Q2 2023 Corteva Inc Earnings Call
Please standby.
Good day and welcome to the courts have US second quarter 2023 earnings call. Today's conference is being recorded at this time I would now like to turn the conference over to Kim Booth. Please go ahead ma'am.
Good morning, and welcome to Cortez second quarter, and first half 2023 earnings conference call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer, and Dave Anderson Executive Vice President and Chief Financial Officer. Additionally, Tim Glenn Executive Vice President.
<unk> 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 <unk> website and through the link to our webcast.
During this call we will make forward looking statements, which are our expectations about the future.
These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including but not limited to those discussed on this call and in the risk factors section of our reports filed with the SEC, we do not undertake.
Any duty to update any forward looking statements.
Note in today's presentation, we'll be making references to certain non-GAAP financial measures reconciliations of the non-GAAP measures can be found in our earnings press release and related schedules, along with our supplemental financial summary, slide deck available on our Investor Relations website. It's now my pleasure to turn the call over to Chuck.
Thanks, Kim good morning, everyone and thank you for joining us in the first half of 2023 for Teva continued to deliver top and bottom line growth.
With over 180 basis points of operating EBITDA margin expansion driven by strong demand for <unk> proprietary technology.
This is translating to another year of anticipated growth and significant margin improvement as we remain on track to deliver the 2025 financial targets, we laid out at Investor Day last September .
Feed continues what can only be called a terrific performance in the first half of the year with about 240 basis points of operating EBITDA margin expansion and double digit organic sales gains in corn.
North America is benefiting from higher corn acres and pricing actions, both of which offset higher input costs.
Our market share in seed remains strong.
In the U S. The first half of the year saw double digit revenue growth in pioneer in Provence as customers recognize the value our products provide.
We are pleased to see enlisted three recognized by the market. This year unless <unk> three is the number one selling soybean technology in the U S and.
We expect <unk> to be on at least 55% of U S soybean acres in 2023.
Further strengthening our portfolio, we launched power core enlist advanced <unk> for corn, providing farmers with the added flexibility of integrated refuge along with advanced combination of above ground insect control herbicide tolerance and industry, leading genetics avail.
Available to farmers in 2024, this enhances the strong technology position for our leading seed brands as well as creates new out licensing opportunities.
In crop protection farmers continue to invest in products to enhance and protect crop yields. However customers are adjusting their purchasing patterns to reflect the macroeconomic environment.
A combination of factors from interest rates to supply availability to working capital management.
Is motivating buyers, including retailers and distributors to adjust the timing of their purchases to be closer to their intended use.
We see these actions as a result of supply chain rebalancing and believe they could persist at least through the end of 2023.
Our crop protection business remains resilient by focusing on levers within our control. The team is delivering on our strategy, including pricing for our new and differentiated technologies as well as executing on portfolio and productivity actions. We have made excellent progress on building, our biologicals business, including the.
<unk> of our recent acquisitions, which are on track to deliver $90 million of EBITDA in 2023.
And we continue to advance our pipeline of new AI with the expected global launch of recommend active later this year pending regulatory approval.
This is a first of its kind selective nomad aside that targets harmful organisms, while not impacting beneficial organisms in the soil.
This reflects the continued journey of introducing new sustainable differentiated tools to the farmer.
Agricultural fundamentals remain positive our products continue to be in high demand and we are laser focused on executing our strategy and becoming more efficient.
At the same time to reflect the current industry environment. We are adjusting our full year net sales guidance down by about 4% versus the midpoint of what we guided last quarter driven by muted sales growth in crop protection as the channel destock.
We are also modestly reducing the midpoint of our 2023 EBITDA guidance, reflecting the revenue reduction partially offset by strength in product mix royalty reductions and cost actions.
Now, let's turn to the market outlook.
Recent USDA estimates have yields in the U S to be below trend line for the third year in a row.
Even with below trend yields given forecasted production in the U S and Brazil, ending stocks are expected to build which may put pressure on prices.
Commodity prices for the 2023 crop are expected to be down from recent highs, but still remain above historical averages. The continued impact of Russia's war on Ukraine, along with projected record demand for grains and oilseeds for food feed and Biofuels are currently expected to keep prices at profitable levels.
The demand for Biofuels hit a record in 2023 with the expectation this will grow again in 2024 at.
At the end of the day, the world needs to produce more crops with less land and a reduced environmental impact this.
This we believe is a recipe for our top tier seed genetics and differentiated crop protection technology solutions, we're seeing strong demand for biologicals and Biofuels and we're investing in those areas there.
Therefore, our overall view is that we will continue to see favorable farm income and demand for inputs. In this environment farmers are more incentivized to increase and protect their yields following a record year. In 2022 2023 is estimated to be in the top five on record for U S Farm net income.
Allowing farmers, particularly in the Americas to expand planted acres and also invest in proven technology to safeguard their profitability.
Now, let's take a look at the crop protection market in more detail.
When we spoke to you in early May we highlighted a change in buying patterns driven by improvements in supply chain reliability as well as higher interest rates, particularly in Latin America, where we were expecting order patterns in the second half of 'twenty three to look closer to pre 2002.
We also noted two weather driven hotspots of elevated channel inventories fungicides in Latin America, due to drought and insecticides in Asia Pacific due to wet conditions, what became clear in the latter part of the second quarter is the combination of events that has caused orders to shift to a more just in time approach.
<unk>.
This focus on inventory levels has resulted in a pullback in orders late in the second quarter, which was most pronounced in Latin America, followed by North America.
Books are closer to where we'd expect them to be in Brazil. At this time of year based on historical patterns.
We've included in our updated guidance the push out of Latin America volume to the second half and continued Destocking in North America.
Against this backdrop farmers continue to invest in top tier technology to drive productivity at the farm.
For <unk> perspective, we believe our renewed focus on differentiated and sustainable solutions makes us more efficient and better able to lead through these dynamic market conditions.
The strategic and operational decisions. We made last year have allowed us to get ahead of the crop protection industry wide channel Destocking and sets us apart from our peers.
We continue to advance our strategy by strengthening our portfolio and investing in R&D to drive strong sustainable growth. Our first half performance and continued demand for our differentiated technology provides confidence in our 2025 targets with clear value creation lever is largely within our control and now let me turn the call.
Over to Dave.
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 you can see from the numbers, we had a solid first half against quickly evolving market conditions.
Briefly touching on the quarter organic sales were down 4% compared to prior year with pricing gains in both segments more than offset by declines in volume in crop protection.
Volumes were impacted both strategic portfolio actions and the.
The exit from Russia, which combined represent an approximate $240 million headwind in the quarter in.
In addition, we saw delayed customer purchases due to weather higher interest rates and supply availability.
Again, particularly in Latin America, and North America too.
Despite the reduction in top line growth improved product mix and ongoing productivity and cost actions translated to earnings growth of 2% and nearly 140 basis points of margin expansion.
Now focusing on the half.
Organic sales grew 2% with broad based pricing gains global pricing was up 11% with strong execution in both seed and crop protection seed volumes were down 5% versus prior year, largely driven by the decision to exit Russia with crop protection volumes down 16.
Percent, which includes a 5% headwind from strategic portfolio exits the.
The top line performance translated into operating EBITDA of nearly $3 billion for the half an increase of 8%.
Pricing favorable product mix and productivity more than offset higher input costs and volume and currency headwinds driving more than 180 basis points of margin expansion.
So let's go to slide eight where you can see how the performance of our <unk> business offset the crop protection market headwinds in the first half for total company sales growth of 1% compared to prior year.
Net sales were up 8% in the first six months to more than six 9 billion organic sales were up 9% on strong price execution as we continue to price for value strategy and also offset higher input costs global seed price was up 14% for the half with <unk>.
Missing gains in every region led by North America, and EMEA seed.
Seed volumes were down 5% versus prior year gains in North America, driven by increased corn acres more than offset fewer soybean acres volume declines in EMEA were driven by the exit from Russia, and lower corn planted area with Latin America, and Asia Pacific volumes Dow.
Due to delayed plantings and also seasonal timing shifts.
And importantly, the exit from Russia represented a 3% headwind for the seed segment.
Crop protection net sales were down 9% compared to prior year to more than $3 9 billion org.
Organic sales were down 9% for the half with pricing gains more than offset by lower volume.
Global crop protection pricing was up 7% for the half versus prior year, reflecting pricing for value of our differentiated technology as well as to offset higher raw materials globally as well as currency impacts in EMEA.
Crop protection volumes were down 16% for the first half impacted by the shift in order patterns that Chuck referenced as well as the roughly $240 million headwind from the strategic portfolio actions and exit from Russia.
Currency headwinds in both seed and crop protection was 3%.
Largely driven by European currencies, and finally, the biologicals acquisitions added $135 million of revenue since we closed on the deals in early March which.
Which is reflected in portfolio and other.
Taking a step back the performance in the first half showcases the strength and complementary nature of our diverse portfolio.
With that let's go to slide nine for a summary of the first half operating EBITDA.
You can see the operating EBITA increased approximately $220 million to just under $3 billion pricing and product mix, coupled with productivity and cost actions more than offset declines in volume and higher costs and currency headwinds and.
And then we took a significant step in the journey towards royalty neutrality with more than $150 million of combined benefit from increased royalty income and a decrease in royalty expense driven by the continued penetration of <unk> list.
The nearly $450 million of net cost headwind was related to seed commodity costs and unfavorable yield impact as well as crop protection inflation.
Crop protection raw material costs were up about 5% versus the prior year as we sold through higher cost inventory.
In total market driven cost headwinds and other costs were mitigated by the improvement in net royalty expense.
$175 million of productivity savings.
SG&A spend in the first half of the year was about flat versus prior year.
It reflects the inclusion of approximately $50 million in SG&A from the biologicals acquisitions. So excluding the acquisitions SG&A is down versus prior year as we maintain disciplined spending and execution on cost actions.
Investment in R&D was up roughly $80 million for the half aligned with a targeted spend increases to support our leading position in AG technology.
Folio and other gains in the half were driven by the biologicals acquisitions, which contributed $22 million of EBITDA.
Currency was a 228 million headwind again, driven primarily by European currencies.
Turning now to slide 10, I want to take you through the updated full year guidance, which reflects the current market dynamics.
The change in order patterns and industry wide to stocking is reflected in the crop protection segment.
We now expect net sales to be in the range of $17 nine to $18 2 billion or 3% growth at the midpoint roughly $700 million lower than the previous Sky. This is largely driven by North America, and Latin America crop protection and.
And consistent with the prior guide, we expect approximately $450 million of net sales for the full year from the biologicals acquisitions.
Operating EBITDA is now expected to be in the range of three 5% to 365 billion, 11% growth versus the prior year at the midpoint.
The updated guidance is driven by lower topline growth, partially offset by improved product mix and greater than expected benefits from reduced net royalty expense as well as productivity and cost actions.
Importantly, with the strength of seed performance in the first half and crop protections improved product mix. We now expect operating EBITA margin of 19, 8% at the midpoint of guidance, where more than 130 basis points of margin expansion over prior year with growth in both C.
<unk> and crop protection operating.
Operating EPS is expected to be in the range of $2 75 to $2 90 per share.
An increase of 6% versus the prior year at the midpoint.
The change in guidance reflects lower earnings partially offset by lower forecasted effective tax rate and also the lower share count.
Now it's important to point out that the allocation of earnings between the third and fourth quarters again, we expect order patterns to be more consistent with historical timing.
This timing in Latin America sales, coupled with the seasonal patterns of the biologicals acquisitions is expected to result in nearly all of our second half earnings to be delivered in the fourth quarter.
Free cash flow is now forecasted to be in the range of one to $1 2 billion, we expect share repurchases to be approximately 500 million for the year, including $330 million that we completed in the first half.
And of course, we recently announced a 7% increase in the dividend consistent with a dividend growth strategy.
On slide 11, I want to remind you importantly of the value creation framework, we introduced at last year's Investor Day.
To accelerate our performance and deliver greater value to shareholders through 2025 financial targets. We presented included operating EBITA of $4 4 billion or 22% margin at the midpoint.
This slide includes those 2025 financial performance targets and it also reflects today's guidance for 2023.
Execution on our strategic decisions, including exiting low margin commodity products, while delivering a cumulative $250 million reduction in net royalty expense.
And disciplined cost actions.
Driving margin expansion, while also enabling increased R&D investment.
And while we're revising our 2023 revenue and EBITDA guidance, we're confident that we're on track to deliver the 2025 earnings targets.
With that let's go to slide 12, and summarize the key takeaways.
Again, we believe AG fundamentals remain positive and demand at the farm level is stable. Despite the significant crop protection market pullback that we're experiencing.
We believe core Teva is well positioned relative to the market. Despite the industry wide destocking trends in.
Some macro level headwinds and.
And our revised full year guide is proof of the strength of our portfolio with continued sales and earnings growth in 2023, we believe this performance differentiates us from others in the industry.
Finally, our expected 2023 performance supports our 2025 financial targets and provides us confidence that we're able to execute and grow.
And with that let me turn it over to Kim.
Thanks, Dave 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 and ladies and gentlemen, if you would like to ask a question. Please signal by pressing star on your telephone Star one on your telephone keypad, if youre using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. We ask that you. Please limit yourself to one question and we will pause for just a moment to allow everyone the opportunity to signal.
For our question.
And we'll take our first question from Vincent Andrews from Morgan Stanley . Please go ahead.
Thank you and good morning, everyone.
With the new 'twenty three guidance and the reiteration of the 25 targets and obviously the.
Complexity of the crop chemical market right now could you help bridge us through 'twenty four 'twenty five in other words, what's changed about the algorithm or the growth by segment.
On the top line is still going to let you get into that zone or is it more likely that youre going to just be at the lower end of that 25% revenue target now and make up the EBITDA, maybe with more productivity or sort of what's changed today versus I guess, a little less than a year ago and the algorithm between 'twenty three and 'twenty five.
Good morning Vincent.
Yes, So let me give you a couple of thoughts and then I'll turn it over to Dave to talk a bit about the specifics so.
Look we don't think a whole lot has changed.
You think about what's happened with the channel and the industry wide Destocking. Obviously it came up it was a larger issue and it happened a lot faster than anyone expected, but we do think that this situation is temporary.
And it's certainly not sustainable so.
When we start thinking about the plans for 2024 and then to your question 2025, but we do think that we're on the same trajectory that we were when we laid this out back in September and if you start thinking about what we have to deliver as we've communicated a couple of times now before.
A lot of this journey is well within our own control and so what we're trying to do is reshaped the overall strategy and the portfolio of the company. So what we're going to need to do in 'twenty four 'twenty five as some of the same things that we've been working on for the last two years.
So we are expecting.
For example, our <unk> and our new products and CP to continue to grow.
They actually held up pretty well in 2023, so far and we are expecting growth through the rest of the year.
We're about 80% complete through the product and country exits by the end of this year. So we'll finish those in the next two years.
We did indicate in this morning's call already that our royalty expenses are running a little lower than we had expected. So we had previously thought about 100 million of expense reduction were closer to 150, now and well on track for the $2 50 by 2025.
I think some of the other things that we're seeing and it's a little too early to talk about the specifics we are expecting some lower costs now to flow through the P&L I'd say, both in seed and CP.
Through 2024, and certainly through 2025, it's too early to give specifics, but that's sort of how we're thinking about things.
There's going to be some offset because we are planning to continue to invest in R&D.
We're targeting 8% of revenue so when you put all of this together.
I don't think we should talk about the low end or the or the top end, we feel very comfortable that we're basically on the same path and that this channel Destocking issue. That's happening right now I think we'll be behind and a significant portion of it will be behind us. This year, there could be pockets that move into next year, but certainly the framework we've laid out.
I think is still one that we're very confident in Dave anything that.
Just a couple I think maybe just a couple of quick.
Points, Vincent I think first of all.
As Chuck said, what we're seeing is very good.
Performance, obviously on margin on EBITDA and margin despite the.
The volume headwind that we're experiencing the crop protection business. This year. So it's a real tribute obviously to our cost performance and cost management, but also the shifts that have taken place related to our portfolio refinements and the upgrade if you will the <unk>.
<unk> and the quality of the businesses, the technology delivery and seed and the enhanced differentiation in technology in the crop protection business.
It's really I think that formula that's working and if anything it's it's working faster in terms of that margin rate and the EBITDA delivery.
Despite the volume.
Again, despite the volume headwinds.
We'll obviously be updating all of this.
The March will proceed now forward to 2024 and it won't be long before we'll be talking with you about our guide for 2024, but what we see right now as Chuck said is continued positive setup in terms of the overall fundamentals, we're going to work through obviously.
And as an industry.
This destocking issue in this phenomenon in terms of inventory correction in particularly in the channel in 2023, that's going to work its way through.
It's going to take time, but our outlook right now remains quite constructive quite positive.
When we look forward with again, an acceleration of what we've seen in terms of our call.
Cost performance and our margin performance.
Performance hub.
Hopefully that helps.
Thank you and our next question comes from David Begleiter from Deutsche Bank. Please go ahead.
Thank you good morning.
Chuck on the crop protection Destocking can you talk to the cadence of that.
The stocking in May June and July and what you are now expecting or seeing in August are we close to or past the peak of the Destocking do you think.
Yes, good morning, David.
So this came up on the industry pretty quickly.
It sort of became very clear that how we were thinking about it in.
In terms of pockets if you recall that at the end of the last quarter. We were talking that we knew there were pockets of higher inventory.
Some areas of Latam and Asia Pacific really weather driven.
By the end of May it became very clear that what we were talking about was more systemic and broad broad based.
And at that point, what we're seeing so just to set the stage right.
The one thing that this industry has as it has pretty good line of sight for data that that goes into the channel and that leaves the channel.
And what we're seeing is that on farm demand actually is very I would say positive.
And it's been consistent over the last two to three years.
Low single digit growth when you're talking about organic revenue.
So thats. The good news is we and you can imagine since may we have spent a lot of time looking at this but we're feeling very good that the overall fundamentals farmers health and they're applying the products they need to preserve their crop and to drive yield.
But what happened since the end of May is that there has been a very significant pullback by the channel because they've had too much inventory.
And so what we're expecting now is that by the time, we get through the end of this year.
I'd say most of it will be behind us, but that doesn't mean that we're out of the woods. When it comes to 2024, there is probably going to be some product lines and some geographies that this will persist.
Into 2024, and we're planning for that and we understand that we're going to work with our channel partners.
But overall I think what we're also finding is that it wasn't just an inventory perspective, but with the higher cost of capital higher interest rates. Specifically there is a move clearly back to the way the industry operated pre 2022, right, where the industry really was used to especially in north.
America, but also I'd say in Latin America, where these supply chains are quite sophisticated they have high fidelity and the channel plus the farming community got very comfortable that the product can be delivered just in time. So we're going to see that so unfortunately, what will happen is you're going to see that in the seasonality, especially around Q3.
Hi, Dave communicated.
The earnings split between Q3 and Q4.
I wouldn't say that we're not constructive about 2020 for the 2024 set up still looks to us to be pretty good.
<unk> got record demand for grains, and oilseeds you have record demand for Biofuels in 'twenty three we think there'll be another record in 'twenty four as we talked about crop prices have come down, but farmer margins are still really healthy.
And we haven't seen a change in buying behavior in terms of the products that they're investing in.
But would there be is it possible that there is going to be some carryover in terms of the destocking in 2024.
Certainly in the first part of 'twenty four that's entirely possible.
Thank you and we'll take our next question from Kevin Mccarthy from vertical Research partners. Please go ahead.
Yes, good morning.
Just to Peel, the onion, a little bit more on the crop protection Destocking.
As you survey the World do you think theres more access at the distributor level or the end user a grower level or both.
And I guess, maybe a related question can you speak to the <unk> earnings cadence I think you made a comment that.
That earnings will be mainly in the fourth quarter, obviously have a lot of seasonal effects, even in a normal year, but just kind of wondering how the destock.
<unk> will affect that in terms of.
Your current planning view.
Good morning, Kevin Let me take the question on where the inventory is our belief and then Dave you can cover the Q3 and Q4 split please.
Look this is <unk>.
I'd say, mostly an issue in the channel.
So the distributor and the retail channel is where.
The surplus inventory is and where it needs to move to the farm.
It depends on where youre talking around from on farm storage, but I would say broadly speaking and there isn't a lot of on farm storage in our major markets. If you look at the United States for example over half the product is applied by the channel. So they would not be typically.
A lot of on farm storage. So we believe that this is clearly an inventory issue in the channel.
Could there be some leftover commentary on the farm, yes, absolutely, but I think if you step back Kevin and you think about how did we get here right.
I think what what clearly happened is when the supply chain issues were front and center.
I think the channel ordered more than they needed just to ensure reliability of supply.
And farmers typically wouldn't take that product. So we're pretty confident that we know where it is and it is moving out I think theres been a lot of progress made in the last few months.
We can see it in the data and so we're optimistic that this is heading in the right direction.
If you want to talk about Q3, and Q4 sure sure and maybe maybe the way I could start to Kevin start the conversation in Q3, and Q4, and maybe just talk a little bit about the half sort of what's implied in terms of guide for the half just to give you some perspective, so to the to the midpoint of our revenue.
The $18 billion.
<unk>.
That would imply a revenue.
Increase on a year over year basis.
Now importantly, when you look at that.
It includes our biological acquisitions, so theres about 300.
Of that 500 is coming about as a result of the acquisitions on the EBITA, what's implied or actual last year for the second half was $466 million. This year round numbers, it's about $600 million and again very importantly, the.
Biologicals acquisition represents about $70 million, if you look at that $90 million number that we've given you. The full year guide for Biologicals contribution to EBITDA 20, roughly in the first half $70 million in the second half so keep that in mind just in terms of giving some perspective.
Kind of what's assumed here, if you will and the growth that's assumed for the second half.
Now to your question in terms of <unk>. It really has to do with timing of Latam.
And timing associated with the acquisition contributions the acquisition contributions are really mostly now in terms of second half will be in the fourth quarter, specifically, the stoller acquisition and it's.
It's business, which is really for the second half really focused on on Brazil.
Brazil, and then for Latam in total when you look at our both our seed business <unk> business with a normal distributions.
<unk> and then for Robert is crop protection business, you are really looking at again.
The recalibration from one <unk> to two <unk> from the first half to the second half that we communicated back in May that's playing out we've got more insights on that now and that really is the other reason the other big component of the fourth quarter and the significance of the fourth quarter. If you look at it historically.
Brickley, it's not a typical compared to when you go back to 'twenty one.
2020.
It is it is different than 2022% for 2022 really was anomalous in terms of the distribution, particularly the distribution pattern that we experienced in Latin America.
Thanks, Kevin.
Thank you our next.
Question comes from Chris Parkinson from Mizuho. Please go ahead.
Great. Thank you so much.
As we're all beginning to think about 2024 as.
As well as a few variables, which you perhaps get better line of sight on or in some cases are directly in your control can you just hit on a few of those we are thinking about net royalty reductions E III penetration.
How we're thinking about germplasm.
Cost based on that.
Presumably lower payments to certified growers CPC inputs like <unk> looks like they're even a little bit. So when we are taking ourselves outside of just the price volume side of it <unk> give us some initial thought processes on how we should be approaching that once again considering 2024. Thank you so much.
Yes, good morning, Chris So.
Lots of time to talk about 2024, we haven't really started our detailed planning sessions yet.
But the way we're thinking about it just to give you sort of directional thoughts.
First the AG setup looks pretty constructive as I've mentioned.
We still think that we're going to have above average historical pricing.
Obviously with the size of the crop in Brazil, right now, we're going to have some rebalancing of stock, but still I think relative tight market conditions.
We've got a healthy farmers around the world they've just come off two record years. This year won't be a record, but it's still going to be at least in the U S. We think a top five year. So the setup very constructive and then as I mentioned already.
Very strong demand for grains, and oilseeds food feed and fuel.
So when you think about that backdrop, then you place that sort of what's happening at Cortez.
The bottom line is that we see another year of growth and margin expansion very consistent with the 2025 framework.
And the levers are the same levers we've talked about so we're going to see and we expect to see.
Significant growth in our new products, our new crop protection products.
As you recall, we last year, we finalized the <unk> expansion. So we're seeing incremental volume go into the market. This year and we will see growth in 2024 and 2025.
I already mentioned royalty expenses, but we're probably trending a little ahead of plan to get to the overall $250 million by 2000 22025.
And then that the thing that we need to unpack a little further, but obviously with crop prices. The way they are today and raw material on the chemical side, we are going to see and start to see lower costs flow through the P&L.
So when we put this all together.
The construct looks looks very I think similar to what we've laid out historically, we don't see any sort of major deviations from what we've communicated. It is early days. So I'll caution you that this is just our initial thinking.
But so far what we would say is that the setup for 2024.
Look it looks quite constructive.
Thank you. Our next question comes from Joel Jackson from BMO Capital markets. Please go ahead.
Hi, Good morning, I'll, just throw a couple of questions in.
Together.
Tell us what you expect crop can volume borrowings to be like in the second half of the year I'm not sure if youre projecting growth year over year, just reiterate that and then.
For Dave on free cash flow conversion.
Drop free cash flow a couple of $1 million. This year I know you were hoping to find some way to increase conversion, maybe get to 40% plus number over the next year or so can you give us an update on what's going on there and then how you might improve it over the next little while.
Sure Let me, let me give you the.
The crop numbers so.
It's a really good point because when you look at our numbers you really have to consider.
Product exits.
The strategic decisions that we've made just to give just to put that in.
Into perspective on a reported basis the volume change for the crop business would be round numbers about 16% down for the first half.
But it's really minus 10, when you take into consideration the exit so theres about six points there of impact in the first half from from those decisions. When you look at the second half.
<unk>.
What you are looking at Joel is.
On a reported basis, we've got a volume change was about 4%, but on an adjusted basis and by the way. This also includes the store acquisition in it. So this is sort of an all in when you look at it all in it would be up 8%. So we're looking at.
That growth is really a transference significantly of Latam from one age to age.
In addition to what we're seeing is sequentially.
For Brazil, specifically when you look at the market research data.
Sequentially <unk> to <unk> in the channel some improvement in overall inventory levels and we're seeing pretty good strength in terms of the actual sell out if you will.
The words product Thats going to go into the farm gate. So essentially what we're seeing in the second half is the improvement in terms of related to the timing of Latam. Yeah. Just one comment before you talk about free cash or Joe The way. Dave has described that the way we think about the market is excluding glyphosate.
Yes, so it's a very important call out because we don't play in that market, it's such a large market and it's such a commodity that when Dave referenced as sort of our volumes against the market backdrop, you need to exclude glyphosate just to call that out so Dave over to you on free cash flow.
So just very quickly just to kind of go through a couple of the numbers and that goes specifically your question in terms of Directionally, what do we see in terms of cash flow and cash flow conversion going forward. So for the first half as you pointed out we've had higher use of cash on a year over year basis, that's really related to the phenom.
Of working capital, including payables and payables has to do with.
More cash outflow in terms of growers comp on the seed side, which is all explainable by this by the size of the business the growth of the businesses as well as commodity costs.
Our pricing actions on the.
On the other side of the payables as trade payables, which is really attributable to what we're doing in terms of inventory management on the crop protection side of the business, we're really pulling back obviously.
Very understandable in terms of procurement there for the full year. The one to $1 2 billion translates to let's say at the mid point of $1 one.
Against our EBITDA translates to about a 30% cash conversion at 1 billion won.
Using our EBIT the midpoint of our EBITDA guide for the full year about a 30% conversion to EBITDA, which by the way is about a 50% conversion if you used.
The cash to operating earnings or a relationship in other words, the numerator of our EPS calculation.
As another way to calculate and communicated conversion.
When you look at what's happening in the second half of the year. It's really working capital is really becomes a source of cash and it's really attributable to the fact that we're growing but holding holding working capital levels basically on a year over year basis, holding it constant coming down obviously from our first half <unk>.
Levels in terms of inventory.
But also increasing in terms of payables. When you look out to 2024 and 2025 again these sort of directional numbers, but we would be looking at for the two years 2425, something in the neighborhood of 50% plus in terms of cash flow conversion. If you look at.
Again cash to EBITDA relationship that would translate to around 80%, 80% plus when you think of cash relative to operating earnings for those periods and that's dialed in we've got the we've got we think the.
All the right disciplines capabilities et cetera, and it's consistent with what we referenced earlier in terms of our confidence in our outlook in terms of our our earnings targets for 2025.
Thank you we'll take our next question from Frank Mitsch from <unk> Research. Please go ahead.
Hey, good morning.
Wanted to focus in on the seed side of things because that was obviously fairly impressive performance and congrats on <unk> three our unlisted three getting to the 50, 55% Mark.
<unk>.
So you are clearly gaining share on the soybean side your corn.
Growth, 20% was also.
Pretty impressive can you talk about your overall feelings on market share gains and what are some of the underlying factors behind that.
Hey, good morning, Frank.
I appreciate the time.
Comments on on successfully list and how the year turned out so.
In terms of market share.
Maybe a few thoughts here so.
As we went as we came through the year, we felt we could sense, obviously, we see customer level order activity and we knew that there was good momentum towards corn and felt like it felt like soy was definitely.
A little bit slower in terms of order and farmers' intentions had shifted a little bit.
As we as we sit here right now what I would say is it's very early to declare one way or another.
At the time that the June 30, USDA report was included I think there was still on the order of about two plus million acres of corn to be planted from farmers.
Something north of 6 million acres of soybeans still to be planted so.
It opens the door for there to be revisions, we know the USDA or revise those over time, so given where we're at right now.
The call it the 83, plus on soy and maybe four plus on corn.
We'd be looking at a slight share gain with obviously very strong value capture on corn.
But that's at the current level.
The area.
In terms of soy again, where I would've I would've said I felt a little bit more uncomfortable with our order position throughout the year, it's actually quite a bit stronger of a share gain.
That 83 plus million acres so.
We feel good about how the year turned out clearly from a value capture standpoint, it was outstanding and from a volume standpoint very satisfied at those levels, we're going to continue to look as the USDA revises here over the coming months.
If there is material adjustments that made that are made that could impact the final share numbers, but that kind of summarizes how we how we look at share right now we're not going to declare victory at this point in time, but we feel good about where we sit.
We'll take our next question from Jeff Zekauskas from Jpmorgan. Please go ahead.
Reach or.
2025 EBITDA guide.
Do you assume positive pricing and overall for 2024 and 25.
David you hear the question.
Yes, Jeff.
<unk>.
Sorry, Jeff did.
Did you say do we assume positive pricing in the seed business relative to our <unk> 125, <unk>, yes, the answer would be in order to reach them in order to reach that.
Yes.
Another way of saying it is that we think that the.
Seed Bill.
We're going to again price for value.
<unk>.
Pricing.
Versus cost assumptions will be accretive to margins.
Yes, Jeff it's Chuck So I think Dave hit it but we've communicated this before right is.
The way, we try to price for seed as price for value, we have a big R&D machine, we're bringing out new hybrids every year.
If you've looked at some of our recent announcements. We've also brought out what we called our Nextgen trade packages I called out power core actually in the prepared remarks, but we also announced.
For seed as well. So these are trade packages that are going to be very important for farmers and the next generation.
Significant value creation will be there.
And we'll certainly price for that I would also say that what it does and it helps a lot as it opens up the door for us to out license this new technology.
And maybe Tim you can talk a little bit about some of the progress we've seen even with a list.
Yeah, absolutely and I would say.
David.
Jeff.
The way, we think about 2425 is getting more back to that traditional pricing metric, where it's about new products that we bring in we're constantly bringing in new varieties and hybrids into our lineup that they bring more value and that opens the door for us to the price and as Chuck said.
Really exciting when you think about the out license.
Sensing opportunity. So just four years ago, we really didn't participate from a licensing standpoint, and as we sit here today. We've got four trades that were able to license in the marketplace. So enlisted three as we shifted made the significant shift this year into our proprietary germplasm it opens up the door.
For us not just to have the <unk>.
Trade licensees that are out there today, but all of a sudden we've got our own proprietary germplasm that are that are accessible and we're making nice.
<unk> into that that.
That licensing so enlist <unk> soybeans in our own core Teva germ plasm.
In Latin America, we've got contested <unk> soybeans.
And again, we're a couple of years out from our proprietary germplasm being there, but we've got the most successful breeding organization in Latin America that is introducing.
Varieties into the marketplace, there Chuck talked about power core list refugee dance and what that means to us that is the largest segment of corn in North America that above ground insect protection with the integrated refuge so all of a sudden we have the opportunity to go out there and participate with our trade interim.
And then on a smaller scale, we have opt in with like an Ola, which we got approval for.
Not again not on the same scale as those other opportunities, but again it allows us to leverage our investment in that technology and again be able to go out there and <unk>.
Generate good returns on that.
Ola market. So it's an exciting time from an out licensing standpoint in addition to our ongoing.
Business in the brands.
And Jeff just Dave just one final comment to just add to what I said earlier, just as a reminder, and Youll recall this from our.
As early as Investor Day last year communications that moves to the pricing of seed pricing will have taken place through 2023. So that's just kind of a reminder, in terms of relative significance of those those forward years.
Thank you we'll take our next question from Steve Byrne from Bank of America. Please go ahead.
Yes, a couple of more questions.
<unk> got 12% pricing that youre getting in seed what fraction of that is underlying like for like pricing versus.
The share gain or the mix shift because of.
<unk> is shifting to higher yielding genetics and then the other bucket being the acreage shift from soy to corn.
And can you split that 12% that way and then.
The net royalty reduction of $150 million that was ahead of the <unk>.
Did you pull some from the 100 million.
Target you hedged for 2024 did you pull some of that forward.
In that list, maybe haven't penetrated faster than you thought and then just lastly, I would like to hear your view on the value to you if the Europeans do adopt their gene editing rule for seeds.
Okay, a lot there and I'll take a shot at that to start off Stephen.
And good to hear from you today. So when you look at the 23 pricing North America, obviously very strong seed pricing overall and.
In terms of how you think about it between between corn and soy it would've been driven more by by corn and soy.
Benefit we had in soy I would say is we upgraded a fair amount of our enlist sales to our proprietary germplasm. So our E series varieties gives us more opportunity.
Higher performing products. So it opened the door for more pricing.
The opportunities on that side. So it was it was a combination of mix. If you want to think about it in terms of new products new varieties.
As well as just flat out pricing for value and pricing.
<unk> across the board so a good mix on both corn and soy and went well in terms of royalties neutrality. We're on track for the four.
For our call it $250 million reduction that we've talked about between 22% and 25.
<unk>.
I guess the over performance if you want to think about that.
This year was driven by a couple of things here first thing on the <unk>.
Analyst side is that we we kind of over delivered on a couple of fronts.
If you will from a from a U S business standpoint.
We ended up with a higher level of our business of our mix and enlist versus.
Versus.
Extend so we're now at about 75% of our roughly 75% of our branded soy business with.
With with enlist that's a little bit higher than what we had planned for in addition, the adoption of our proprietary germplasm was higher.
We're a little over 80% on that side in terms of what our proprietary germplasm is for enlist so all those things coupled to allow us to call. It convert a little bit faster. So it is in the end, we're going to we're going to be fully converted over here in the next few years. So the fact that we over.
Performed each year, you can think of it as an acceleration into 2023 and I think Chuck wanted to take the question around gene editing, Yes, Steve Great question on gene editing and what's happening in Europe first of all just to set the stage. So we believe that gene editing is sort of that next level of agricultural science.
Very powerful set of tools.
And it has the potential to be more impactful to see development and crop development than BT was 25 years ago. So we're very excited we've got a full on R&D program and we are this is a space, where we are increasing our investment in R&D.
The EU proposed policy that came out early July what I would say is a good start.
It's a workable framework I think for the industry.
It is going to take some time to get through the specifics there.
They're on a timeline hopefully to have clarity of the policy and I'd say in the next one to two years, but so far what we see is a framework that is relatively connected to the rest of that.
The policy landscape around the world.
So what we're hoping is that we'll be able to have freedom to operate.
And the next one to two years and we are actively investing in.
And a whole suite of gene editing products and tools. So.
So that we will be ready when when the market says that we can start putting these products into the ground.
It is a very exciting part of our overall future development.
And I think that what we saw in Europe was a very good first step.
Thank you and we'll take our next question from Arun Viswanathan from RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
So I had a question about the trajectory from 23 to 25 going from that three six to say or 443 and the midpoint in.
And 25.
It looks like a relatively ratable.
Growth and that would kind of imply 10% EBITDA growth and 24.
I know there is a lot of uncertainty and you're still going through the planning process, but.
How should we think about that or are there any major buckets that you could help us with.
I understand that.
Maybe you could kind of bucket that out by restructuring program gains royalty.
Royalty reduction market growth and.
And pricing is there any way you could help us with that thanks.
Got it.
Arun I would say this.
First of all again, it's early.
For us to comment on specifics.
For 2024, and that's going to be a very important component.
Our installment for us and will give us also full of US obviously, a lot of more detail and color around the components that you're asking about I think the way I think about it is going back to Investor day, where we provided the bridge or the walk if you will.
<unk> 2022 forward and I think the way to think about that again.
Something we provided we quoted the value creation framework.
And it's the same buckets and it's the ones that you just you just mentioned the royalty neutrality, we said greater than 250 million lower net royalties driven by enlist we said that we were going to have in product mix, we were going to get the benefit of that that's going to be margin lift for us not only on the sea.
Business and seed side as Tim articulated, but also in crop protection with greater than 60% of our crop protection revenue coming from differentiated products.
G&A, what we've talked about is translating into a $400 million of savings and by the way just to put a plug in for that in 2023 on a on a call it apples to apples basis in other words, excluding acquisitions.
Acquisitions on a full year basis, we're going to be.
North of $50 million, despite inflation, despite merit and inflation. So that's <unk>.
Fairly significant testimony to what we're doing on that front, so operational excellence and then more to come obviously.
From both businesses in terms of their if you will cost of revenue and then against that backdrop as Chuck said still very much committed to our increased R&D investment Chuck side of the target of the 8% of revenue for 2025. So those are the.
Same building blocks.
That.
Does there today very much I think what youre seeing in terms of our results for the first half and our guide for 2023 really reinforced that so again a lot more color a lot more detail on that to come as we develop and flesh out our 24 plan and communicate that guide to you later.
Thank you.
Thank you and I'd now like to turn the call back over to MS. <unk> for any closing remarks.
Thank you. So 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.
Thank you and ladies and gentlemen that does conclude today's conference. We appreciate your participation have a wonderful day.
Okay.