Corteva Inc (CTVA) — Q1 2025 Earnings Call Transcript

Good morning. And welcome to Corteva's first quarter 2025 earnings conference call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer; and David Johnson, Executive Vice President and Chief Financial Officer. Additionally, Judd O'Connor, 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 today. Spring is always a busy and exciting time for agriculture, and this year is no exception. 2025 is off to a good start. Planning in the Northern Hemisphere is proceeding well. The weather has cooperated for the most part, and crop protection destocking is firmly behind us. There are some back half risks we are monitoring and we will discuss those today, but let's start with the quarter. Year-over-year, Corteva saw a 15% increase in Q1 EBITDA, nearly 400 basis points of margin expansion, driven by strong cost execution in three growth platforms: Biologicals, crop protection new products, and seed out-licensing. Both of our segments delivered healthy double-digit EBITDA gains. The biggest driver was operational excellence, and on this front, we are tracking well against the $400 million net cost target we set for ourselves. More on this later. This performance allows us to reaffirm our full year guidance, which we announced in February. It also allows us to derisk the second half of the year. David will explain more. Factored into our guidance is the fact that farmers in the US are projected to shift planted area from soybeans to corn, resulting in a projected increase in corn of about 5%. If current trends hold, Enlist beans will be planted on just over 65% of all US soybean acres in 2025. As it approaches maturity, Enlist is the number one selling soybean technology in the US. Our focus is now set on becoming the leading provider of soybean technology in Brazil, and we're making great strides on that front, having sold more than 3 million units of Conkesta E3 soybeans over the last three years. Globally, from an overall industry perspective, we're seeing somewhat mixed fundamentals. Record demand for grains and oilseeds continues, and farmers are investing in premium seed and crop protection technology to enhance and protect their yield. Although corn is faring relatively well so far this year and is less reliant on export trade, overall crop prices and margins have moderated somewhat as planted area shifts and trade uncertainty begins to weigh on the markets. Our seed business is off to a strong start. Organic sales were up 2% in the quarter, driven by pricing, reflecting the value our seed technology consistently delivers to farmers. Our seed order book reflects strong demand for our product lineup, and we are planning to bring about 500 new products to the market this year with approximately 300 new seed hybrids and varieties. We are also seeing meaningful improvements on the cost side, allowing seed to deliver just under 400 basis points of margin enhancement for the quarter. On crop protection, organic sales were up 3% in the quarter, driven by double-digit volume growth for both new products and Biologicals, two of our near-term strategic growth platforms. We've now seen four consecutive quarters of volume gains, a sign that the channel is operating at healthy levels. Our latest view of the crop protection market for the full year is a flattish environment with low single-digit volume gains offset by low single-digit pricing headwinds. For Corteva, we continue to expect high single-digit volume gains more than offsetting low single-digit pricing headwinds. Our revised thinking is that price pressure will persist into the second half but to a lesser extent than what we've seen in the first half. Our plan for crop protection in Brazil for the second half contemplates an EBITDA contribution about the same as last year, a strong performance, but if we did it once, we can do it again. On seed in Brazil, we've spent considerable time talking about the inroads we're making on soybeans with Conkesta, but I'd be remiss not to mention the exciting developments we're seeing in the market for corn. Brazil's corn ethanol industry has seen remarkable growth since the country's first plant opened in 2017. With production poised to nearly double by early next decade, corn is expected to account for nearly a third of Brazil's total ethanol production by 2026, strengthening Brazil's position as the world's second-largest ethanol producer. The rise in production is also linked to Brazil's increasing safrinha corn output, which has doubled over the past decade. Given our leading position in Brazil corn, this is certainly going to be a structural value creator for us. Moving on to tariffs, an important topic in the quarter. This is a fluid situation, as you all know, but I'll summarize how Corteva may or may not be impacted by the tariffs currently in place, which in 2025 is largely a crop protection story. Long story short, based on what we know today, the direct cost impact to Corteva in 2025 should be about $50 million, which we believe is manageable. While we work through the process of identifying the level and nature of mitigation efforts, we have not dialed the puts and takes into our financial numbers that David will discuss in a few minutes. The main takeaway is that tariffs are not impacting our full year guidance range. It is important to reiterate the significance of our domestic manufacturing footprint. Two of our largest crop protection franchises, Enlist and spinosyns, are both produced here in the US. We are also seeing the benefits of our global multi-sourcing capabilities as we work to minimize the impact on costs and customers. That said, our bigger concern lies with American farmers. American farmers are the backbone of the world's food supply, working sun up to sun down to produce the food we eat every day. As the American growing season moves closer to the harvest, we hope to see export markets open up for North American grain and oilseeds. The financial well-being of our farmers affects the entire industry, and the world does need the food. So as we sit here today in the beginning of May, I am pleased with our first quarter performance. Double-digit EBITDA gains and almost 400 basis points of margin improvement is not easy to come by in this market environment, and it is driven by another quarter of operational excellence. While the first quarter doesn't dictate the year in agriculture, the first half is playing out a little better than we expected. The tariff situation appears to be manageable based on what we know today, and we're showing good progress on our growth platforms. I believe we have the appropriate level of attention on improving our cost position through our controllable levers. We expect to generate net cost improvements of $400 million, driven by productivity and raw material tailwinds. Our path to royalty neutrality and transitioning to a net out-licenser technology by later this decade is expected to generate another $65 million in benefits this year. These self-help levers continue to drive value creation for the company and provide meaningful, some might say transformational, margin enhancement through the ag cycle. With that, let me turn the call over to David.

Thanks, Chuck. And welcome, everyone, to the call. Let's start on Slide 6, which provides the financial results for the first quarter. You can see from the numbers, results for the quarter were strong, led by more corn acres in North America along with favorable timing and execution on controllables in both seed and crop protection. Organic sales were up 3% compared to last year, with seed up 2% and crop protection up 3%. Currency was a significant headwind to the top line for the quarter at 5% of sales in line with expectations. Seed pricing was up 3% in the quarter with pricing gains in most regions as we continue to price for value. Latin America was the one exception. Our price was down, as expected, given the competitive dynamics in Brazil as we close out the safrinha season. Seed volume was down 1% compared to prior year. More corn acres in the US and favorable spring weather drove gains in North America that were offset by declines in other regions. Seed volume in EMEA and Latin America was down mostly due to seasonal timing sales. Crop protection pricing was down 2%, as expected, driven by competitive market dynamics. Crop protection volume was up 5% with gains in nearly every region. Notably, new products delivered double-digit volume gains in the quarter. Operating EBITDA was up 15% over last year. Operating EBITDA margin of nearly 27% was up 390 basis points, driven by organic sales growth, coupled with significant benefits from lower input costs and productivity. Moving on to Slide 7 for a summary of the first quarter operating EBITDA performance. Operating EBITDA was up more than $150 million to just under $1.2 billion. Price and mix, volume gains, and cost benefits more than offset currency headwinds. Seed continues to make progress on its path to royalty neutrality with another $20 million decrease in net royalty expense. This improvement was driven by both increased out-licensing income and lower trade licensing expense. Seed and crop protection combined to deliver more than $200 million in productivity and cost benefits, including lower seed commodity costs in all regions, led by North America. In the first quarter, SG&A was up modestly compared to prior year, driven by higher compensation and normalized debt accruals. The increased investment in R&D aligns with our target and is on track to reach 8% of sales for the full year. The higher costs were partially offset by a benefit from currency. As expected, currency was roughly a $90 million headwind on EBITDA, driven by the Turkish lira and Canadian dollar. Both seed and crop protection had an impressive first quarter and delivered double-digit EBITDA growth and meaningful margin expansion. Moving on to Slide 8 for the remainder of the key sensitivities that could impact our full year results within the guidance range. At this point in the year, there are a few key factors that could drive results to the upper or lower end of our full year guidance. While the industry is expecting more corn acres in the US and our order books support that, not all of the crop is in the ground yet. So we need to finish up the North American season and see what ultimately gets planted. In Latin America, we are expecting an increase in both summer and safrinha corn areas in Brazil and a partial recovery in corn area in Argentina after much of it was lost due to corn stunt in the past season. There are many factors that could still influence farmer decisions in the region and could impact our second half results. We're now expecting crop protection prices to be down low single digits throughout the year, offset by high single-digit volume growth. Demand for biologicals and new products continues to be strong and gives us confidence in our ability to deliver growth. We recognize that tariffs and global trade policy continue to be a source of uncertainty. Although our exposure to tariffs is expected to be manageable given the level of crop protections imports, the associated costs and any potential mitigation actions are not factored into our guidance. Nevertheless, as Chuck mentioned earlier, tariffs should not impact our full year guidance range based on what we know today. With that, let's go to Slide 9 and transition to the key assumptions for the first half and second half of the year. Driven by the strength in the first quarter, we now expect net sales for the first half to be about flat versus prior year with operating EBITDA up low to mid single digits, driven by favorable timing, cost benefits, and additional volume in the first half. As a reminder, this is stronger than we originally thought. In our original guidance that we provided back in February, we were assuming first half EBITDA would be about flat. Seed is expected to continue the momentum from the first quarter, delivering solid organic growth in the first half of the year, led by North America and more corn acres and a strong product lineup. Crop protection is expected to deliver solid volume growth over prior year, including double-digit growth in biologicals and new products. Pricing will continue to be pressured as expected. Though seed and crop protection will deliver significant benefits from lower input costs in the first half while SG&A is expected to modestly increase compared to prior year. R&D is expected to be about flat in the first half. Turning to the second half of the year, we expect strong sales and operating EBITDA growth driven by low single-digit price and double-digit volume growth over last year. Crop protection operating EBITDA is expected to be roughly in line with the strong second half 2024 results while seed is expected to drive growth through price and volume gains. Seed price is expected to remain strong in the back half of the year, driven by the strength of the portfolio in Latin America. While crop protection pricing is expected to continue at a rate of low single-digit decline compared to prior year, both seed and crop protection are expected to deliver double digit sales volume led by Latin America. We will continue to deliver cost savings in the second half of the year but at a lower rate than the first half, given the timing of crop protection and deflation and productivity as well as timing of seed benefits due to the seasonality of the business. Again, while we do not expect the net costs associated with tariffs to affect our full year guidance range, as of now, any associated costs and impact from mitigation efforts will be weighted towards the second half of the year given the timing of the crop protection inventory turns. And finally, on currency. We expect about 50% of the full year headwind will be reflected in the second half of the year, driven by our exposures to the Brazilian real. To summarize, with our updated assumptions for the first and second half of the year, we remain on track for full year operating EBITDA of $3.7 billion with a few small changes to our original assumptions. We expect to deliver low single-digit pricing gains for the year but at a modestly lower rate than originally assumed. Volume is expected to be higher now driven by increased North America corn acres and strong demand for crop protection as the market continues to stabilize. With that, let's go to Slide 10 and summarize the key takeaways. First, while there's still much of the year left to go, we delivered an impressive performance in the first quarter ahead of expectations. Organic sales growth was driven by a continuation of our price-for-value strategy, strong North American seed deliveries, and mid single-digit volume gains in crop protection. We delivered more than $200 million in cost savings from lower seed and crop protection raw material costs and productivity. Together with organic sales growth in both businesses and improved product mix, this translates to 390 basis points of margin expansion over prior year. The strong first quarter cash flow supports our ability to deliver the midpoint of our free cash flow to EBITDA guidance range of 40% to 45% conversion rate. And finally, we remain on track for $1 billion of share repurchases in 2025. With that, let me turn it back to Kim.

Thanks, David. 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.

Chuck, in your early remarks today, you mentioned some risks for the second half of the year. You're guiding that the first half will be around 83% to 85% for the full year, which would leave us with about $500 million to $600 million of EBITDA for the second half. That doesn't leave much room. How much risk is there for upside or downside in the second half? Are we discussing $200 million or $100 million? Could you provide some clarity on those comments, considering the significant earnings we saw in the first half?

So here's how we're thinking about it. First of all, the first quarter, right? So close to $1.2 billion, 400 bps of margin improvement, 15% increase, I think, in EBITDA, something like that. So it was a little better than we thought, to be candid with you. But as you know, the first quarter doesn't make the year. And we really don't like to move on guidance in Q1, especially before the crop's in the ground, but Q1 was better than we thought. If you now think about that for the first half, we actually think that the first half is going to be better than our original plan as well. So the second half of the year, the way we're thinking about it right now with what we can see looking forward is that it's been derisked since the February guide, which I think is a good positive first step. Obviously, there's puts and takes, and I'll have David kind of walk through them. But to get to your question, the way I'm thinking about the second half now is we need Crop Protection, for example, in Brazil to do essentially what they did last year. It was a strong quarter last year if you recall, but nothing more than that. I actually think that our guide, even though we've kept it the same, has been derisked pretty significantly. As far as risk, there is potential for something positive or negative, with crop protection pricing down low single digits. We now believe it will be reflected in the guidance.

If we step back, I just would remind our original guide was 10% EBITDA growth over prior year. And when we first thought about how the first half and second half would play out, we did expect the first half to be about flat to prior year. So now, given the strength of the first quarter, we're probably getting a little more refined there in the 4% to 5% range. So if you look at what that might mean for the back half of the year, it's still a 40% increase over prior year.

I was excited to ask my question and accidentally hung up. Regarding agriculture, I apologize for that. When you take a step back, you've experienced a good amount of success with your seed portfolio over the past few years. Some might think there isn't much more potential, but you still have many products left to launch and progress in both the United States and Latin America. Can you briefly share where you feel most enthusiastic about what's left to come across the Americas? Also, could you provide a longer-term perspective on what you're still excited about and where the market should refocus its attention?

Chris, I'll have Judd take the question. But let me just remind you, from a strategic perspective, there's really exciting things happening with our seed business. Our history has been that we've been a net importer and licensee of technology, and what we're trying to do is strategically shift this to being an out-licenser of technology. We think that there is a potential big revenue opportunity in the sector. Therefore, the pipeline is, I say, far from getting peak yet. The best is yet to come.

If you look at North America, of course, the talk has been consistently around are we going to put 95 million acres of corn in the ground; that's obviously very favorable for us. Our product portfolio is very strong right now. We see pricing opportunities with additional productivity and yield that we're bringing in the portfolio. Planning progress is right on where we typically see from a five-year window, so it looks like we have a very legitimate chance to put those 95 million acres of corn in the ground. From a North America perspective, 2025 looks like it's going to be another solid year of growth.

Chuck, I'm wondering if you could color in your comments on the price environment in crop protection a little bit more. And in particular, what's driving sort of the change in the trajectory or cadence of the negative pricing? It seems like it's a little bit less negative but for a longer period of time. And is that uniform across markets and products?

Price across for the year will dampen out as we get to the back part of the year as we begin to lap last year. We're seeing good signs of stabilizing coming out of China. The generics pricing out of there have been stable for several months. This business has been a low single-digit organic growth business for a long time when you look at it over the decades, and it will return there. When we start to see those things, then we can start to think more about what the bottom looks like, et cetera. But we're in a pretty good position as we move across the rest of this year with our pricing primarily because our growth is all going to come from our biologicals and new products.

Look, I think what we've seen over the last two to three years was almost unprecedented. It feels like to us now is that there's some stability underneath the market. Volumes are healthy going into the channel, but the channels now are much healthier than they have been for the last two or three years.

Chuck, I realize it's been less than six months since your Capital Markets Day in New York, but I thought you might provide a brief update on the two new growth platforms that you unveiled there. It sounds like you're still excited about wheat. Maybe talk a little bit about the ramp to the economic opportunity.

So on wheat, it's the largest row crop by area, so 500 million acres worldwide. If we can do what we did for corn almost 100 years ago and hybridize it, it will move the needle from a technology perspective for farmers. The crop that we had through our test plots this year, we'll be able to harvest them very soon. We think that the initial unlock of yield will be somewhere between 10% and 20%. Our intention is to be a leader in this area and to do a combination of providing our technology but also to license it. We are still on track for a 2027 launch.

I wanted to ask two quick ones with the guidance around the tariff impact. Can you clarify, I guess, that assumption, what you're baking in there? And just to follow up quickly on the FX side of things.

The way we're thinking about this is after a lot of work in this area, we've been able to reduce the overall macro tariff impact on Corteva to around the $50 million that we communicated today. We feel very strong pathways to mitigate a lot more of this, but we chose not to include it in the guidance range for now.

If you look at the Brazilian real, our exposure is definitely back half related. We're hedged at over 80% for Q3 and just under 20% for Q4. We're also looking at our exposures which have gone up a little bit as we expect a little bit more volume and less price in Brazil. Overall, I'd say we're in a balanced range right now.

With the likely further share shift in Chinese soybean imports from the US to Brazil, how is Corteva positioned for this? How much more profitable are soybean sales in the US than Brazil?

Farmers today are really focused on getting the crop into the ground. You can see the area shift, so they have prioritized corn over soybeans. As this works itself through, we hope to see that some of these export markets reopen so US farmers will be able to export soybeans.

What you're seeing currently from a market perspective is both in North America and Latin America, just from where commodity prices are versus inputs and farmer economics. We're seeing good economics on the corn side in both markets.

This out-licensing model that you've launched, is that targeting roughly 20% of the US corn seed market with independent seed companies?

We have over 100 licensees of both corn and soybean right now, and we believe there is a potential big revenue opportunity in the sector. Our first foray into corn out-licensing is fantastic technology, and it is competing very well. In Asia, there is certainly an opportunity for us to continue to expand our germplasm penetration as we look at next-gen technologies. We've got a great presence there today. But I think it's fair to say that we can participate bigger in those markets, so opportunity.

I have a specific question on your approach in Brazil between your Conkesta E3 and then the competing Intacta. Can you share, what’s the pitch to the seed multiplier for your product versus the competitor?

From a technology standpoint, Conkesta versus Intacta, we have very competitive technologies on both sides of that equation. Growers are looking for this technology and the efficacy. Multipliers want to bring choices to their customer base, which is creating opportunity.

Seed production costs were solidly lower in the quarter. I just want to understand the extent of commodity cost inflation hitting the P&L versus execution on productivity.

From a cost standpoint, we're down about $100 million in the first quarter; a big piece of it is due to commodity prices, and a significant portion is due to productivity. We'll see more of that in the first half of the year.

Margins have come off a little bit for farmers here in the United States. The one thing that we're watching is, if you look at crop pricing, they have come down slightly and that has tightened margins.

Great. That concludes our call. We thank you for joining and for your interest in Corteva. We hope you have a safe and wonderful day.