Corteva Inc (CTVA) — Q4 2023 Earnings Call Transcript

Good morning and welcome to Corteva's fourth quarter and full year 2023 earnings conference call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer; and Dave Anderson, Executive Vice President and Chief Financial Officer. Additionally, Tim Glenn, Executive Vice President, Seed Business Unit; and Robert King, Executive Vice President, Crop Protection Business Unit, will join the Q&A session. We have prepared presentation slides to supplement our remarks during this call, which are posted on the Investor Relations section of the Corteva website and through the link to our webcast. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including but not limited to, those discussed on this call and in the Risk Factors section of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in our earnings press release and related schedules, along with our supplemental financial summary slide deck available on our Investor Relations website. It's now my pleasure to turn the call over to Chuck.

Thanks, Kim. Good morning, everyone and thanks for joining us. I hope your year is off to a great start. There are several key takeaways I'd like to share with you today, including an overview of the market fundamentals, our solid 2023 performance, and an update on our path to incremental value creation by 2025 with a closer look at what's ahead for 2024. First, I would say that our 2023 performance validates the effectiveness of our value creation strategy and its key levers of portfolio simplification, royalty neutrality, product mix, and operational improvements. At our core, we are a technology company and last year, we had more than 400 new product launches. In Seed alone, we introduced 300 new hybrids or varieties, two new product concepts, and 41 new trade or stack registration approvals. In Crop Protection, our team delivered and launched about 140 new products in two new actives, Adavelt and Reklemel, the latter being the first of its kind, selective nematicide that also has beneficial soil characteristics. The outcome of the strategic and operational actions implemented over the last two years demonstrates the significant progress we have made in converting every dollar of sales into more cash and earnings. With this solid momentum, we entered 2024 well-positioned and are confident in our ability to deliver value to our customers and other stakeholders. As we look ahead, overall ag fundamentals remain constructive. Large global crop production is being met with rare demand for grain, oilseeds, and biofuels. In North America, corn production and yield for the 2023-2024 crop year is expected to hit a new record despite the productivity challenges that farmers must face related to weather and disease, a testament to the importance of ag technology. Brazil could be the exception with weather influencing crop stress and planting decisions. Commodity prices have declined from their peaks as global stocks to use have grown, but remain elevated as demand continues to keep pace with production. Global crop area is forecasted to increase in 2024 with a modest shift in the U.S. from corn to soybeans. In addition, U.S. farm income remains above the historical average, slowing down from its 2022 peak. What has not changed is farmer demand for breakthrough innovation and technology, including seeds that maximize yields which, in turn, boost farmer revenue. With on-farm demand remaining overall strong, the crop protection industry is still going through what we refer to as a rebalance as it recovers from de-stocking that had a challenging and abrupt impact on the market in 2023. While we expect this to continue to normalize throughout the first half of 2024, we're seeing signs of improvement, which gives us more confidence in what the crop protection market should look like as we enter the second half of this year. Once we get into 2025, we expect the imbalance between product going into the channel versus what is being applied on the farm to be back in sync. On full year results for 2023, Corteva continued to deliver with 5% operating EBITDA growth and 116 basis points of margin expansion. Our Seed business, in particular, had an outstanding year with Enlist E3 soybeans achieving the status of being the number one selling soybean technology in the United States, where it reached 58% market penetration. The Enlist system, including our herbicide offerings, reached $1.7 billion in sales in 2023, growing in a well-supplied market. Our new product sales held steady year-over-year at about $1.9 billion for the full year, and the Biologicals business had a strong year, delivering both top and bottom line growth. Between strong demand for our innovative seed technology, costs and working capital discipline, as well as healthy farmer income levels in North America, our free cash flow in 2023 exceeded our previous estimate, coming in at about $1.2 billion. We returned approximately $1.2 billion to shareholders via dividends and share repurchases for the full year, while also funding approximately $1.5 billion of acquisitions. Turning to 2024. And I'll turn this over to Dave in just a minute but at a high level, we should expect to see another year of meaningful margin expansion with a heavy focus on cash generation. As a result, we expect to deliver 2% top line and 6% operating EBITDA growth at the midpoint, which reflects another incremental EBITDA margin improvement of nearly 100 basis points. We foresee another year of strong cash flow generation and plan to execute $1 billion in share repurchases over the course of 2024. Now, let's spend a few minutes on key themes as we transition from 2023 into 2024. In 2024, we expect Seed to have another strong year as farmers continue to look to effective technology to boost yields while offsetting the effects of climate change and increasing pest pressures. In Crop Protection, we're expecting volume growth but also continued pricing pressures, so low single-digit sales growth overall. We expect to increase our Biological sales by double digits and nearly double earnings. And although we expect the effects of de-stocking to linger through the first half of the year in certain regions, we're beginning to see the benefits of cost deflation. All-in, we believe volume gains from our differentiated portfolio, as well as operational improvements and a modest recovery in Brazil will more than offset expected price headwinds. We plan to launch more than 300 new seed hybrids and varieties, putting much-needed solutions in farmers' hands. Our Seed pipeline is the best in the industry. Promising technologies like gene editing will make our innovation more effective, sustainable, and accessible to everyone from startups to large customers. The incremental yields from the advanced technologies in our pipeline allow us to continue our long-standing price-for-value strategy. Importantly, we have adjusted the 2025 financial framework based on current market factors. The expectation is for continued strong EBITDA growth off the 2023 base and EBITDA margin rate of 21% to 23% in 2025. Benefits from our self-help actions give us the ability to invest in R&D and future innovation. The overall strategy is very much intact. Differentiation in our portfolio, strengthening our route to market, and cost performance are all driving value. This is the formula that has been working and will continue to work for Corteva. With that, let me turn the call over to Dave.

Thanks, Chuck, and welcome, everyone, to the call. Let's start on slide 6, which provides the financial results for the quarter and full year. You can see from the numbers that both for the fourth quarter and the full year, we continued to deliver operating EBITDA growth and margin expansion. Quickly touching on the quarter, sales and earnings were largely in line with our expectations. Organic sales were down 8% compared to prior year with Seed pricing gains offset by volume declines in both Seed and Crop Protection. Seed volume gains in North America and Europe were offset by volume declines in Latin America and Asia Pacific. In Crop Protection, as expected, we saw continued inventory destocking in both Latin America and Europe. Importantly, we did see volume gains in North America as destocking in the region seems to be largely behind us. Turning to the full year, organic sales down 3% versus last year with pricing gains offset by lower volume. This includes a 4% impact from product exits. Total company pricing was up 7% with double-digit Seed pricing and price gains in all regions. Despite the reduction in top line growth, strong operational performance translated into operating EBITDA of nearly $3.4 billion for the year, an increase of 5% over prior year and margin expansion of 116 basis points. And finally, free cash flow for the year 2023 was approximately $1.2 billion or 35% conversion rate on EBITDA. The improvement in free cash flow from last year was driven by increased earnings and working capital improvement, primarily inventory and accounts receivable, with a partial offset from accounts payable. Let's now go to slide 7 to review sales by segment. Seed net sales were up 5% to nearly $9.5 billion. Organic sales were up 7% on strong price execution as we continue to price for value. Global seed pricing was up 13% with gains in every region and across the portfolio. Seed volumes were down 6% versus last year. Gains in North America, driven by increased corn acres were offset by declines in Latin America due to lower expected corn planted area and delayed planting in Europe, driven by the exit from Russia and lower corn planted area. The exit from Russia represented a 2% volume headwind for the Seed business. Crop Protection net sales were down 9% compared to last year to approximately $7.8 billion. Organic sales were down 12% with pricing gains more than offset by volume. Crop Protection pricing was up 2% and driven by demand for new products. Crop Protection volumes were down 14% for the year, impacted by channel destocking and Brazil market dynamics as well as more than $400 million headwind or 5% impact from exits. Finally, the Biologicals acquisitions added approximately $400 million of revenue, which is reflected in Portfolio and Other. With that, let's go to slide 8 for a summary of full year operating EBITDA performance. For the year, operating EBITDA increased approximately $160 million to about $3.4 billion. Pricing gains, coupled with improvement in net royalties, productivity, and cost actions more than offset declines in volume and higher cost and currency headwinds. The approximately $380 million of cost headwinds were related to seed commodity costs and unfavorable yield impact as well as crop protection inflation on input costs. Crop Protection raw materials costs were up 2% versus prior year. Importantly, we're starting to see the impact of lower input costs. During the second half of the year, Crop Protection raw material cost trends went to low single-digit deflation. Market-driven and other costs were mitigated by approximately $200 million of improvement in Seed net royalty expense and $285 million of productivity savings. SG&A spend for the full year was roughly flat versus prior year, including $130 million in SG&A from the Biologicals acquisitions. If you exclude the acquisitions, SG&A was down nearly 5% versus prior year as we maintain disciplined spending, coupled with lower incentive comp accruals despite year-over-year inflation. Let's now transition to a discussion on the guidance for 2024 on slide number 9. We expect net sales to be in the range of $17.4 billion and $17.7 billion, representing 2% growth at the midpoint, driven by seed pricing and volume growth in both Seed and Crop Protection on demand for new and differentiated technology. Volume growth will be muted by approximately $100 million of product exits in 2024. Operating EBITDA is expected to be in the range of $3.5 billion and $3.7 billion or more than 6% improvement over prior year at the midpoint. Margin is also expected to improve with price and product mix, cost deflation, and productivity actions translating to 90 basis points at the midpoint. Operating EPS is expected to be in the range of $2.70 and $2.90 per share, an increase of 4% at the midpoint, which reflects earnings growth and lower average share count, partially offset by higher net interest expense and a higher effective tax rate. We expect free cash flow to be in the range of $1.5 billion and $2 billion, with higher earnings and working capital improvements, partially offset by higher net interest and cash taxes. At the midpoint, it translates to a free cash flow to EBITDA conversion rate of roughly 50%. Note that the free cash flow was revised to utilize cash from operations on a continuing basis. Turning to Slide 10, you can see the operating EBITDA bridge for 2024 from approximately $3.4 billion in 2023 to $3.6 billion at the midpoint for 2024. Total company pricing in 2024 is expected to be flat to modestly up with low single-digit pricing in Seed to be offset by declines in Crop Protection pricing given ongoing destocking, particularly in Brazil and global market dynamics. Importantly, we do expect volume gains in both Seed and Crop Protection. Seed volume gains are driven by expected increased US soybean acres in planted area in Brazil, safrinha for the 2024/2025 season. In Crop Protection, we expect mid-single-digit volume growth in 2024, led by Latin America and driven by global demand for new and differentiated products. New crop protection product volume is expected to be up high single-digits, driving incremental organic revenue. Additionally, we'll benefit from Spinosyns' capacity expansion as we expect high single-digit growth from the Spinosyns franchise. 2024 will be another significant step in our path to royalty neutrality with a $100 million improvement in net royalty expense, with increased benefits in both out-licensing income and royalty expense driven by Enlist E3 penetration. And after two years of high levels of input cost inflation, we expect to see low single-digit deflation in Crop Protection raw material costs. Productivity and cost actions in both Seed and Crop Protection, combined with input cost deflation, are expected to add approximately $300 million of benefits. We expect an increase in SG&A spend in 2024, driven by normalized bad debt and compensation accruals. We'll also continue to invest in the future with increased investment in R&D, which is expected to now be approximately 8% of sales. And finally, the Biologicals franchise is expected to add approximately $90 million of operating EBITDA with improved margins in 2024. Regarding the timing of sales and earnings in 2024, we're expecting over 60% of sales and roughly 80% of EBITDA to be delivered in the first half of the year. We also expect to see a timing difference between the first two quarters versus prior year due primarily to the strength of Crop Protection in the first quarter of 2023. You'll recall that Crop Protection's first quarter 2023 was prior to the significant impact of channel inventory destocking. For Seed, we're assuming a normal delivery pattern in the Northern Hemisphere, which could shift significantly between first and second quarter depending on weather conditions. With 2024 guidance in mind, let's go to Slide 11 to review the key drivers of earnings growth in 2024 and 2025. And as Chuck said, we've adjusted the 2025 financial framework based on our actual results for 2023 and the expectation for continued earnings growth and margin expansion in both 2024 and 2025. Now, in 2023, we delivered an incremental $800 million in EBITDA versus 2021. Given the market dynamics in 2023, this was no small feat and clearly differentiates us from our peers. We have a plan to generate an approximate $800 million of additional EBITDA growth by 2025, which translates to low double-digit compound annual growth rate between 2023 and 2025. A number of the drivers of our anticipated performance of about $4.2 billion of EBITDA and 22% margin in 2025 are within our control. We've demonstrated our price-for-value strategy in Seed and we expect this strategy to continue. Our royalty neutrality strategy delivered more than $200 million in benefits in 2023 alone and is going to add another $100 million per year in both 2024 and 2025. What's even more exciting is that we're starting to see benefits from our out-licensing business as we migrate a greater portion of our portfolio to our own proprietary technology and we expect that to meaningfully grow in the next decade. The rebalance in the Crop Protection industry will take some time. We expect it to be achieved by 2025, but underlying demand and applications at the farm gate remain solid. The differentiated portions of our Crop Protection portfolio, including our new products, together with its Spinosyns franchise and our Biologicals franchise, will continue to outpace market growth in 2024. The differentiation will also protect our business from the most severe elements of pricing competition, which are largely in the non-differentiated portions of the industry. Now, we delivered more than $315 million of combined productivity and cost actions in 2023 across the business. And our plan is to deliver another $200 million per year in both 2024 and 2025, and this does not include an additional improved net royalty or the deflation benefit that we anticipate will grow into 2025. Importantly, we'll also continue to invest more in R&D and our future innovation. With that, let's go to Slide 12 and transition to the setup for 2025 and the assumptions included in the base case as well as what could drive EBITDA to the low and high end of the range. Now, in both 2024 and 2025, we expect low single-digit Seed pricing, driven by demand for yield advantage technology. One of the biggest variables in our assumptions is how much growth we'll see in the Crop Protection business, given the current market imbalance. While on-farm demand remains relatively consistent, we're not assuming a significant rebound in the market. New and differentiated products, including Biologicals, would drive much of the Crop Protection growth in 2024 and 2025, as we move towards differentiation in two-thirds of the Crop Protection portfolio. In 2024, we expect to see modest input cost inflation in Crop Protection with Seed costs relatively flat. By 2025, we expect to see more benefit from cost deflation in both Seed and Crop Protection. Our assumptions include increased SG&A due to normalization of bad debt and compensation accruals as well as increased investment in R&D, as we reach our target of 8% of sales. Together, we have a balanced set of assumptions, which gives us confidence in our ability to grow earnings and margins out to 2025 and beyond in both Seed and Crop Protection. So with that, let's go to Slide 13 and summarize the key takeaways. First, full year operating EBITDA performance for 2023 was in line with expectations, led by the strength of the Seed business and we're able to grow EBITDA by 5%. Self-help levers helped improve operating margin by roughly 115 basis points. And importantly, this is going to continue into 2024 and into 2025. The bottom line is that our guidance for this year and the setup for next year 2025 that we shared with you today reflects continued earnings and margin growth, much of which is in our control. And finally, the significant financial strength and balance sheet flexibility give us confidence in our ability to continue to grow and supports our track record of returning cash to shareholders. 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 instructions.

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

Good morning, Vincent, it's Chuck. I'll provide an overview and then Robert can delve into some specifics regarding the market. Last year was quite challenging for the global Crop Protection sector. This year, the Crop Protection market remains somewhat unbalanced, but primarily in a few regions. Brazil continues to have sufficient supply, and there are some areas in Europe experiencing similar conditions. However, in the US, destocking appears to be largely complete, and the market is now functioning quite normally and is in good health. Looking ahead to 2024, we anticipate that the global industry will likely see a decline in the low single digits, primarily due to pricing factors. Volumes seem stable and are expected to grow, which we project will continue into 2024. The first half of the year may be challenging for Crop Protection, but we anticipate normalization and stabilization in the latter half. This outlook applies broadly on a global scale. As we consider 2025, we believe it will resemble a more typical year for the Crop Protection industry, with low single-digit growth returning off a new lower base. That provides the context for 2024 and our initial look at 2025. Robert, would you like to discuss specific markets?

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

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

Good morning, David. The Seed market is still very strong, and we've noted consistent demand for top-tier Seed and Crop Protection. This steady backdrop is important to consider alongside the current situation in the Crop Protection industry, where we anticipate some destocking in 2024 that will affect our business. This has influenced our guidance for the upcoming years. We expect that by 2025, as the global Crop Protection market stabilizes, we should see growth. Additionally, we have a significant opportunity for value creation by focusing on internal improvements related to costs and productivity. Our out-licensing royalties have also shown growth, which was over $500 million in 2023. Looking ahead, we expect to achieve between $350 million and $450 million in self-improvement initiatives in 2024 and 2025, with some deflation impacts as well. A key point to note is that deflation is now becoming evident in our financial results, particularly within Crop Protection, and our risk management practices in the Seed business will further benefit us as we approach 2025. In response to your specific question, it is partly about the timing and extent of deflation affecting our financials, along with some accounting adjustments we will make.

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

Corteva increased its EBITDA by approximately $800 million over the past two years. We expect a similar trend for 2024 and 2025, with a slight decrease in 2024 and a higher increase in 2025. We've observed this pattern in 2022, followed by a slight dip in 2023. This gives us confidence in our trajectory towards 2025, especially since we haven't adjusted our margin. We feel assured that we are on the right path.

Hi, good morning, everyone. I want to refer back to slide 10, which shows the 2023 operating EBITDA bridge. When examining the bridge and the various factors, particularly the tax overhead, we've discussed controllables and costs extensively. However, the data indicates that overall, costs are not contributing to your growth or earnings in 2023. You have implemented several cost benefits and cost programs, along with reduced seed royalties, yet there are also increased costs in SG&A and R&D. Can you clarify this and help connect the dots on why, at a high level, costs appear not to be driving growth despite your discussions on the right side?

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

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

In Crop Protection, we expect to see benefits from direct material costs. We are assessing the addressable spend and opportunities for improvement as we move into the second half of this year. A low single-digit increase seems reasonable for 2024. Regarding Seed, there will be a delay in how market commodity costs impact our P&L, tied to our commodity hedging strategy. For 2024, a significant portion of these costs will reflect grower compensation and procurement activities from 2022 and 2023. Additionally, FIFO accounting will also play a role in the Seed numbers. There are various factors at play beyond just commodity costs, but we don't foresee a significant change year-over-year in the cost of goods sold for the Seed business as part of our guidance.

Thank you very much. I want to focus on Latin America. Clearly, there were weather impacts that you had indicated in the previous conference call. I'm interested in your thoughts on what the overall impact might have been. Additionally, regarding that region, you're expecting destocking to continue into the beginning of the year, but you also mentioned market dynamics in Crop Protection, which I assume relates to generic competition. I would appreciate an update on what you're observing in terms of the impact of generics in Brazil specifically. Thank you.

Good morning, Frank. Let me provide a high-level overview, and then Tim will share a situation happening in Seed, followed by any insights Robert may have on Crop Protection. You're correct that Latin America is a diverse region for us, but this is primarily a situation in Brazil. In 2023, I would describe it as a perfect storm. Crop Protection destocking was especially noticeable in Brazil, alongside severe weather challenges that slowed down destocking and affected the planted acreage of the safrinha crop. Additionally, there are various macroeconomic conditions at play. Sorting this out will take some time. However, we are moving in the right direction. A positive note is that the long-term trends and structural opportunities in Brazil remain unchanged. It will continue to be an ag growth market in the future. There have been some variables in Seed and Crop Protection. I’ll now hand it over to Tim to discuss Seed.

Thank you, Chuck, and good morning, Frank. Looking back at the situation heading into the season, we experienced a significant and rapid decline in commodity prices due to the large yields and ensuing high carryover stocks from the last safrinha season. Additionally, the highly variable weather conditions significantly delayed the start of the soybean planting season in key Brazilian markets. This included drought or insufficient moisture early on in some areas, while others faced excessive moisture further south. As a result, a considerable portion of the soybeans ended up being planted later than ideal, which affects farmers' ability to plant corn during the optimal times. As we discussed in November, we were at a critical juncture needing to plant that crop. My estimate is that about 20% to 25% of the soybeans were planted outside of the optimal window for following up with corn. While I won't quantify exactly how much corn may not be planted at this stage, I've spent significant time in the marketplace over the last three months, engaging with customers and channel partners, and receiving feedback from our commercial team. Based on our current assessment, we expect a double-digit reduction in the acreage planted to corn for both the safrinha and the already planted summer season. However, farmers are still planting corn where conditions allow. I witnessed this firsthand in Brazil last week, where they were harvesting beans and immediately planting corn. The momentum for corn remains strong, even amid the reduced commodity prices. Our expectation, as Chuck mentioned, is to return to more typical corn planting levels next year, similar to the safrinha hectares for 2022 and 2023, which should be a significant factor in the second half of next year. Corn continues to be a profitable crop, and the demand for rain in Brazil is still on the rise, highlighting its importance. Moreover, we've seen strong agronomic reasons to plant corn, and the soybeans being harvested now that followed corn last year are performing better than those that were not rotated. We remain optimistic, and the fundamentals remain robust, even though this safrinha season in Brazil is quite challenging. Now I'll hand it over to Robert for Crop Protection.

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

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

Good morning, Steve. I'll address your questions. We're currently focused on North America Seed. Since we began operations on August 1st, we've spent the time until December collaborating with customers, creating proposals, and securing commitments. We feel confident about our current order book. The order timing aligns with our past experiences and expectations, and there has been no shift in the technology mix, which is encouraging. Regarding pricing, it's a competitive environment. This year, soybeans seem to be a bit more competitive than corn, with many players vying for market share. However, as we approach the planting season in about 70 days, our prices remain stable, and we feel positive about our position. Customers recognize the value we offer, and our team is dedicated to executing our strategy. Although we can't predict future developments with certainty, we believe we are in a strong position regarding price stability. As for E3, our current order status aligns with what we anticipated, and we estimate that about 60% of the market has converted to E3 this year. We don't have complete visibility concerning our licensees, as over 100 companies are also marketing Enlist E3 soybeans, but we're confident in the 60% figure. Everything appears to be proceeding as expected. Regarding the royalty reduction, most of the benefits we expect this year will come from decreased royalty payments, particularly in soybeans. This is the main contributor. Looking ahead, as Chuck mentioned earlier, we anticipate a transition starting in 2025, where the benefits from royalties will surpass the reductions we are currently seeing. This transition will be a significant milestone for us. I believe I've covered all your points.

Thank you. Good morning, everyone. I would like to receive more information regarding the free cash flow outlook, particularly the strong performance in the fourth quarter and the expected developments in 2024. How should we consider the normalization in crop protection production? Will this result in an increase in your payables balance? How is the working capital change expected to progress throughout the year, and are there any notable differences in working capital trends between Seed and Crop Protection, given the distinct trends in those two areas?

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

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

Yes. I believe Robert has already addressed some of this. Good morning. In the third quarter, we observed a significant increase in imports, especially from generics entering Latin America. However, as we move into the fourth quarter and look ahead to 2024, imports into Latin America are decreasing and slowing down, including generics. We noted that the price levels we experienced at the peak were not sustainable, and this rebalancing is occurring. It’s important to recognize that profitability is essential when distributing products globally and within these regions. Thus, we’ve seen a deceleration. Generics are a component of this market and will remain, but they are not our primary focus. We have made strategic decisions to shift our portfolio away from these products, as we aim to add value through differentiated technology services with strong agronomic support, which we believe farmers need and are prepared to invest in. To directly respond to your question, yes, we have noticed a reduction in imports into Brazil, including generics.

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

Hey, Josh, good morning. I'll try to address this. It's no secret that corn has always been more profitable for us than soy in North America. However, we anticipated this change, and it has been accounted for in our projections. The difference in profitability between corn and soy is still present, but it's not as significant as it used to be. This is because we are no longer reliant on external technology for soybeans. Compared to where we were three, four, or five years ago, soy is now much more profitable. While there is still a difference, we have included it in our calculations, but it's not as pronounced as it was before the major shift with Enlist E3 in our business.

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