Corteva, Inc. (NYSE:CTVA) Q4 2023 Earnings Call Transcript

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 was 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 in 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 $100 million improvement in net royalty expense, with increased benefits in both out-licensing income and royalty expense driven by Enlist E3 penetration.