Can you walk us through why the Crop chem volumes were so weak in the quarter? Thank you.

Sure. Q4 is one that played out really in South America for us and Latin America. As you look at the big volumes, we had a strong Northern Hemisphere with Enlist continuing to go to fill tanks and took over a lot of tanks this Q4. But in Latin America, the drought is really bad. When it comes to Argentina and Southern Brazil, the fungicide growth that we typically would see there we thought we would see didn't come through; it just wasn't in demand. And so that's really what the difference was in Q4 when you look at volumes. The other thing I would mention is roll back to Q4 2021 Brazil had mid-20s growth in that quarter alone, and so had a huge mountain to compare against as well when you begin to look at Q4 versus Q4.

Thank you. This is someone filling in for Steve. I wanted to ask about the settlement charges related to Lorsban. I believe this is the third quarter this year that you've recorded a charge. Can you provide insights on what you expect for any charges next year? Considering the $7 million charge this year, how will these settlements affect cash flow? Have you already paid the settlements, or are they primarily for future cash flow? How should we view this situation?

Yes, this is Dave. As you know, we have not provided and cannot provide any kind of forward guidance. There's currently no estimate available that would allow us to do that. We will have an $87 million charge for the full year of 2022. At this time, there is limited visibility regarding how that will translate into 2023, and we are not prepared to comment on that. Similarly, on the cash side, that is very much to be determined. We will obviously provide updates as actual results come in and progress.

Yes. Good morning. I wanted to follow up on the Crop Protection Chemical growth that you saw in new products. Obviously, that was a nice success story for 2022. The original guidance was for a $300 million increase in 2022, and you came in at $475 million and you're guiding again for $300 million in 2023. So I'm wondering what went right in 2022? And what could go right in 2023, or what could go wrong in 2023?

Thank you, Frank. We're optimistic about 2023. Looking at our new products, we had a successful year with approximately $1.9 billion in sales, which is a $475 million increase. This success was largely driven by three key products. Enlist saw significant demand, and our estimate indicates that over 80 percent of our spray acres involve it. Arylex performed strongly in Europe, with increasing demand for this herbicide. Additionally, Inatreq, our insecticide, also contributed to our growth. As we move into 2023, we anticipate our new products will continue to grow in the high teens, with each of those three products expected to exceed $300 million in total revenue. The potential for growth will largely depend on the demand for our technology. Given the healthy state of farm fundamentals and growers’ strong profits, there's limited downside for these new products. Growers are focused on maximizing their value through new technologies, which is where we can offer support. This situation exemplifies our strategy to create a more differentiated portfolio, making these new products a critical element of our approach.

Yes. Frank, maybe I'll add one other point. It's not necessarily a new product, but we've got the new Spinosyns franchise capacity that will come into the market in 2023. So beyond what Robert said around that existing portfolio, we've got a capacity expansion, and one of the most profitable franchises we've got with Spinosyns, and that will start to go into the market, the new capacity this year. So we're looking forward to good things from that franchise as well.

Great. Thanks for taking my question. So just looking at the guidance, it looks like you've noted that the cost headwinds are largely weighted to 1H 2023. Is there any potential for maybe cost to surprise to the downside or upside? How would you kind of look at that? And if so, is the pricing that you have in place sufficient to offset some higher costs if there is any possible increase, or would you be able to enact pricing to offset that? I'm just wondering what drives the lower end of your range there.

Maybe I could introduce and then Tim and Robert can comment on their business. As we mentioned, most of our challenges are market-driven headwinds, such as commodity and input costs along with freight and logistics. A significant portion, about 80% of our forecasted costs, will be seen in the first half of the year, with improvements expected later on. Although costs will continue to rise, they will do so at a slower pace in the second half. Overall, we anticipate that seed pricing will more than compensate for these commodity cost increases, and in Crop Protection, we will be able to cover those costs. Additionally, this pricing will help mitigate the currency impacts included in our guidance. Tim, would you like to discuss seed a bit more?

For the first half, we have a solid understanding of our seed costs based on what we produced last year. Our products have been in the marketplace since August in North America, and we've experienced strong performance and demand for our technology. Our pricing has been well accepted due to the value we provide and our ability to demonstrate that to customers. North America is performing well. We've been operating in Europe for about three months, and our pricing there is also holding steady after my visit last week. Looking ahead, we are still producing seed in Brazil and Argentina, which presents some additional exposure to costs. We're actively managing these factors in our guidance and have flexibility with our pricing strategy since we're not fully active in that market yet. We've successfully captured value in Latin America in the past, and we believe we are well positioned to continue doing so while offsetting inflation pressures.

And in Crop Protection, just to add a little bit to that is that we continue to see, as I said before, mid-single digits inflation that will continue with us. It will be heavier in the first half than the second half, but our price-for-value strategy and productivity will continue to help offset that. So far we're seeing good progress in all of our markets with what we're doing and what we're going to market with. And the other thing I'd say is just a comment that one of the key indicators for us is what's going on in the generic market and how is pricing holding there. And all the leading generic producers have come out and said that prices are stable for the first half of the year from what they can see so far. And so that's always a good indicator for us as well as what's price going on there. So we expect we can offset the cost using the same strategy that we've used in the past for Crop Protection.

Good morning. This is Lucas on for Josh. I just wanted to go back to the path for the 2025 targets. So, looking at your EBITDA for this year, I mean that seems to be progressing pretty ratably. You sort of highlighted why your free cash flow is going to be depressed in the next year. So you're kind of looking at like a mid-30s conversion versus the 55 to 75 target. So could you just kind of help us bridge how the free cash flow is going to converge there towards the target range? And if you see any risk there now given it's sort of more back weighted versus what's happening with EBITDA.

I think I would just comment that we've got on a year-over-year basis, obviously, those additional headwinds that I mentioned to you. The other thing that I would mention is that we will get the cash contribution over time from acquisitions. It's not going to be significant, but it will be important to the overall equation. But the other thing is just the growth in EBITDA that's going to occur over that period of time. So we also see some call it improvement as we look to more normal patterns in terms of the cost and inflation issues and some of the supply chain issues that we've been dealing with and the industry have been dealing with in general. All of those are going to be able to be contributors towards the targets that we've talked about. And by the way, just to reinforce again, the 2022 performance combined with the 2022-2023 guide is again a very important statement we think we're making about the attainment of those 2025 numbers.

Yes. Dave maybe just a couple more minutes on this topic. Look, when we, Dave and I look at the free cash flow conversion, it is obviously a focus for the company. So if you think about what we've done as an organization, we started with the portfolio and the strategy and then the operating model for Corteva. And I think we've made a lot of progress in 12 months in those areas. So now the next level of focus, obviously, is looking at the cash conversion. It is a high priority for the management team. It's a complete focus for us. And as we make the structural changes to the portfolio, I mentioned we still have some country exits, some AI exits. That's going to be looked at through the lens of earnings of margin but also of cash generation. And that was always the plan. So what I'd say is we're very comfortable with the path that we're on, and by the time we get to the end of 2023 from a margin and EBITDA perspective, we're going to be halfway through this journey. And we believe that there's a pathway to get free cash flow conversion sort of north of where it is today as well, and that will be a primary focus as we look through the rest of the portfolio changes that we're planning to make.

Yes. Thanks. Good morning, everyone. I wanted to maybe come into the some of the market assumptions that you have both at the industry level and at the Corteva level for 2023 and just maybe on the Crop Protection side. And I know there's some noise related to the portfolio exits, but mid-single-digit kind of market CPC growth. Help me think about Corteva volumes organically for Corteva in that context? And any maybe differentiation by region? And along those lines kind of where you see channel inventories kind of going into 2023 in your key kind of operating regions?

Adam, thanks for the question of what's going on in the market. It's going to be a dynamic year. But as we look at it, we're expecting the market organic growth to be in the mid-single digits, call it 4% to 7%, with biologicals outstripping that. It will be the fastest-moving segment. Overall, the demand continues very strong across all regions. And again, it's – growers are chasing yield and that's where we – that's our sweet spot, I guess, is what I would say with the products we have. You asked about channel inventory, and right now we see inventory to be about normal across all regions with a few hotspots around some pockets that we're going to have to watch. One being, we talked about earlier the fungicide in Latin America is elevated a bit. To a lesser extent, Europe, not near as much, but in a couple of areas in Europe. And then insecticide in Asia is elevated as well because it's just been vet not have pest pressures. But if you roll all that together, those inventory levels from what we see in the channels is very manageable across the year, across the seasons. No issues there from a standpoint of will it work itself out. We do see that the pace of price for the year flattening as compared to a year-over-year comparison. But we – like we said before, mid-single-digit inflation we're still expecting for crop protection. Again, more weighted towards the first half. I think the thing to watch is the global supply chain. So all things are trending in the right direction. If you look at all the key indicators for the global supply chain market. But what I would say is it's stable. It's not getting any worse for the first time in a while. And I guess I'm cautiously optimistic that that continues to improve, but that's one to watch as well to see how does that drive the market as we move into this year. So overall from a market standpoint, it's poised to have a really good year, and we think we're sitting in a pretty good position across all levels there as well. Maybe a couple of comments on seed.

Yes. Go ahead, Tim.

Yes. I think Adam, when you think a seed this year, one of the big movers obviously is the shift back towards corn here in North America. We believe we'll have an increased area in both corn and beans, but that tilt towards corn is very important. Clearly for us, we were still operating in a very healthy environment as well. Customers are generally good in terms of what their farmer income is, and there's certainly as always demand for the latest and best technology that's going to help them be most productive. The dynamics between corn and soy, we watch that all the time up through final decision-making and it continues to tilt towards corn. And I'm comfortable with that current 91, 89 as reasonable assumption. Around the world, certainly dynamics are different than what we see here in North America. In Europe, I'd say that we're probably expecting corn to be flat-ish in the marketplace and that's driven by a couple of markets including Ukraine impacting that. Latin America, still strong momentum there. Certainly, we're in the midst of planting this safrinha season, and here in a few months we'll be out selling next summer corn, as well as soybeans and then on to safrinha. That all comes very fast, but still tremendous growth across Latin America and no reason to see that hectares won't be up, not just this season, but also in the coming seasons as well for Brazil in particular.

Thank you. Good morning. Actually, this is Edlain Rodriguez. A quick follow-up on seed for Tim. I mean, this is the first time in a long time where the seed business has a positive EBITDA in the fourth quarter. Can you talk about how sustainable that trend is going forward? And also, with minus, what's driving that change?

Yes. I would say that the fourth quarter is our second smallest quarter, and we need to keep that in mind. Our business tends to be heavily weighted towards the first half of the year. The main factor in the fourth quarter is definitely Latin America and the live market we have there, which can vary between the fourth and first quarters depending on the timing of the safrinha season. This year, we had a timely start to that season and strong product demand in Latin America. In North America, we don’t sell a lot of Pioneer through the rep model since that business is direct-to-farmer, so not much of that occurs at this time of year. However, we are noticing an increased significance of Brevant in our multi-channel business, and we expect that trend to continue. It's not set in stone as there are seasonal elements to consider depending on how the year progresses, but pricing and volume have been positive factors. We anticipate continual growth in our Latin America business over time, meaning that end-of-year business will remain, and we expect our multi-channel Brevant business to grow as well. This growth has supported our fourth quarter, driven by customer demand coupled with good execution on our part.

Thank you. That does conclude the question-and-answer session. I'll now hand the call back over to Kim Booth. Thank you, Dave. Now, let's move on to your questions. I would like to remind you that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.