Q2 2022 Corteva Inc Earnings Call
Good day and welcome to the <unk> second quarter 2022 earnings call Today's conference is being recorded.
At this time I would like to turn the conference over to Kim Xu. Please go ahead.
Good morning, and welcome to of course have as second quarter and first half 2022 earnings conference call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer, and Dave Anderson, Executive Vice President and Chief Financial Officer.
Additionally, Tim Glenn Executive Vice President Chief 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 courts have a 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.
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.
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 is now my pleasure to turn the call over to Chuck.
Thanks, Kim and good morning, everyone and thank you for joining us.
There are several key topics, we're excited to share with you today, including our strong results for the first half.
Robust customer demand and sustained execution of its dynamic market conditions resulted in double digit growth in sales and operating EBITDA.
Strong organic sales gains in every region are a testament to continued customer demand for our differentiated sustainably advantaged technologies.
On the seed side, our top tier genetics, continuing to be in high demand as growers prioritize yields to help offset inflation.
In crop protection, new product sales surpassed $1 billion for the first half.
An increase of more than 60% compared to prior year.
This was led by products like enlist herbicide, which has more than doubled in sales compared to the same period last year.
The enlist system continues to gain traction in the market given its superior performance and grow our confidence and we now estimate.
Enlist soybeans were planted on at least 45% of U S soybean acres in 2022.
This is a remarkable feat considering this technology has only been in the market for three seasons.
Market challenges persist, including tightness in supply chains and continued inflationary cost.
Despite this the organization is executing well utilizing price and productivity actions as well as tight controllable cost management to offset inflation.
Through the half these actions along with a mix of new technology products helped to drive margin expansion of almost 130 basis points.
Looking forward, we are also taking new strategic and operational actions to further accelerate our performance and create shareholder value, let's turn to slide five where I'll provide an update on the progress we've made on our strategic framework.
Earlier in the year, we announced that we moved from a matrix organization to a global business unit model to drive overall simplicity and speed of business, while increasing accountability.
Today, we are announcing actions associated with our comprehensive strategic portfolio review, we recently completed.
At the center of our strategic review, we focused on several key priorities, including developing and commercializing differentiated technologies shaping a performance driven organization and maximizing customer experience.
As a result of these reviews, we plan to exit non strategic geographies and product lines, while redirecting resources closer to the customer in core markets. Importantly, we are employing a strategy of differentiation to drive our competitive advantages, bringing unique sustainable AG technology.
Solutions to growers to drive advancements and global food security climate change and the energy transition to include Biofuels.
I've said from day, one at Cortez, our technology engine is a powerful differentiator in terms of value.
For growers Society and shareholders, we plan to provide a deep dive of our pipeline as part of our upcoming Investor day.
But here are a few highlights to give you more confidence today.
On the feed side, we have nearly 20 times, the experimental hybrids and our corn pipeline compared to 10 years ago, a testament to the strength of our data science capabilities on the crop protection side as I look forward to 2024, we will have launched 10, new active ingredients 90% of.
These new products meet our sustainable innovation criteria.
Utilizing this strategy, we will prioritize investments to support innovation, while also balancing our commitment to return cash to shareholders. In fact since 2019, we have returned more than $3 billion to shareholders in the form of share repurchases and dividends now.
Now, let's turn to the outlook on slide six recent AG commodity price volatility has increased due to several factors, including the war in Ukraine increased energy costs, especially in Europe .
The strengthening U S dollar and continued cost inflation pressures.
Although we expect to see expansion of <unk>.
Janet acres in Latin America global grain supplies remain tight.
Especially as dry weather Cas uncertainty over important growing regions.
Despite the short term volatility the outlook for agriculture remains positive.
We expect record demand for grains, and oilseeds in 2022, which we believe will support commodity prices for the next few years as demand continues to outpace supply and we work to rebuild ending stocks.
Farmer income levels remain at near record highs, despite increased input costs for fuel and fertilizer.
We're encouraged by resilient demand as growers prioritize the latest technology and top tier products to increase productivity on the farm.
Based on this market outlook and in conjunction with our refocused strategy and second half operating plans. We are raising our previously provided guidance for the full year net sales are now expected to grow 11% and operating EBITDA, 17% at the midpoint over prior year.
This level of operating leverage demonstrates we are on the right track and I look forward to sharing more of our plans with you soon.
Let me turn it over to Dave to provide financial details on the half and the outlook.
Thanks, Chuck and welcome everyone to the call, let's start on slide seven which provides the financial results for the quarter and the half.
As Chuck said and as you can see from the numbers we've started the year strong quicker.
Quickly touching on the quarter organic sales increased 13% compared to 2021 with gains in both segments and all regions. This translated into earnings growth of 18% and margin improvement of more than 150 basis points.
Another solid quarter of continued growth and margin expansion and I think differentiating quarter ever in this environment.
Now focusing on the half organic sales grew 14% over prior year with broad based price and volume gains.
Global pricing was up 9% with notable increases in both seed and crop protection.
Volume growth in crop protection of 16% was driven by strength of new products, which delivered approximately $400 million of sales growth year over year, an increase of more than 60%.
We delivered two 8 billion operating EBITDA and have a 17% increase from the same period last year. This is noteworthy given the continued inflation of raw and energy costs.
Commodity price volatility and the war in Ukraine.
Reising and productivity more than offset the higher costs incurred as well as an approximate 200 million currency headwind driven predominantly by European currencies.
This improvement translated into almost a 130 basis points of margin expansion year over year.
Let's go to slide eight where you can see the broad based growth with strong organic sales gains in every region.
In North America organic sales were up 9% driven by crop protection on demand for new chip technology.
Technology, including enlist herbicide seed volumes were down versus prior year, primarily due to a reduction in U S corn acres and supply constraints and canola.
Soybean volumes were up 4% versus prior year, driven by continued penetration of the list.
Both segments delivered pricing gains with corn, and soy up 6% and 7% respectively.
Double digit pricing gains in crop protection more than offsetting higher input costs.
In Europe , Middle East and Africa, organic sales increased 19% compared to prior year, driven by both price and volume gains again in both segments. It's an impressive performance by the organization considering the impact from the war in Ukraine, and the recent dry weather condition and parts of <unk>.
Stern Europe .
Seed pricing increased 12% and helped to mitigate currency impacts and for crop protection demand remains high for new and differentiated products driving volume growth of 15% year over year.
In Latin America, we delivered 31% organic growth with double digit volume and price gains.
<unk> increased 13% compared to prior year, driven by our price for value strategy, coupled with increases to offset rising input costs.
Seed volumes were flat due to tight supply of corn, while crop protection volumes increased 34%. We also had a timing benefit.
On an early customer demand in Brazil, shifting some forecasted volume into the second quarter.
Asia Pacific organic sales were up 13% over prior year, when both volume and price gains.
Organic sales increased 24% on strong price execution and the recovery of corn planted area from last year's Covid related impacts crop protection volume growth of 5% was again led by demand for new and differentiated products.
Let's now turn to slide nine for a summary of our operating EBITDA performance.
First half operating EBITDA increased nearly $400 million to $2 8 billion and as I covered on the prior slide strong customer demand drove broad based organic growth with price and volume gains in all regions.
On costs, we incurred more than $500 million of market driven cost headwinds in the half driven by higher seed commodity costs crop protection raw material costs as well as freight and logistics.
The company achieved approximately $130 million in productivity productivity savings in the half, which helped to partially offset this impact.
Currency was a $200 million headwind primarily by European currencies.
The organization's focus on meeting increased customer demand, while effectively managing cost headwinds through pricing product mix and productivity resulted in nearly 130 basis points of margin improvement for the half.
Let's turn now to slide 10.
I'd like to expand just a little bit on our cost actions.
In connection with the business realignment that Chuck referenced we've completed a strategic assessment of our priorities and operational structure as.
As a result of this assessment, we anticipate incurring restructuring charges.
Quarterly basis through the second quarter of 2023 of approximately $400 million rough.
Roughly half of the $400 million of restructuring will result in cash payments and the remaining 200 million is related to long lived assets the.
The Russia withdraw and some inventory write off.
This quarter, we recognized $68 million in restructuring and other charges. These charges were primarily result of contract terminations.
A reduction in head count and a $45 million charge related to our previously announced withdraw from Russia.
We expect additional restructuring and other charges of approximately $325 million over the next 12 months, including charges from head count reduction and right sizing our operations and functional support structure.
And finally and a key point, we expect the restructuring actions will deliver more than $200 million and run rate savings by 2025.
More to come on this but we believe these actions will position us to deliver increased value in both the short and long term.
Let's go now to slide 11, and talk about the remainder of the year and our updated expectations for 2022 with the backdrop of our strong first half performance, we're raising our reported net sales guidance to be in the range of 17, two to $17 5 billion for the year representing 11%.
Growth at the midpoint and includes an approximately 2% to 3% currency headwind.
We're also raising our operating EBITDA guidance to a range of $2 95 to $3 1 billion or 17% growth over prior year at the midpoint.
This increase reflects continued strong price execution in both segments and all regions. Both for our technology in response to rising input costs, we now anticipate $500 million of year over year improvement in sales from our new crop protection products and an increase of 200.
Over our original annual assumption driven by strong demand in every region.
And as we focus on the second half of the year, we expect pricing and productivity to more than offset cost headwinds, which are driven by crop protection raw material costs.
Key commodity costs as well as freight and logistics volume growth will be led.
By crop protection, primarily in Latin America as farmers look to the newest technology to drive productivity on the farm.
Seed volumes are expected to be relatively flat in the back half of the year with tight seed supply and Latin America corn.
And regarding the third and fourth quarter outlooks, we expect the distribution of both revenue and operating EBITA between the quarters to be consistent with our historic patterns.
The volatility of exchange rates continues to be a key variable that we're monitoring primarily the Brazilian real.
While we are largely hedged for this currency exposure. We currently expect an approximately $50 million headwind in the second half.
We continue to maintain disciplined spending we anticipate that SG&A as a percentage of sales will improve by more than 100 basis points for the full year.
Increased customer demand, coupled with the ability to manage cost headwinds through pricing and productivity is expected to result in approximately 100 basis points of margin improvement for the full year at the midpoint.
We are raising our operating EPS guidance to a range of $2 45 to $2 60 per share.
The lower share count driven by the $600 million of share repurchases completed in the first half of this year.
Coupled with strong operating earnings is driving an expected 17% increase in operating EPS EPS year over year.
Lastly, we expect free cash flow to be in the range of one to $1 3 billion lower than our earlier assumption of one three to one 6 billion.
The change is led largely by higher accounts receivable balances on higher revenue.
Despite the increase in working capital balances, all working capital metrics, including days sales outstanding receivables and our inventory days supply.
<unk> to be strong.
Let's now go to slide 12, just to summarize a few key takeaways.
It's clear that our organization is Chuck has said is executing very well. We're obviously very pleased with the strength of the first half results.
This momentum gives us confidence to raise our full year revenue and earnings guidance.
And we've taken very important steps in our strategic roadmap to accelerate operational performance and drive continued operating EBITA margin expansion.
We have completed comprehensive portfolio reviews.
We're taking cost actions to support our strategic priorities.
And our performance outlook and.
And finally, we plan to maintain our track record on capital deployment with our recently announced 7% increase in the dividend and we expect to complete approximately $1 billion in share repurchases for the year.
So we're excited to share more about this at our upcoming investor event and with that Tim I'll turn it over to you.
Thank you Dave on.
On slide 13, I want to briefly share the agenda of our upcoming Investor day. As a reminder, the event will be held on September 13 in Johnston, Iowa at our global business and R&D Center.
Management team will provide more detail on the strategic updates that we touched on today as well as how these actions will translate into earnings and margin growth.
We will detail our financial framework and include a showcase of our innovation pipeline.
<unk> details are available on our website and we look forward to seeing many of you in person at the event.
Now, let's move onto 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.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
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Please limit yourself to one question again press star one to ask a question.
And we will take our first question from Vincent Andrews with Morgan Stanley . Please go ahead.
Thank you and good morning, everyone.
Just a question on the 5% of sales that youre going to exit as well as the $200 million program.
How would you characterize both of those in terms of is this just complete finality.
<unk> gone through everything top Nevada, and that said, it's only 5% of sales.
The $200 million.
That's all you've.
Ed you figured it out or is it the case that maybe there is some more sales that are sort of on the bubble that youre going to reevaluate down the road and that you think may be as you get through the $200 million you may find other things to do how would you characterize these programs.
Yes, good morning, Vincent So why don't we do this this morning, we'll have Dave talk a little bit about the process that we went through I will say it was an extensive process. We had many employees involved in the effort and then I'll come back and I'll give you a perspective on what we think where we are in the in the overall outcome.
And what we'll share more.
In September so let's start with the process. This morning go ahead, Yeah, Let me let me just.
Say that.
Echo what Chuck said, which was this was very comprehensive and.
Yes.
Involved.
The breadth of the organization to really ensure that we are looking at all elements of the portfolio as well as again as our cost structure cost structure.
I'm going to call it fit for purpose in terms of their cost structure in terms of the process you really think of it I think of it as two dimensions one dimension is.
Our call it unique and technology base differentiated products in other words do we do we have call it comparative and competitive advantage.
In particular products in particular geographies, so call it markets and the second one is of course, then we apply to that screen in terms of our financial performance are we delivering if you will economic profit.
In those markets. It was really that screening process that allowed us to really stand back and really scrub, which are those that are really call. It really strategically significant and.
And core to the business going forward and what was the appropriate resource allocation associated with that including the appropriate go to market strategies.
All of that then resulted in what you just referenced which is.
Decision, which by the way is still in process and Chuck will talk about that from a timing standpoint, but decisions in terms of some of these call it market market exits as well as some of the realignment.
Cost structure, just on the cost structure and that may be what youre referencing in the $200 million of $400 million of restructuring $200 million of that is call. It cash costs, which will generate $200 million of savings in terms of run rate savings by 2025, Theres more that we do.
Doing theres more simplification more additional other work that will also provide benefit and again, we'll expand on that.
As we come together again in September so if you want to add to that yes. So look I think from a process perspective.
We spent a lot of time and effort we have made the decision to exit.
What we call some non strategic geographies and product lines.
We're still focused Vincent to be candid with you is there are some markets that were were still analyzing when it comes to what level of Resourcing should we have whats the route to market. So these are some of the other pieces of work that are still on the to do list.
But the way you referenced it is accurate.
We I think did a very good analysis on.
The ability for the market to grow.
The strategic fit that we're trying to shape up for our focus and then how much money we make in some of these markets and different product lines.
And we've made the decision and as you've referenced so theres about 5% of our revenue that impacted here.
We're going to keep essentially all of our our EBITDA.
But there is some further work to be done the reason, we're not talking about specifics today just to be candidates.
We still have to go through the internal communication process, we haven't notified some of our steak other stakeholders around the specifics.
And so those plans are going to take some time, but I think the when you think about the $200 million thats related to the $400 million write down what I would say to you today is that.
That is one element of a broader strategic and financial framework, which we will share.
In our September Investor day so.
The way you asked the question is is it fit as it done I think you need to wait till September to see the overall financial framework that we're going to lay out at the Investor day, So that youll be able to measure to monitor our progress for value creation.
We think that we've got a great plan now put together, obviously, it's going to be key to execute the plan.
But I think looked at the company from first of all a strategic lens and then on R&D and innovation lens and now a financial lens annually, we put that together I think what youre going to see is a very comprehensive.
Our plan to drive shareholder value, but more than that to really work on some of the world's biggest challenges when it comes to food security and the energy transition.
And we will take our next question is from Joel Jackson with BMO capital markets. Please go ahead.
Hi, Good morning, maybe a two parter on seeds, let's say to euro soybean performance is really strong this year.
Part of it looks like you're taking share in soybean seeds are you may be giving up some sharing corn seed and then my second question is.
If you look into now.
Early but it looks like there's some really good trends happening in seed pricing in one of your competitors talking about double digit.
Low double digit price mix that in corn, and soybean seeds and they get into into pricing season soon.
Can you talk about that a little bit and where cost might trend for the next season versus now thing.
Hey, Good morning, Joel This is Tim I'll take that I'll take a shot at these so obviously the first part on market share.
I appreciate the comments on soy, especially in calling that out.
USDA reported in June .
The what their expected acres were in the U S and and I would say they were consistent with what we believe was planted so not a lot a lot of conflict there and again no update that report next week, but based off of.
Where we sit today is we believe we gained market share.
In North America, both on corn and soy so on corn, both pioneer and Vermont contributed to that and on soybean pioneer really drove the growth there and on top of that we did very well in Europe for both corn and sunflower, So really strong execution in the field.
For us to be able to capture both share and value through.
Really really outstanding execution, so proud of where we sit there and really positive momentum on <unk>.
On both corn and soy as we go here.
Terms of pricing as we go into next year, clearly that's going to be one of the big questions is always out there.
I guess I'd start with really reinforcing the strong execution, we had in the first half of 2022, we went out with I think what I would say a bold.
Broached pricing this past year, and we were able to deliver 7% globally and really 7% for each of our major major crop categories in the first half corn soybeans and our oilseed products. So.
To me, it's a testament to the value that we're delivering to farmers and also continuing with that strong execution in the field.
Turning to page 23, we know it's going to be a competitive market.
But the general economics continue to remain favorable and our customers are demanding.
<unk> technology, there and help them drive yield and profitability. So we're in the process now of working on our offer for 2023 from a North America timeline, we will start to roll that out here in August and that will continue.
<unk> and September will be out in the marketplace in Europe , it'll be more like a September October timeframe.
Got a strong portfolio of hybrids and varieties farmers are recognizing the value. Our teams have a proven track record of executing in the field and capturing value and we continue to expect our pricing to be accretive to margins in 2023. So.
<unk>, it's a huge amount of priority generally speaking, we don't have the area increase that much in any one year. So for us to be able to continue to drive growth value and margin expansion, we've got to be able to continue to execute strong and the price area, Yes, Joe maybe just a good callout on enlist so.
We mentioned in the prepared remarks that we're we're now anticipating that were on 45% of the U S soybean acres.
I've traveled through the south and the Midwest over the last two weeks talking to our customers and I will tell you theres a lot of excitement around this technology.
From multiple dimensions I think it is a set of tools that the that farmers need.
We're just very pleased that how.
Farmers are adapting to the technology.
I actually attended a couple of training sessions.
For some of our retail.
Channel partners, two weeks ago, and look everything looks great. When it comes to the enlist system and in the first half we cross the $1 billion range for the entire technology platform systems. So you start thinking about that now it's another $1 billion franchise that <unk> has and I think that there's some good things.
To come down the down.
Down the road as I mentioned, we've only been on the acres for three seasons now. So there is still some more to come.
Okay.
And we will take our next question from David Begleiter with Deutsche Bank. Please go ahead.
Thank you Brian nice quarter.
Chuck just on crop protection again very good results here are you still seeing cost increases here.
Are you still raising prices and how durable are these price increases going forward.
Thanks, David I'll have Robert to address those questions.
Hi, David when you when you even look at crop protection for the year, Yes, we've seen some inflation in the first part of the year and been able to use.
Our value for pricing.
Our strategy as we move forward there.
More than offsetting with price and productivity, so we've been able to hit.
Had those headwinds off as you look into look into the second part of the year. We will continue to follow that same strategy and we do expect to continue to have some headwinds. Although we think that the inflation will begin to slow a little bit based on being able to lap.
This year it increases.
But we do anticipate that there'll continue to be headwinds and so we're going to continue to follow the same strategy.
What's inflation closely.
But we think we're in a very good position with the technology, that's being pulled on to the farm from our from our growers.
If you look at look at our new products were up 60% and I think that's a that's a big I guess shot in the arm for us from a standpoint of the demand for our new technology that is being pulled into the market. So I think that's sort of how you should look at the second half.
Yes, Dave maybe this is Dave and so maybe I could just add a little bit to Robert's comments is.
As we as we indicated we have some incremental inflation.
We've now built into our guide for the second half so.
Bringing the total up now for the full year, probably into the 10% 10% to 11% range.
In terms of inflation.
Company overall.
The components of that Robert referenced obviously the active ingredients.
As a key component freight and logistics.
Very very important.
Component of that so we're really looking at all of this is wide open.
Robert said the the early planning that we have is for the.
Okay.
As we go forward again, we provide a little more insight to that forecast on that as we go forward to the year I think one of the things Thats really testimony to the company is the fact that we've been out in front of US would you go back actually to early 2021 in terms of what we began to see then and the actions that we've been able to take subsequent.
<unk>.
So.
Its something Thats, very very front and center for us.
And we'll take our next question from Kevin Mccarthy with vertical Research partners. Please go ahead.
Yes. Good morning would you comment on your latest expectations for your net royalty payments.
In 2022 trending into 2023 and based on what Youre seeing with enlist and other trends.
How would you describe your latest level of confidence in achieving neutrality there.
<unk> 2008 or 2009 timeframe.
Maybe I can just comment very quickly similar on a couple of numbers and then why don't you talk a little bit with the strategic view that Kevin asked about but.
Kevin you recall that.
Basically we are even with 2021 in terms of that net royalty assumption thats in the P&L.
That had to do with some benefits that we achieved in 2021.
We're basically constant in 2022, there is a nice pickup that begins in 2023 and then we will continue to ramp again, we're going to share more insights on that in more of a multi year look of that when we get together in September Tim you want to talk a little bit just about overall from your perspective, yes, Dave.
I think the big thing now as we look into 2023, there is one major driver.
As Dave said, we take a big step forward.
In terms of in terms of that move towards royalty neutrality as you as you say, Kevin and Thats driven by our significant ramp up in the sale of whatever genetics with the E trade and <unk> brands and so that's been something we've talked about for it seems like a long time now about three years here in 2023 is when youre going to see the big move forward there.
So we're going to continue to increase the amount of core Teva branded sales at our analyst day, three and we will take a major step forward with that in the end of the year and also a major ramp up in terms of the proprietary.
Germ plasm that we'll have available.
For our brand and down the road what that does as we introduce our proprietary germplasm is opens the door for more licensing not necessarily a 'twenty three item, but further down the road thats going to continue to offset those royalty payments that are ongoing and.
And keep us on that path towards neutrality.
And we will take our next question from Chris Parkinson with Mizuho. Please go ahead alright, great.
Great. Thank you so much for taking my question.
Hit on this a little bit earlier, and then the potential for CPC margins, just given the degree of inflation and obviously then pricing quite well.
There are also a lot of moving parts in terms of the new product momentum I mean, it seems like it's a class a rents for all of the things in the last few years Theres still carrying a decent degree momentum as well.
You hit on that as it pertains to 'twenty three 'twenty four and also just give us a quick update on the spin SMC expansion. Thank you so much.
Go ahead Robert.
Yeah, Chris when you.
When you look at.
Second half and margin.
Dave mentioned some of it a little bit ago.
How we will manage that we've had a great run in the first half of being able to manage our margin with the strong demand that we've got for our new products as you mentioned, there and so like we said before.
Historically first half margins are higher.
The new product growth was disproportionate to first half.
But Latin America has.
It also had early season buying that happened a little bit in Q2 with just the strong demand thats going on there, but all of that said, we still expect to have a very solid second half for margins.
We expect that.
Our new products continue to give us give us value there.
The technology, we're putting on the farm in and driving value for the growers something that that.
Is is really being pulled pulled by them in and it's something that's given them a new tool in their toolbox.
Specifically to <unk>, so our capital projects that has been run and they're up in up in Midland, Michigan is on track, we've actually had our first commercial product come off the off the line and we're working on moving forward. There. So this is going to be a good a good expansion for us over the next few years on a phone.
A product that is in high demand and are in our markets.
And as we as we ramp up between now and 2015, that's going to put another 50% capacity into the market that.
We will be very good value add for us and to the growers.
Yeah, Chris the way I think about.
CP and the journey, we're on for the next couple of years.
It's sort of more of the same I think just if you look at the first half results. It's clear we have the right strategy and the CP team is executing very well and I would consider to be quite.
Challenging market backdrop, when it comes to supply chain challenges and cost inflation.
I think we do have the right formula and where we're trying to take the CPE business is to be a seller of differentiated and unique.
<unk> products and so the new products plus the <unk> capacity as it comes online over the next couple of years, what Youre going to see from US is that we're going to continue to sell the higher margin differentiated type solutions to farmers and that should continually to improve our business now when I look at the first half.
It's a strong year by almost every measure when you look at our CPE business.
And some of that is the fundamentals and the timing from it from a customer demand perspective. Some of it is structural change that were making in the product portfolio and as you look out to 'twenty, three and 'twenty four and I'd, even say 25.
What I would expect you to see is just continued steady business improvement margin expansion as we manage our controllable costs and we put new technology into the market.
We will take our next question is from P. J <unk> with Citi. Please go ahead.
Yes, hi, good morning.
Your price guards for seats typically come out in August or September .
Which is way in advance of the actual planting and a lot can change between when the price cuts come out into planting, especially in a year like this when there is so much volatility.
How do you manage that volatility how much of your seed production is hedged right now and then you also mentioned that one Brian .
Brian gaining share can you just give us an update on that in the retail channel. Thank you.
Yes P. J, let me take a shot at that so in terms of.
Volatility I mean, there's always a fair amount of uncertainty at this time of the year in terms of our seed production. So as we look out across the board we've been it's been an interesting environment.
And in the U S.
We saw commodity prices kind of peak in the spring and go down and now bouncing around a little bit. So we're off of the high there. So that's clearly one of the factors we deal with in terms of the other factor is clearly around our production volumes.
<unk>.
And this is a both a U S and North America and in Europe issue in terms of the production season.
Got a very distributed production footprint in terms of geographic footprint. So that's got some diversification there were largely irrigated.
In both North America, and Europe , and I would say is as we evaluate and far from certain in terms of what will harvest. We feel like we're close to budget right now in the U S. Despite.
Some of the weather weather challenges that have been out there in Europe feel very good harvest is underway and we probably have a little bit of.
Of higher stress from our production hungry, but other plant.
Seem to have handled the stress well and we really do expect to be in a good position. There. So in terms of timing I mean, obviously, it's a balance I would love to be able to price just in time and have every variable known but from a competitive standpoint, it's very important that we get out in the marketplace and connect with our customers and so as customers are harvesting the commercial crop.
Through the through the fall months, that's when they are evaluating their hybrids and what performed what didn't perform who they're going to commit to for the for the next year. So it's very important that we're positioned well we can go out there with a confident offer.
And put that in front of a customer at a time when they are ready to make their decision and so that seed purchase decision. The timing has been very consistent over a number of years and by the end of the year farmers are generally made.
Close to a final decision in terms of the brands and the products and they'll finalize the volumes as they get closer to planting and what the ultimate crop mix is so I don't anticipate that changing and I wouldn't say, we're dealing with a whole lot more variables. We are well hedged at this point, but we still have some hedge to go on both corn and beans and so.
We have not locked down our Cogs right now, but we feel like we've got a pretty good grasp on on what that will be and obviously.
We're going to continue to use the levers as Dave said, the controllable that are in front of us.
<unk> around productivity and pricing to help mitigate those those situations and in terms of our bonds.
We're rolling into year, three with provider in the U S.
We continue to grow the business.
Which is which is really exciting in a year when when acres were down in the U S and provide definitely did contribute to our share growth for corn in the U S. This year, our focus will provide right now is to continue to build confidence with our channel partners and we got to continue to build confidence with our farmers and so we've got <unk>.
Fluent product performance things look good in the field right now.
I've spent a fair amount of my time connected with those key channel partners, we continue to build the confidence and relationship and the interest in and as we roll into 2023, our third year in the market I'm very satisfied with the progress to date and really excited about the opportunity in full expectation.
We're going to continue to grow that segment of our business.
And our next question comes from Jeffrey Zekauskas with Jpmorgan. Please go ahead.
Thanks very much.
A few questions precedented.
Can you talk about your pension liability.
And what it might look like at the end of the year.
And how that might affect.
<unk> future pension fund things in the future.
Second.
You talk about what your crop chemical growth and volume would have been.
If you didn't have new product.
And then thirdly.
Is the restructuring that you plan really more seeds and crop chemicals, and if so why or CIT EBIT.
Okay, Jeff why don't I start with the first one on pension.
The pension status is is another I would call right now a good news story despite the.
Some of the challenge in the equity markets I think we've managed this very smartly.
We've significantly reduced.
The percentage of asset allocation and our overall portfolio to return seeking assets.
And we've also been able to obviously benefit from interest rate increases.
At the end of 2021.
Pension funded status was.
90 over 92% over 90%.
Funded so that was very healthy and you recall those those numbers from our filings and from our previous discussions.
Despite <unk>.
<unk> markets and some of the other challenges. The reality is we've been able to hold to over 90% funded status through June 30th in fact, I looked at the numbers just a couple of weeks ago and we're still in that if you will positive territory. We've recently.
<unk>.
Recalculated.
All of the math looking forward.
And as you know.
Fairly complex statistical analysis.
That goes into that usage, using our outside experts and actuaries.
And there is there is little claim.
The company's free cash flow.
Within the foreseeable.
Multi year outlook in terms of pension liability.
It's something that's been very very well managed.
I think it's a really good new story, when you think of Cortana and what it translates to obviously is it gives us fairly significant flexibility when we think about our capital deployment strategies, and we think about the opportunity not only to return cash to shareholders.
To invest if you will organically for growth. It also gives us opportunities selectively as we look at advancing our technologies and accelerating our market position and some of those key technologies that really gives us a lot of flexibility going forward.
Maybe on the on the last one on the restructuring.
And then Robert you May want to talk a little bit about the CPE volume without the new products on the restructuring there really isn't a.
A precise split that I can give you between the two business units between seed and crop when you look at it.
Terms of the major categories.
The components of what we're doing with the restructuring it's really across the organization and it's really again associated with an outcome of our portfolio reviews, our strategic review as well as looking at our overall cost structure and we think doing the right thing to set us up not only.
As you would suspect for 2023 and as Chuck referenced but really is taking.
Our view.
Over the if you will the mid term.
Our multiyear midterm look at how to best position the company going forward.
Maybe before going to Robert So Jeff just on the restructuring so Dave covered that well, but what I would say this was a company wide exercise it wasn't simply a product line or a bu exercise. So we started with the top of the house the strategic direction. So, yes, theres going to be AI that we're exiting theres going to be more focused on certain crops.
Yeah.
But theres also a really good look at our infrastructure and our.
What cost structure do we need to go forward, we've even looked at our digital offerings. So this was very comprehensive it wasn't contained to one or two of the big be used and we will put all of that together for a financial and operational framework for you to understand at our Investor day. So maybe Robert can you address the CP growth volume question.
<unk>.
Yes sure Chuck.
Jeff when you look at this.
In the <unk>.
The new products grew 400 $400 million for the.
Half, but more importantly.
Your question of what would it be without it.
A lot of things in that.
Old products would still be sold.
And those place oven et cetera.
It's not just straight math theres a lot of different moving parts to this.
The big the Big thing to understand here is the grower demand is very strong and so there would be there's a continued need for four products on the on the farm and the new products are filling a need there with the technology et cetera.
Give them as a new tool.
And I think just maybe Robert just add quickly to this and something.
You mentioned earlier.
Obviously, we're benefiting in terms of what you were able to bring to the bottom line and what you are demonstrating in terms of margin expansion.
Those new products are also contributing to so.
Very important not only meeting demand in the marketplace, but also adding value, which is which is great.
Okay.
Okay.
And we will take our next question from Steve Byrne with Bank of America. Please go ahead.
Yes. Thank you.
Curious as to what you heard on your travels in recent weeks Chuck on the level of Dicamba drift that has occurred this year. What are what are your data sources, indicating to you in terms of.
Is it.
Worse, or perhaps maybe less so than prior years, just because of the shift towards unless but more importantly, if you have a view on whether.
EPA might take some action on the canola registration.
Suggested where.
That could make over the top use of that camera more challenging in 'twenty three if that were to happen.
How would your lineup of seed production in 2022.
Give you the opportunity to really shifts more towards an a list.
In 2023.
And just one more on there you mentioned renewable fuels I'm curious if any of that soybean pipeline you have.
Includes any high oil percentage soybeans in the lineup.
To be a feedstock for our data on the road.
Yeah. Good question, Steve. Thanks, I'll comment from my travels and Tim spent most of his days out there so let.
Let me just address the renewable fuels question for you right upfront. So yes, I guess the short answer is we're going to show you some of our technology pipeline at our Investor Day. This is an area. We're quite excited about to drive up higher oil, but also other elements of the genetic code I think as well.
That that Sam and his team are working actively on to do different things even in alternative proteins. So.
These are things that I think the world needs their solutions that.
Are going to be we're working with some of our partners in different industries. There is a lot of excitement around what we can do.
And so that the key for us will be not only solving the technology formula, but then the regulatory arena and the freedom to operate and we need to put all of that together, but I think that from what I've seen certainly is the science and technology is is getting to a point, where we can solve some of these at least make made.
Your steps to solve some of these really difficult challenges renewable fuels needs to be part of the energy transition and I think that we're going to demonstrate some of that for you in September .
<unk> addressed so I did as I mentioned I spent some time in the south.
And certainly I've seen the fields, where there was that kind of addressed and damage the soybean fields.
Unintended consequences is the way I would say so I won't comment on whether this should be further taken up by the EPA I think the EPA needs to figure that out.
But what we're trying to do of course is ensure that.
Growers and even the retail channel has.
Options and solutions and when you look at the enlist technology of course, it doesn't have that same characteristics. When you spray the enlist herbicide it stays where it is intended to stay on its target and Thats one of the major reasons, that's driving I think a strong demand from our customer base. So that that is one of the things that.
I think the market in general is highly focused on is if keeping these products where they are intended to be applied and I think the analyst platform has demonstrated that it does that very well Tim observations, yes, Chuck I think your comments in the south very consistent.
There's been a few pockets where I'd say.
And the visibility or the the noise around some of those issues have been had been stronger this year.
And particularly when you get into the mid south of the Delta area and I'll be there next week and be spending time on the ground with.
With customers and our sales team and channel partners.
And to understand more about it.
In terms of.
Speculating on what could happen from a regulatory standpoint, it's impossible to do that and as Chuck said, the EPA is going to have to make a call on that we have seen some states step up and be more aggressive in terms of regulation and I would say I'll speak in general and lifestyle I spent.
Better part of the evening with about 30 of our field sellers.
In a meeting and got feedback on this I would say across the Midwest, we've kind of gotten to a critical mass with enlist flare.
And some of those state regulations that are in place where maybe the issue is not quite as visible as it had been in the past years at least in terms of what our customers are experiencing there. So what we have to continue to do is.
Support our customers through proper advocacy, our technologies customers, where they have concerns farmers need to speak up.
To their channels within their within their states and obviously, we're going to continue to support and advocate for best practices around safe to use for all of the technologies that are in the marketplace.
I don't think we want to position this as enlist versus expand or anything like that we want to make sure that all technologies are available and our customers do have choice and that those products are used appropriately and those best management practices have to be in place. So.
In terms of.
The 2020 to see crop that's in the ground and so we will have a significant ramp up in our branded business for 2023 sales. So that's reflected in our RC production decisions already Steve.
And we'll take our next question from Michael <unk> with Cleveland Research. Please go ahead.
Yes. Good morning, just wanted to get your sense in terms of the early buying from Latin America. How much revenue you think might've been pulled forward and if you could just give us a look at where you see the inventory situation in Latin America, North America than anywhere else fall interesting in terms of our crop protection inventories. Thanks, yes.
Maybe I could just start there and just comment quickly on the on the numbers and then Robert once you pick up and talk a little bit about those inventory levels in the overall market as you see it in Latam in Brazil.
Estimate from kind of best estimate this judgment is it's about $100 million of approaches $100 million of.
Benefit that we got in the second quarter.
It's part of what when you look at our guide for the second half we factor that in in terms of our thinking and also contributes to what I said earlier when you look at the distribution of both revenue and EBITDA.
Between third and fourth quarter.
Our outlook or our guide.
Matches or is consistent with our historic pattern. So that's one of the <unk>.
<unk> in terms in terms of that math, Robert and Thats really just reflected by the way that $100 million.
Estimate is really attributed to two things number one just the strength of demand and the second thing is that we had product available to.
To fulfill that demand so Robert you want to talk a little bit about just the overall conditions sure Latin.
Erika like like Dave was talking about there very strong demand.
And the growers there.
Yes, unprecedented first half organic growth love to have it into the future, but that's really not not realistically be sustainable but.
All that said there are.
There is early season buying because wood products available, they're going to take it the farmers are healthy financially and in a good position.
But we expect still have very good very good growth in second half down there anyway.
If we hit that we should hit in that 25%, 30% organic growth and that's nothing to laugh out either so we expect a very strong second half down there and the growers demand is really driving that.
That concludes today's question and answer session. At this time I will turn the conference back to you Kim Booth for any additional or closing remarks.
Thank you.
That concludes today's call. We thank you for joining and for your interest in core Teva, We hope you have a safe and wonderful day.
Yes.
Thank you for your participation you may now disconnect.
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