Q2 2021 Corteva Inc Earnings Call
[music].
Good day, everyone and welcome to the core Teva second quarter 2021earnings call today's conference is being recorded.
During today's Q&A session. Please limit yourself to 1 question.
And now I would like to turn the conference over to Jeff Rudolph with Investor Relations. Please go ahead.
Yeah.
Good morning, and welcome to <unk> second quarter, and first half of 2021 earnings conference call with prepared remarks today will be led by Jim Collins, Chief Executive Officer, and David Anderson Executive Vice President and Chief Financial Officer. Additionally, Tim Glenn Executive Vice President and Chief Commercial Officer, and Raj on the Giulia.
Covid Vice President of business platforms will join the Q&A session.
We prepared presentation slides to supplement our remarks during this call which are posted on the Investor Relations section of the courts have a website.
Moving to our webcast.
During this call we will make forward looking statements, which are our expectations for where statements 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 Securities and Exchange Commission.
We do not undertake any duty to update any forward looking statement.
On our Investor Relations website, you can find our earnings press release and related schedules, along with our supplemental financial summary, slide deck, which is intended to supplement our prepared remarks for today's call. These items provide a reconciliation of differences between reported GAAP and non-GAAP financial measures and should not be considered a substitute for the measures of financial performer.
<unk> prepared in accordance with GAAP.
It is now my pleasure to turn the call over to Jim.
Thanks, Jeff and welcome to the participants joining the call today.
Starting on slide 4 we launched core Teva with a strategy grounded in buildings and delivering value for shareholders through new product innovation that drives organic growth and margin improvement.
Organizational efficiency and rigor and disciplined capital allocation.
As I speak to you today I'm happy to say this strategy is working.
Now that's a testament to the extraordinary efforts by our more than 20000 colleagues worldwide over the last 5 years, beginning with the announcement of the intent to create core Teva.
At its core this team is focused on 1 thing delivering.
At the time, they have demonstrated tremendous resilience and adaptability.
<unk> forward to bring our purpose to life and advance our strategy and deliver our near term business results no matter the circumstances.
So to them I say, thank you as I could not be prouder of their relentless focus.
Our first half performance is yet another solid proof point of our progress with 6% organic growth and 17% operating EBITDA improvement compared to the prior year and crop protection. We continue to build on our new product momentum and now expect we will deliver 400 million.
And sales growth for this part of the portfolio for the year up from our prior estimate of $300 million.
A direct result of successfully advancing our pipeline in fact through June of this year, we received nearly 90 additional new product registrations for our crop protection portfolio.
Market fundamentals remain positive as growers look to best in class solutions to drive productivity and capitalize on what likely will be a record year for income levels in key markets, such as the U S and Brazil.
This helped to drive pricing in seed specifically, 3% increases in corn globally.
As well as further penetration of the enlist soybean system for 2021 now estimated to be on approximately 35% of U S soybean acres and Thats up from prior estimates of 30%.
Execution is sound and we are carrying substantial momentum as a result, we are raising our guidance for full year. We now expect to deliver between 2.5 and $2.6 billion in.
Operating EBITDA for the full year 2021, representing a 22% growth over the prior year at the midpoint.
Importantly, we also expect to maintain the operating leverage we delivered through the first half with an impressive 200 basis point increase in margins for the full year on the organizations continued agility in the face of ongoing supply chain volatility and cost inflation.
Which brings us back to value creation.
In addition to strong earnings growth. We are also advancing our commitments on returning cash to shareholders spin.
Specifically core Teva returned approximately $750 million in cash to shareholders via dividends and share repurchases through the first half and we recently announced a dividend increase of 7.7% and a new $1.5 billion share repurchase program.
In total we expect to return more than $1.2 billion to shareholders through dividends and share repurchases by the end of 2021.
The bottom line, we are executing on what we said we would do we are delivering operating leverage and we are intently focused on advancing our strategy to deliver value for all of our shareholders.
So looking at slide 5 which has our financial results for the quarter and the first half so quickly touching on the quarter, we delivered 6% organic growth on gains in both segments led by North America and Latin America.
This translated into earnings growth of 18% and margin improvement of more than 200 basis points. Another solid quarter of continued growth and margin improvement.
Now focusing on the half sales gains were led by execution of our new product pipeline, where new crop protection products delivered $260 million in sales growth over the prior year. Additionally.
Additionally seed sales improved on increased planted area in U S soybeans and strong demand for corn in Latin America.
We continue to deliver on our price for value strategy as global corn prices improved 3% for the half.
Now Dave is going to provide you much more detail on the earnings growth drivers for the half, but it is important to note the impressive level of margin improvement that we have delivered so far this year.
Through the half we drove nearly 200 basis points of margin improvement compared to the prior year on price and volume gains across the portfolio.
Despite continued challenges on cost inflation that we and many others across various industries continue to face.
Again. This first half performance is yet another important proof point that our value creation strategy is working.
Further reinforcing our updated guidance for the full year.
So shifting to the market backdrop on slide 6 funding.
Fundamentals remained strong despite volatility in the commodity markets.
We believe global demand will ultimately drive growth into 2022 and beyond as local economies recover from the pandemic related shutdowns were.
We're monitoring the impacts of the pandemic globally and will remain agile to ensure we continue to support our employees our customers and our local communities.
Now while the U S market remains attractive as we look to the near term outlook, we see strong demand for best in class technologies in markets outside of the U S. Take Brazil for example, where demand for grain is leading to increased planted area and rising commodity prices with our market leading position for corn and 1 of the best.
New crop protection lineups, we are in a strong position to capitalize on above market growth.
While commodity prices will continue to react to short term events in the industry. It is important to remember that the global diversity of our business is what provides an attractive outlook for growth.
Together with sustained growth in global AG markets led by robust global demand. We are pleased with the acceleration in opportunities to deliver value to our customers in these local markets through our best in class products and advantaged routes to market.
Turning to slide 7 I'll provide more detail on the balance and the diversity of our sales growth across the globe and provide further proof points for the half.
In North America organic sales were up 4% for the half seed sales benefited from increased planted area for both corn and soybeans, coupled with continued penetration of the enlist <unk> soybeans as.
As I mentioned, we now expect enlist to represent about 35% of the U S. Soybean market in 2021, and that's up from our previous expectation of 30%.
On seed pricing for the first half competitive pressures in the soybean market was aligned with our prior expectations with pricing down 2%.
Corn price and the pioneer brand was up about 1 point compared to the prior year.
North America crop protection had a strong first half with 10% organic growth on continued demand for new technologies, including enlist herbicide and solid pricing execution in response to rising raw material freight and logistics costs.
Fungicide growth was also a highlight up double digits as growers looked to take preventative measures to maximize yields.
In Europe, Middle East and Africa organic sales grew 5% on strong pricing execution and record sunflower seed volumes.
This growth was muted by an approximate $80 million to $100 million sales impact from corn supply shortages.
In crop protection, our portfolio of new and differentiated products remain in high demand, including technologies, such as <unk>, herbicide and <unk> fungicide, which enabled us to drive price and volume gains and gain market share in Europe, despite the impact of product phase outs.
In Latin America, we delivered 23% organic sales growth on strong volumes and execution on our price for value strategy.
In seed volumes grew 20% on share gains in the Brazil, Sabrina and earlier shipments for the Brazil summer season.
In crop protection volumes grew 9% on a significant demand for new and differentiated technologies, such as ICU Quest and Jim's Alba insecticides pricing.
Pricing actions reflected strong product demand and helped to more than offset unfavorable currency impacts from the Brazilian reais.
In Asia Pacific, we realized 3% organic sales growth compared to the prior year on both volume and price improvements seed volumes were down largely due to COVID-19 related demand impacts primarily in southeast Asia, India crop.
Crop protection on organic growth of 11% was led by further penetration of our new products, including <unk> corn herbicide and <unk> insecticide.
So Dave will now provide more detail on our first half performance on our upgraded expectations for the rest of the year day.
<unk>.
Thanks, Jim and welcome everyone on the call.
Let's move to slide 8 for a detailed review of our operating EBITDA performance for the year for the first half Youll see that for the first half 2021 operating EBITDA grew $335 million versus the prior year to nearly $2.4 billion, a clear indication of how well we executed in the first.
And a reflection of our ability to capitalize on robust demand for our products.
Driving the increased operating EBITDA was strong price and volume with combined benefits of approximately $340 million.
This came from focused commercial execution.
Penetration of new and differentiated products across all regions.
Illustrate this.
Sales of new crop protection products grew over 260 million versus the prior year.
The same time, we delivered nearly 30% of organic fee growth in Latin America, driven by strong corn sales in Brazil.
And finally, we continue to extract value from our yield advantage technology and as Jim said global corn pricing up 3% during the half.
Costs were about $60 million net headwind to operating EBITDA for the half.
This includes delivery of approximately $175 million from productivity initiatives, including the ongoing benefit from asset footprint rationalization and other cost improvements.
Helped to partially offset $240 million of cost headwinds in the half.
Which are primarily market driven net.
We continue to operating environment marked with channel supply chains and cost inflation in the first half we experienced higher freight and logistics costs as global trade markets saw shipping demand outpaced supply. Additionally.
Additionally, price with certain active ingredients and intermediates continue to rise compared to the same period last year, including glyphosate.
Now, we're continuing to take action to mitigate these impacts where possible, including passing through certain inflationary cost for our seed and crop protection products and delivering against our productivity initiatives as evidence of our disciplined and focused execution, we delivered more than 190 basis points of <unk>.
Margin expansion in the App. It's notable in terms of the agile operations team delivering strong performance.
Let's go now to slide 9 cover a few highlights from the crop protection segment.
Half, where organic sales grew 10%, which included a 4% headwind from our strategic decision to phase out certain low margin products primarily in insecticides.
Again strong demand for our new technology led to sales gains, including an increase of more than $260 million on new product sales when compared to the same period last year.
Herbicides were up 13% compared to the first half of 2020 led by continued penetration of <unk> and enlist.
Fungicides grew 26% driven by strong demand from <unk> and Innotrac, primarily in Europe, Middle East and Africa, and lastly, insecticides grew 3% in the half which included a 16% negative impact from discontinued products.
Growth was largely driven by our differentiated <unk> technology, including Jim Delta and Cal Covid, Actives, which were up 14% in the half.
Favorable product mix and strategic price increases drove pricing gains in all regions for the half led by a 9% improvement in Latin America, and a 3% price improvement in low.
North America.
Operating EBITDA for crop protection grew 26% from the prior year driven by strong demand for new products and pricing execution, we did experience cost headwinds of approximately $130 million for the segment during the period overall.
Overall, the headwinds more than offset productivity actions in most cases, we see these higher costs, representing a new baseline, which will continue to work to mitigate by taking pricing actions, where possible and delivering ongoing productivity net.
Despite these challenges we drove over 220 basis points of operating EBITDA margin improvement in crop protection.
Very impressive performance.
Let's go to then slide 10 and talk about the seed highlights.
You can see on slide 10 organic sales for seed, we're up 4% driven by solid pricing coupled with market share gains in Brazil, saphena demand driven earlier shipments from Brazil summer season and.
Also volume growth in North America on increased planted area aligned with USDA estimates.
On pricing, we maintained our track record and extracting value for our yield advantage technology.
Core prices of 3% compared to prior year led by double digit price improvement in Latin America.
Soybean volumes were up 7% for the half led by an approximately 5% increase in U S planted area soybean pricing was down 2% consistent with our expectations as we continue to see competitive pressure in the U S market.
Other oilseeds were up 21% versus the first half of 2020, reflecting record sunpower volumes in Europe, and also a higher canola volumes in Canada.
Operating EBITDA for this segment improved 13% on strong price execution globally on.
Ongoing cost and productivity actions, lower royalties and bad debt and the favorable impact from currency and while we experienced higher input costs. The teams continue to manage through these headwinds we were able to deliver operating EBITA margin improvement of over 200 basis points for this segment.
The half.
So now let's go to slide 11, and talk about our full year 2021 guidance.
You can see there for the remainder of the year and our updated expectations for the full year.
And with the backdrop of a strong performance for the first half we're raising our reported net sales guidance to be in the range of $15.2 to 54 billion, representing 8% growth at the midpoint, which includes an approximately 2% tailwind from currency.
We're also raising our operating EBITDA guidance and now expect to be in the range of 2.5% to $2.6 billion, representing 22% growth at the midpoint.
This increase reflects.
<unk> strong demand for our new products globally in both crop protection and seed coupled with strong price execution in key regions on technology and also improved currency.
Specific to the second half, we expect price to largely offset cost headwinds, which are notably seed driven and as a result volume primarily in Latin America crop protection is driving second half earnings growth.
The volatility of exchange rates will continue to be a key variable watching notably the Brazilian re on where we assumed a rate of 525 for the back half of the year.
In crop protection, we anticipate $400 million of year over year improvement in sales from our new products are $100 million more than we originally estimated.
The additional growth is a testament to strong demand that we're seeing globally for our best in class technology.
And as we think about cost.
The current inflationary environment is expected to continue through at least the end of the year.
As a result, we now expect a net cost headwind of approximately $125 million for the full year 2021. This represents about $75 million in additional cost inflation from our previous estimate it's driven by higher input costs as well as freight and logistics network.
Actively monitoring supply chain pressures in the market and the operational teams remain agile in meeting customer demand.
As it relates to SG&A. The organization continues to maintain disciplined spending and we anticipate that as a percentage of revenue SG&A is expected to improve by approximately 50 basis points for the year, Despite higher commissions and also variable compensation.
Taken together, it's an impressive improvement and impressive outlook and really highlights the strong focus by the full organization to execute on our strategy.
So now on to slide 12, and a few comments on cash flow and give you a view on our 2021 cash flow expectations. We now believe cash from operations will be in the range of 1.2 to $1.6 billion for the year reflects both increased earnings but also the investment we're making in working.
Capital to support growth.
The organization continues to focus on cash cycle time, it's working as a result, we're targeting improvement in net working capital turns for the full year.
We're increasing our capex spending target from 550 million to between 600 and $650 million for 2021.
The increase allows us to fund projects with high return on investment to support growth and it follows a complete mid year review that we completed all of our capital programs.
Experienced an improvement in the funded status of the U S pension plans year to date, driven by both asset returns and discount rate. The improvement provides increased probability there will be no required contributions to the plan in 'twenty, 1 or 2022.
Finally, as Jim stated, we are committed to the return of cash to shareholders as evidenced by more than $1.2 billion, we expect to return via dividends and share repurchases by the end of the year, which includes expected progress on the new $1.5 billion program that we ran.
And we announced.
Now if we move to slide 13, I just want to give you. Some early insights on our planning process and thinking as we start to frame out 2022.
Importantly, carrying forward our momentum from 2021, we expect to see organic growth globally.
This will largely be driven by execution and further penetration of new and differentiated products across all regions, reflecting the strength of our portfolio and our pipeline, which are expected to drive increases in both volume and price in 2022.
For example, we continue to remain excited about the growth opportunities for <unk>, which we believe will approach sales of $1 billion in 2022.
We expect seed pricing to be additive to earnings when netted with the impact of higher cost of goods sold as a result of higher commodity costs.
And with our transition to enlist we expect royalty improvement for 2022 as part of our journey towards royalty neutrality by the end of the decade royalty reduction is anticipated to be more significant in 'twenty 3 and 'twenty for that next year will be an important next step on.
Continuing net royalty improvement.
And lastly, we remain focused on delivering against productivity.
As input costs continue to evolve with the current market environment. So to manage this pressure we're going to continue to drive execution on productivity initiatives, which are expected to partially offset any increased costs.
And this is just our preliminary take on the setup for next year, we're going to share more details later this year, but certainly we view 2022.
As a solid opportunity for earnings and margin growth as we execute our strategy and.
And we leverage our global footprint and our diversified portfolio.
So before turning it back to Jim Let me just do a quick summary.
Focus on both our 2021 delivery and the setup for 2022.
This year is characterized by first half operating EBITDA and margin improvement of nearly 200 basis points.
In full year margin expectations also improved by approximately 200 basis points.
And it's set up for 2022 is positive.
We're driving growth in all regions across a strengthening portfolio and delivering solid operating leverage.
And with that let me turn it back to Jeff.
Thanks, Dave and that's a great summary.
Before we get to your questions I'd like to share a few final comments.
Through our heads down focused execution by an incredible global team, we've gotten through 1 of the toughest periods in the history of our industry. We emerged on the other side, even better positioned to serve farmers and ensure the security of the global food supply and to deliver value for our shareholders with our.
Distinct competitive advantages cortana is positioned for long term sustainable growth in a rapidly changing global agriculture marketplace.
Now when I say sustainable I refer bulk or tell us long term growth and the way we will deliver it.
As consumer preferences, and environmental challenges change farmers will need to adapt.
Teva will be at the center of that relationship deploying our knowledge market presence and industry, leading capabilities to assure the sustainable future of global agriculture.
Helping growers deliver more while using fewer resources.
Our knowledge of farmers' needs comes from the relationship that we have built over decades through our advantage route to market, which helps drive our grower focused innovation.
Now this is clearly showing up in our new product sales quarter after quarter, and we will continue to be 1 of our top priorities moving forward.
And importantly, we have a number of exciting products that continue to progress through our pipeline in both segments.
So finally, our first half performance and updated guidance for the year clearly demonstrates that all of the elements of our strategy that we built are working.
Our team is advancing our purpose.
Driving a culture focused on our customers delivering on our commitments through focused execution building momentum on long term value creation and.
And most importantly, growing progress for all of our stakeholders for years to come.
So with that I'll turn it back to Jeff.
Thank you Jim now, let's move on to your questions I would like to remind you that our caution 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, ladies and gentlemen, if you would like to ask a question today. Please press star and then 1 to enter the queue.
For the sake of time, we do ask that you limit yourself to 1 question and 1 follow up question.
Again that is star and then 1 if he would like to ask a question today.
First question will come from Joel Jackson from BMO capital markets.
Good morning, Jim Gouin Gabe.
Hey, Good morning, John Hey, Joel I appreciate Dr. Early look into 2022.
You seem to have a comment on the slide deck.
Reiterating that you're on track with your midterm targets at 12% to 16% EBITDA CAGR between 2019 and 2022.
That implies I wanted just to understand if that's true and that implies.
No.
EBITDA range next year at 2.8 and $3..1 can you just maybe comment as much as you can and if that's true that you are comfortable that you will be in that range next year.
Great Joe. Thanks, Thanks for the question and Youre right. Our initial view views on 2022 are that it's going to just be another great opportunity to continue to drive some really solid both top and bottom line growth, we think against what will be a really constructive market backdrop.
That market could grow next year somewhere between 3 and 3.5% and so we're carrying some fantastic momentum and you look at first half results you look at the setup and the revised guide for the second.
Half of the year and we just believe we will be carrying some really good momentum.
That growth also just to highlight if you think about it is very broad based right. We're leveraging a diverse footprint globally from a geographic perspective, but we're also leveraging a very diverse portfolio and that's coming from the new product pipeline, but it's also coming from just great execution.
Out there so.
As we continue to not only drive productivity that.
It will be constructive to margin expansion and also taking a really solid look at pricing going into 2022.
I think when I step back it is going to be very solid and I believe it will be an opportunity for us to deliver above that market growth there will be an opportunity for us to continue to deliver that margin expansion that <unk> seen and then that entire framework then Joel if you step back from it it really does align very nice.
With those mid term target expectations that you and I have talked about before so without without going to a specific number I believe we are well lined up here in that framework is right on track with those mid term expectations.
Thanks, Jim.
And we'll move on to Vincent Andrews from Morgan Stanley.
Thank you and good morning, everyone.
And then maybe you can give us.
Thank you sorry, maybe you could give us some from some early insight I know you price cards are probably coming out later this month or so.
So.
If we look at sort of the pricing achievement that you had in the second quarter for South America.
In seed you know 10% ish.
Is that a good proxy for how we should think about north American pricing for next year or do you think it could be better than that or will it be a little bit less than that.
Yeah, Great Vincent Thanks, Thanks for the question.
As we've talked about this a number of times before there are a bunch of variables that go into how we think about.
Seed cost as we go into the season, obviously into our our pricing model.
First as yield how we do in seed production around our yield factor the quality of what comes out of our seed production fields, how much discard that we have as we spread that cost over over fewer units clearly commodity prices and the prices that are growers lock in at the market.
That they lock in at on all of those seed production fields. They have a 12 month window to do that so that factor adjusted and change as we kind of kind of go through all of that so.
We're sitting here today with some assumptions around average commodity prices and yields and quality. So if I put all of our current assumptions today into our model, we would estimate that our seed cost of goods in in North America could could increase in a range of somewhere between 100.
75.
$225 million.
Now this can change its still early we still got a seed crop that's maturing out there and it's based on our assumptions today. So so we have we feel like we now have a pretty good estimate of what to expect the flow through in cost of goods will be.
So with that said and as you as you've asked pricing is obviously, our biggest lever to really help manage and cover that increase in cost and so.
I won't comment specifically on what our price cards are going to be we're still finalizing those details our plans as you suggested or to release those cards later this summer consistent with.
With our normal timing approach there.
But the way I think about it rather than specifically talking about cards.
Think about it overall in terms of earnings.
And so at this point.
I would anticipate that for 2022 that are seed pricing approach net of all of those cost of goods increases that I, just mentioned would be incremental to EBITDA for the fourth.
That market so.
At the end of the day Vincent what you have to do is look at our track record right.
Records that we've delivered on 2000.
In 2020, the track record Youre seeing now through to this year.
And we're building momentum so I'm.
Just pricing. This this year through the first half of 3% global seed shows you that we've got the team focused on that and we're going to continue to drive that momentum.
Okay, and just as a follow up.
Do you think this was the last year or sort of the soybean price competition in North America that could turn positive next year or is there still some on some tussling to do out there.
Yes. It is always a really competitive market in that space and clearly we have a big technology transition going on but maybe I'll, maybe I'll ask Tim to say a few words about soybean competition.
I think as Jim said, we're in the middle of the technology shift out there we've seen the.
The penetration of that enlist is made in the marketplace, obviously theres new competitive products that are coming into the market as well and so.
Clearly that has.
And companies that have been competing for the attention of growers in terms of penetration pricing to try to drive technology adoption and we've seen that for the past couple of years, it's hard to predict where we'll be going into 2022.
I would I go into the attitude that every year's competitive, but you are competing more on value versus price and as we think about the soybean market clearly we are going to focus on the value that we're delivering.
Relative to the competition and more closely with our customers for them to understand the value of our product as well as the value of the service that we're providing.
We've been able to position the enlist system very well with our customers and they are.
Driving tremendous value and not just from the seed, but also the crop protection system that goes along with it. So I feel good about our value proposition and I'm optimistic that that the value that we're delivering will be recognized in the marketplace and clearly as Jim said, we've got a strong process in place around implementation and administration of pricing that.
The debt that we're going to continue to follow.
And then Tonight, just add when I kind of summarize that and I can talk about pricing approach in seed being earnings positive I'm kind of all inclusive their corn and beans. So it's kind of just the full package. So our volume might be pushed in some areas, we'll have some opportunities on others.
And our next question comes from Kevin Mccarthy from vertical research partners.
Good morning, Kevin.
Good morning.
2 part question for you on the price cost spread.
The first part would be with regard to the incremental cost pressure that you referenced how much of that is occurring in crop protection versus seeds and then the second part would be on the crop protection side.
What is your outlook for pricing you used the word agile a few times and describing the disposition maybe you could talk through where you are more confident or less confident in obtaining price by region or product line and how we should be thinking about that flowing through.
In the back half as well as 2022.
Great Great Kevin So some of the numbers that I was talking about a minute ago answering <unk> question. We are really focused kind of on on seed cost of sales flow through so we do have crop protection cautions and maybe I'll ask between Dave or Raj on to say few words about the work.
We are doing there as well, but <unk> seen good pricing already this year through the first half that's allowed us to go capture price to cover the raw material flow through and again ill have Dave share some of the specific numbers and I think you just have to look at that momentum here in 2021 and that track record and know that we're going.
On a continued to be.
Aggressive as we go into 'twenty, 2 and beyond about how we think about that so Dave do you want it.
Maybe just talk a little bit about GM about some of the market headwinds.
Kevin gave you a little bit of color, there and specifically I think 1 of the things you asked was.
Terms of the.
The incremental $75 million, where we're seeing that that's largely in seed kind of breaks down 50 million seed.
25 million in crop crop protection.
You look at it sort of overall, what we're seeing is a lot of that is freight and logistics. So if you look at it sort of by element.
Freight and logistics and then you get into seed yield and commodity close next license sales.
And actually a little bit of a break in the.
Updated numbers in terms of precious metals, just because of the actions we've taken operationally with.
With precious metals and the use of palladium. So I think we've got a good a good handle on it.
And we.
Really credit to the teams.
In terms of looking at early indicators and being on top of this and we think that really I mean from my perspective coming into the organization I think it's 1 of the things it's actually quite impressive when you look at the results.
Instead as a backdrop, maybe Raj you want to talk a little bit about the other piece to Kevin's question, Yeah, Kevin just to talk about <unk> pricing.
About what Jim mentioned the track record net.
Pricing for the crop protection for the first half year, we had a significant price increase 4% and for example, when you look at debt product like this is a differentiated product reactive or high single digit on pricing debt. So let me look at that portfolio, but more of a shift towards new and differentiated.
So we've put it on $400 million of.
This theory that Jim mentioned, we continue to see the momentum that gives us commercial organization in a box on a day to make sure that those products and get the value back and bad debt consistent with our philosophy of flow both seed and crop protection. So high confidence on the productivity that was reported by Dave.
I would say that on pricing philosophy continues to be strong and we are delivering strong results in the first half and we see that continuing next year.
Thanks, Kevin perfect. Thanks, everyone.
And we have a question from P J <unk> from Citi.
Turning to T J.
Yes, good morning.
It was interesting to hear about your royalty introduction comments you know that.
Beginning next year.
Can you talk about the bigger impact that happens in 2023 and 2024 in terms of your royalty reduction as well as some royalty income from in licensing.
And then why does it take until the end of the ticket to become royalty neutral.
Okay.
Great P. J. Thanks for the question and Youre right Youre really we're starting to see now that flow through of royalty expense reduction through the first half of 2021 royalty expense decrease somewhere between 40 and $50 million compared to last year.
And I'll just point to a couple of.
Messages. There first this was broad based it's across our whole portfolio of corn and soybeans.
That's a really good step it represents really good progress against that royalties from reduction commitment that we can firm that we've talked about before.
As you start to think about how that begins to roll off over the decade, we've talked before about the effect of the enlist roll off.
And that'll really gets you about half of that reduction towards that royalty neutrality that we've shared many times before so by the middle of the decade and Thats just directly tied to the ramp up of the enlist system as we back down on roundup ready to extend and really start to drive.
Not only the ramp up of units oven list, but also the ramp of the corporate type proprietary nature of those units as well the second half of the decade that we've talked about before where you really get that second tranche is really more related to royalty income that is offsetting a residual on a number of expenses that were still.
We continue to have we will still have a few trades that will be licensing in so we offset that and it takes a little while right. When you license to trade to a third party. It takes them a while to do their own breeding and integrates the trades into their germplasm and then it takes them a little while to begin ramping those units and so those royalty income they come in.
Based on units sold not units bread or units licensed so so it just takes a little while for that.
To spool up and then that just becomes a continued long term margin opportunity kind of through the remainder of the decade as we get through that ramp up on on the first phase of that list.
Okay. Thank you.
And just a quick question on FX I was looking at your exchange gains and losses stable.
And a net loss of $15 million or would you consider debt reasonable given the size of your company.
I know you had a new FX strategy.
So so.
How much of your orders are for.
For the upcoming Latin American season are are hedged just talk a little bit about just.
Under the new strategy on it so how is it working now.
Sure James Let me just give you a kind of a summary, there where essentially 100% hedged for the second half of this year.
We've got some EBITDA exposure, even with the hedge.
We're assuming I think I mentioned in my remarks 525.
<unk> is the.
The assumption for the second half.
Basically we are hedged at around $5.50, so there's a little bit of exposure between the 25 of the slide 50.
But really we think very manageable in the context of the balance outlook that we've given you for the full year certainly 1 of the considerations.
But it's we think a seed.
<unk> best in class capability and approach that we're taking in terms of net exposure.
Thanks for the question.
Okay.
And we have a question from David Begleiter from Deutsche Bank.
Good morning, David Good morning.
Thank you, Jim Jim and Dave just on net productivity savings looking at next year should they be equal to or above what you're realizing this year, which is I guess roughly $2 million.
Yes, David if you look at this year first we are on track to deliver the $250 million in productivity savings in.
Those are really helping us offset.
Any of those market driven cost headwinds that we've been talking about in our productivity strategy is to continue that momentum as we go into 2022, and we do have a fairly robust pipeline of initiatives in.
Crop protection, we're going to continue to focus on footprint rationalizations that we've had out there where we're down from 9 manufacturing assets.
Globally and these are these are large units that takes some time to.
Worked through supply chain implications and reset those so we have a few more of those still to go those will begin those will continue to show up in 'twenty 2.
Working on.
Much more deeply now into the procurement space as Dave has come on and he's brought some real great insights around our buy in.
Working through understanding how we source intermediates, how we source.
Our direct and our indirect spend we've got some work we can do next year on SKU rationalization as we can continue to focus now our portfolio and our pipeline on these new products and we've probably got some some older older Skus out there that will just help us from an overall cost.
And then we're beginning to deploy some advanced analytics around understanding our freight and logistics costs and especially in the year that we kind of come through this year those costs are meaningful in our ability to use some of these advanced tools to improve our efficiency around matter are going to be a really important source of productivity on the seed side we've been.
Really focused on field productivity, how do we get more seed out out of a given acre and there are some things that we can continue to do to help educate our seed producers to be more productive and effective and spread our fixed costs.
Out over more units and on top of that we still have some seed conditioning facilities around the world debt, because we look at where our growth is occurring and where we need those assets probably have some additional reductions I think were down 34% in seed seed assets to date since we merged.
Big number, but there are still a few.
More on and finally, I've always been a person focused on inventory and write downs around making sure that we produce the seed that we need for a season, but don't produce too much when you wind up writing off some of that so I really like the list.
But we have an.
I think youll continue to see really good flow through into 'twenty..2 what else would you add day I think the thing I would just say to US we'll provide specifics.
The subset of.
List.
Employee productivity initiatives will provide more specifics.
Get into 2022 outlook, we'll provide more color around that.
But count on Us I mean, I think that's a very important item.
Thank you.
Thanks, Dave.
And we will take our next question from Jeff Zekauskas at Jpmorgan.
Good morning, Jeffrey Hi, good morning.
I have a couple of questions around cash flows.
Your cash flow from operation estimate, it's pretty wide, 1.2 to $1.6 billion and.
So why is it so wide.
Is it so low relative to your EBITDA of $2.5.5 billion that's about 50.
<unk> 50 or 60% of EBITDA.
On your cash flow statement.
It looks like there's about $800 million debt.
Went out for pension and OPEC benefits, but your pension line just went down by about $400 million.
Can you explain the cash flow constellation what normally should be your ratio of operating cash flow to EBITDA.
Yeah, No. It's really it's a really good question and it gets a bit confusing because you may recall, we did.
On a fairly significant change.
Our provision at the end of 2020.
Basically moving much closer if you will to market.
In terms of in terms of the OPEC.
As a result of that.
Flow through of an accounting entry that we've made at the end of 2020 that really affects.
Cash from operations presentation.
Financials, yes.
So that's that's that's number 1.
We can explain more of that offline. If you want to go through right now.
Retail I think the important thing you talked about which is really a key 1 is just the range estimate that we're giving and the level of that range estimates in terms of cash from operations for 2021.
It's reflective of a couple of things.
1.2020 was really in many respects anomalous in terms of both cash collections and prepaying debt, we got from customers.
As a result of that.
Notably on a year over year basis somewhere in the neighborhood.
With $600 million, if you will pull forward.
Cash or.
The increase in cash the benefit in 2020, net we're getting the benefit of that in 2021, because thats really helping us.
Talked about returning cash to shareholders and if you look at our net our net debt. If you will on a year over year basis cash on cash.
In minus debt balance the numbers are actually quite quite attractive in terms of.
What we have there and that's where the reflective of the debt very positive cash that we've got at the end of the year, but the big difference.
If you look at our guide this year versus last year and look at the guide in terms of what you think.
Is really the year over year change in working capital mostly related to the timing prepay as.
And as low as collections and then the other part is we're building working capital right now we're building working capital as part of the investment for growth we're doing it in advance.
He has a strong continued seasonal growth Latam Europe elsewhere, and the other thing that I was just out there and stay with us.
Prepared remarks.
What we're seeing in operating working capital So we've got improvement of DSO.
Improvement in day sales inventory and we're really tracking net very closely so we're on top of this feel good feel good about this and I understand the year over year difference that youre looking at.
Alright. Thank you and then quickly from my follow up when you look at herbicides fungicides insecticides.
Is there a meaningful difference in operating margin between those 3 subdivisions where they all the same.
Great, Jeff clearly as our pipeline begins to deliver and we're driving newer classes of chemistry.
We're seeing some nice margin lift in places like our insecticides portfolio, which is benefiting from products like Isa class.
And then in herbicides as we've launched RIN score as we've launched <unk>.
And as we continue to trim and from some of those older industries like we talked to you about late late last year as we exited a few of those older products, but maybe maybe Raj on you want to provide a little higher higher level summary, there a little more detail then yes, I think I gave you are spot on I think the big difference is not between the indications, but it is about the new net.
The technology. So there is a lot of public sales, which would be quote unquote commodity type of businesses and the margin debt would be lower than the new products with the new herbicide like Jim mentioned on Elixir misquote concrete examples that margin would be as high as debt.
Valencia debt insecticide would it be like just the fact that there is a lot more of this size, which would be more.
Commodity base it might feel like the margins are low and in other states. So typically across the industry, you would say that insecticides and fungicides on high margin don't hesitate, but that changes when you launch new products.
Okay.
Thanks, Jeff.
And we'll take our next question from Arun Viswanathan from RBC capital markets.
Turning to run.
Good morning, Thanks for taking my question.
Just wanted to build on.
Now some of the drivers for next year. So you mentioned.
Price is probably <unk>.
Gonna be incrementally better than cost assuming inflation.
Ultimately stabilizes here.
And you'll have the productivity as well and you'll have that new product pipeline.
I would imagine acreage also is a positive driver could you touch on how we should start thinking about 'twenty 2 if at all possible.
Yes, I think you've hit those right we've talked about price being an improvement we've talked about on new product sales growth I mean, if you look at.
<unk>, our new product revenue.
Revenue in 2021, we previously thought we have about $300 million of incremental year over year.
Revenue from that pipeline, we updated that today that it's going to look like more like $400 million.
2021, we will keep carrying that momentum forward.
I think you characterized it right market.
We will be.
Supporter of growth going forward, we'd expect the overall market to be up 3% to 3.5%.
And you mentioned acres and we're watching that very very closely we would expect to see.
Especially Brazil.
Planted area it could be up in that 4% to 5% range the demand for Brazil beans, and also corn is really strong and growers have a lot of good resources today, a lot of good cash theyre investing in their operations.
Especially in that Supreme New market, where we're really strong from a technology perspective so.
Acres in Brazil will be 1 of those drivers and then I think in the United States, We could see another modest increase in total both U S corn and soybean acreage possible going into 'twenty, 2 now I'm not talking about $5 million or anything like that it could be a $1 billion here 4 million there, but I think on U S market for 'twenty 2 is setup.
To also be pretty strong acre volume.
Great. Thanks, and just as a quick follow up on the raw materials side.
Have you guys.
And then any strategic sourcing alternatives I know that there are some issues on the chlorine side, but.
What can you share as far as raw materials and how those should evolve over the next couple of periods.
Yeah, I'll have rodger on share some of the specifics I just want to acknowledge the agility and the capabilities of our supply chain team through through this year. So far as we as we came into late 2020. We saw these headwinds coming we shared a lot of that with you as we set our guide for 2000.
'twenty, 1 and we put our teams hotly focused on the agility of how would we alter supply change how would we make sure that we were understanding where we were going to be tight.
I'd get out ahead of some of these logistics I think about what's going on in Brazil, right now, we're a month or 2 earlier in our logistical supply changed of getting material to Brazil than we ever have been and I think it's just a real testament to how quickly. This team pivoted, but you want to talk about some of the specific materials, absolutely Egypt I don't know.
I just wanted to share 2 examples to be close to what Jim said in these examples include debt that's an ongoing process, but the first 1 that comes to mind is the precious metals.
We use that can load up on key products manufacturing and you were looking with rhodium and when we saw the prices of rhodium beginning the votes with their low technical teams work very closely and made a shift to the catalyst be used to palladium. So that's an example, and that's really helped us not only make sure that we are a reliable supplier and.
But also manage costs on the as an example, and that is in the broad category of co formulate the impact from <unk>, which essentially but our real challenge because of the Texas free and our teams are predicted have made some significant changes and ensured that there was no disruption of supply. So short answer yes, absolutely looking at that but those are 2 specific.
Examples yet and I think we've got good visibility around of those as we're building our plan for 2022, we're going to continue to drive productivity.
To stay out ahead of a number of those and as I said before we've got that pricing lever well in hand, as well to make sure. We're covering these costs as they come.
And our final question today will come from John Roberts from UBS.
Hey, good morning, John.
Good morning, Jim It's a little early to wish you well on your retirement at year end, but I wish you well, but could you give us an update on the succession process and do you think you'll be introducing your success from on the next call.
Great John Thanks, Thanks for those comments and.
Look what I can say right now is I'm, 100% focused here and in the role and continue.
Continuing to drive the business working working with my team.
We're very solidly focused on delivering 2021, I committed to working hard to make sure that we're setting up a really strong start for 2022.
My job right now is supporting this organization through that transition.
This team is well positioned to continue to drive.
The business forward.
<unk>.
What we've just delivered here in our first half is a good indication of that that the strategy is on track that we are accelerating the penetration of some of the new technologies.
And that.
As David share, we've got a great handle now on our on our capital allocation model.
So on.
I'll admit it's a little bit sooner than I had expected, but if a change was going to happen it needed to happen. When the organization was really hitting on hitting on all cylinders. So I couldn't be more proud and thankful of the team on how they remained really focused the board is driving that succession process and theres not much I can comment on today.
Day about that in terms of timing or possible candidates I know the board remains very focused on identifying the right talent to help carryforward Cortez US success and until then I'm here extremely focused on making sure that we don't Miss a beat.
I think that's a great place to end I'll pass on the second question.
Okay, Great John Thanks.
Yes.
Yes.
And that concludes today's Q&A session I will turn the call back over to our speakers for concluding remarks.
We thank you for joining our call today on your interest in car tab on we have to have a great day. Thanks again, thanks everybody.
Okay.
Once again, ladies and gentlemen that concludes today's conference. We appreciate your participation.
Yeah.
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