Corteva 2020 Annual Report Highlights and Analysis

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Corteva is one of my favourite annual reports to go through because it is a purely ag company. They have more specific information and it’s easier to decipher what revenue is associated where and derive more utility from.

This was the 2nd year for Corteva as a stand alone company and while they have had some challenges on the activist investor front, it was an overall positive year for Corteva.

Financials

Their total sales grew by almost a half billion:

EBITDA Margin actually went up slightly, a point of contention with an activist investor (more on that later).

For background here, Corteva EBITDA margin is the lowest among the large seed and chem players by a significant amount.

From Bayer’s annual report:

Revenue by product type:

Corteva is strong in herbicides and obviously corn, with those two segments alone making up 60% of their business!

Revenue by geography:

A heavy influence of North America, specifically the USA which is consistent with previous years.

Their work force closely aligns with their sales too:

The company has a geographically diverse employee base with 50%, 16%, 16%, 14% and 4% located in North America, Latin America, Europe, Asia-Pacific and Africa regions, respectively.

For those interested there was a chart that broke out Canada specifically:

Ratio of business by geography:

Overall, the business breaks out to be 55% seed and 45% crop protection. Consistent with 2019.

Their expenses broke out like this:

They have a fairly typically R&D to SG&A ratio for the ag space.

SG&A was $3,043 million (21 percent of net sales) for the year ended December 31, 2020 and $3,065 million (22 percent of net sales) for the year ended December 31, 2019. The decrease was primarily driven by currency benefits and ongoing cost and productivity actions taken to curtail spending, partially offset by higher commissions and selling expenses due to higher volumes, higher enterprise resource planning ("ERP") costs and higher product launch costs.

Seed Focus

Seed net sales were $7,756 million in 2020, up 2 percent from $7,590 million in 2019. 

Seed operating EBITDA was $1,208 million in 2020, up 16 percent from pro forma operating EBITDA of $1,040 million in 2019. Favorable mix, volume gains and ongoing cost and productivity actions more than offset the unfavorable impact of currency, higher input costs and higher royalties

They continue to be very strong on the seed front. As they begin to license out their new traits (Enlist) which will be a growing revenue stream for them, this likely increases their margins slightly over time.

Their distribution avenues:

The seed segment has a diverse worldwide network which markets and distributes the company’s brands to customers, primarily through the company’s multi-channel, multi-brand strategy, which includes four differentiated channels: Pioneer agency model, regional brands, retail brands, as well as third parties through licensing and distribution channels.

The Pioneer agency model is unique to Corteva and represents sales made directly to farmers via independent sales representatives. Through this agency model, the company interacts directly with farmers at multiple points in the growing season, from prior to planting all the way through harvest. These regular interactions enable the company to provide the advice and service farmers need while giving the company real-time insights into the customers’ future ordering decisions. The company’s regional brands connect to customers through regional brand employees and farmer-dealer networks. Retail brands provide a one-stop shop for seed and chemistry solutions and may include sales to distributors, agricultural cooperatives, and dealers. Finally, Corteva out-licenses traits and germplasm to third parties.

CEO Jim Collins comments on an investor call:

We pulled Mycogen, and our goal here in 2021 is to really kind of lock down and regain the Mycogen share that we had, but in a Brevant bag as our initial launch year. So, that will put us 3% or so market share in that retail channel and then demonstrate the performance of these products. So, we held the yield trials this past fall, and we were beating the head- to-head competition by nine bushels an acre. And so, we're going to start with a small base. We're going to keep demonstrating the superior performance of the technology. And there's no reason why we couldn't get upward or north of 15% or 20% market share in that retail channel over the decade based on having not only a really good brand well positioned but also great technology inside those bags.

3% share in year 1 is pretty good if they do achieve that. The goal to move to upwards of 20% of the retail shelf share seems aggressive, but may be doable. I like the dual route to market (Pioneer direct + Brevant retail) but at some point it seems to me it would be a clash between groups wanting to push back on that share level in the market, with high Pioneer and that high of Brevant.

From a call with their CTO, Sam Eathington:

Our germplasm advantage provides the foundation by enabling locally adapted products. This advantage is strengthened by our data science capabilities, which help us to innovate higher quality products while at the same time optimizing the efficiency and cost effectiveness of our overall breeding program.

Now, in fact, before a seed is ever planted, our predictive analytics based on genomics and digital insights enable us to manage a larger breeding pipeline than ever before, all while increasing efficiency and data quality. We were able to predict the performance of the candidate new products prior to field testing. You know just in corn for example, we have nearly 20 times the candidates in our pipeline compared to 10 years ago far more than we could ever do a trial.

It's really industry first and this opens up new revenue stream for us into out licensing the technology. So, taken on a whole, our seed innovation position is strong, giving farmers choice and really is industry changing.

The usage of data in their business is powerful for bringing best in class varieties to the market. This isn’t necessarily unique to Corteva, but with their level of investment in breeding plus level of seed sales, the data they have will compound faster and improve significantly for them over time versus competitors.

Related: Bayer, Corteva in 'two-dog battle' over U.S. soy market - Reuters

On their use of CRISPR for seeds:

We continue to make targeted investments in innovation we see as both aligned to our strategy, as well as critical to the company's ability to evolve and grow over time. And CRISPR is a great example in this space. We have an industry-leading IP position. They're a key out licenser of the technology for agricultural applications in conjunction with the Broad Institute of MIT and Harvard. We are also driving innovation through our own people, including development of CRISPR-edited high protein soy, a next-generation corn disease resistance package.

Crop Protection

Crop protection net sales were $6,461 million in 2020, up from $6,256 million in 2019. Sales gains were driven by a 7 percent increase in volume and a 4 percent increase in local price, which was partially offset by a 7 percent impact from currency and a 1 percent impact from portfolio.

The increase in volume was driven by continued penetration of new products globally, with combined sales of $1 billion in 2020, up $265 million compared to the prior-year period, led by Enlist, Arylex, and Rinskor herbicides and Isoclast insecticide.

Sales by patent versus off patent:

Sales from patented and differentiated products represented 36% of total sales, up 5% versus 2019—and they expect that figure to reach 50% by 2023!

This is significant and I’d be curious to see how it breaks out by geography. There will continue to be an increase in generics in North America which will be difficult to compete against if their patented actives aren’t better than off patent re-formulations.

In 2020, we delivered approximately $30 million in net Operating EBITDA improvement, which reflects execution on our productivity and cost actions. In addition to targeted reductions to our footprint and headcount, this progress also reflects our work to maximize the efficiency of our R&D operations, enabling us to reduce our spending, even as we advanced the strongest new product pipeline in our history. Looking ahead, we expect to maintain this momentum, and are targeting approximately $150 million in net cost savings in 2021, which includes $250 million in savings from our productivity programs, mostly related to the manufacturing and supply chain rationalization work we have underway in Crop Protection.

In terms of managing their margins, the above will help.

COGS was $8,507 million (60 percent of net sales) for the year ended December 31, 2020 compared to $8,575 million (62 percent of net sales) for the year ended December 31, 2019. The decrease was primarily driven by currency benefits, lack of inventory step-up in 2020 as compared to $272 million recognized in 2019, and ongoing cost and productivity actions. The decrease was partially offset by increased volumes, higher input costs in both seed and crop protection and higher royalties in seed. Amortization of inventory step-up was 2 percent of net sales for the year ended December 31, 2019.

Research and Development

Corteva R&D has actually been dropping in terms of total expenditure the last 2 years:

This expenditure puts Corteva at 8% of sales.

How does Corteva compare to their counterparts?

Lower than Bayer and BASF and aligned with Syngenta.

To my knowledge Corteva does not have a venture fund either; Bayer (Leaps), BASF and Syngenta do have entire internal VC groups. This means they do not have dollars being positioned on top of the R&D expenditure in outside new technology like the other companies.

Instead Corteva has been focused on making strategic partnerships as of late, especially in the biological space, which does help move their innovation needle.

Patents and Trademarks

Corteva has extensive patents and even more filed:

Corteva continually applies for and obtains U.S. and foreign patents and has access to a large patent portfolio, both owned and licensed. Corteva’s rights under these patents and licenses, as well as the products made and sold under them, are important to the company in the aggregate. The protection afforded by these patents varies based on country, scope of individual patent coverage, as well as the availability of legal remedies in each country. This significant patent estate may be leveraged to align with the company’s strategic priorities within and across product lines. At December 31, 2020, the company owned about 5,400 U.S. patents and about 10,500 active patents outside of the U.S.

In addition to its owned patents, the company owns over 6,400 patent applications.

When we look at R&D focused companies, these are really the life blood of their business.

How does that compare to the other big 4, say Bayer? From Bayer’s 2018 report:

“ Monsanto being the Assignee of over 4,000 granted and unexpired U.S. patents and Bayer being listed as the Assignee of over 6,000 granted and unexpired U.S. patents.”

This number is old and I am confident that Bayer has more than this now.

For context, Corteva’s total in their 2019 report was 9,200; so they grew by 1,500 patents in one year alone. That’s >4 new patents each day!

 97% of patents never make any money. While this isn’t specific to biotech/life science so take it for what it’s worth, I’d estimate a significant amount of the profits come from a select few patents in the case of the ag industry.

On the trademark front they aren’t a slouch either:

The company also owns or has licensed a substantial number of trade names, trademarks and trademark registrations in the United States and other countries, including approximately 12,500 registrations and pending trademark applications in a number of jurisdictions.

Digital

I have made this comment numerous times; there is still a lack of focus on digital in their investor related materials. At this point I am certain it is by design until they have a more cohesive plan of action with digital.

This was the main point in their report around digital:

Our digital capabilities continue to serve as a catalyst for further enhancing our innovation advantage and operating leverage. At the same time, the ongoing ramp-up of our proprietary digital tools focused on driving farm yield and profitability strengthened our customer relationships and enabled us to quickly navigate the unexpected shift toward contactless customer engagement in 2020.

I think what has been made apparent this week with their carbon announcement is that it will be a core tool to enable their carbon offset initiative for farmers.

For organizations like Bayer, they have made Climate Fieldview an enabler to sell more of their core products, enhancer of relationships with farm customers and a carbon foundation. Really a three pronged approach. What we don’t know is this:

• at what cost?

While there have been some successes for Bayer, there have been billions in expenditure to achieve those incremental benefits.

Corteva has the Pioneer Digital base, the Corteva Digital base plus Granular. It appears there are moves to make these more cohesive in the coming months and years so it will be fun to watch them progress as they are currently segmented and disparate.

Carbon

April 8th Corteva announced their carbon initiatives:

Corteva Agriscience announced the creation of a new Carbon and Ecosystems Services portfolio to develop innovative products and services. The initial offering will enable the carbon sequestration process, ease access to carbon credits and create flexible solutions to help farmers increase profitability while contributing to a climate change solution.

The focus is in Iowa, Illinois and Indiana for 2021 with expansion plans in place for 2022, without publicly announcing where.

The focus is on two practices:

• reduced tillage

• cover cropping

This seems like a smart start, specifically for the geography they are focused in, plus bring a broad reach. For context, this is consistent with where Bayer Cropscience is starting too.

They even have one of the easiest to understand and concise approaches to market:

The ease of enrolment plus support from their staff is actually a differentiator. They have boots on the ground so they are well positioned to execute on this actually, specifically with their focused geography and practices to start.

They will start with physical soil samples, creating that baseline that is so important for the amount of carbon in the soil, and then apply modelling to it based on the practices and actions input into their Granular Insights tool

One of the encouraging things I found when having a discussion with Ben Gordon, their Global Portfolio Leader for Carbon Services, was that they are focused more on outcomes than trying to incentive purely practices.

This is how it HAS to be in my opinion. If you focus on the practices, you get too focused on the carbon sequestration and not enough on the holistic outcome and output for the farmer. Growing less bushels or smaller crops does not sequester more carbon, so strong agronomic actions and carbon and inextricably tied together.

For example, there are going to be times where tillage is necessary in order to get the crop in the ground where excessive moisture may have been a concern.

Partnerships

They are partnering with EcoSystem Services Market Consortium, a non-profit that works to compensate farmers and ranchers who improve the environment through their agricultural practices. These will be the verifiers.

The focus on more partnerships and success throughout the value chain becomes apparent in reading the Corteva materials along with being reinforced by Ben Gordon. Seeing this through their distributor partners, working with market places like Nori and even cover cropping companies for example.

Business Model

The business model is very simple: Corteva takes a percentage that is not more than 20% of the total offset amount created while being focused on guaranteeing $15/mt of value for the farmer. Depending on what the sequestration amount per acre works out to, it could be $5-$20/ac for the farmer.

For background on take rates, in Canada there was the Conservation Cropping Protocol which had “aggregators” taking ~33%.

This is the direct revenue, but it also creates a trojan horse, or entry point to get tighter with that customer and engage them digitally.

To access incremental revenue the farmer needs to sign up for Granular Insights, and talk with a Corteva representative. This enhances the relationship with the farmer and therefore increases the influence Corteva will have with all products, even though their products are not directly linked to “reduced tillage” or “cover crops”, but agronomy is ultimately a system. When you are talking with a farmer about how to integrate cover crops into their farm, you need to ask a lot of questions and better understand other practices and products used.

Future

One of the big contributors to GHG emissions is nitrous gases. Corteva has been in the nitrogen stabilizer space for some time with their nitrapyrin products for example. These practices and products are not as widely applicable and can skew the bigger picture with bias, but from a GHG perspective and other sustainability point of view (N use efficiency), it is a natural progression at some point in the future.

Overall

I was really impressed with the thoughtfulness of approach that Corteva took; it was as simple as a company can make a carbon like scenario which is ultimately good for both the farmer and for Corteva. Carbon could be one of the avenues that actively increases the EBITDA margins for Corteva, so is something watch in the coming years.

Other carbon messages:

As demonstrated by the goals, Corteva is working to shrink its role in the emission of greenhouse gasses while enabling a more resilient agriculture value chain. Corteva will establish a climate strategy, including appropriate Scopes 1, 2 and 3 greenhouse gas reduction targets, by June 2021. The company is seeking ways to reduce its impact and providing tools and incentives for customers to do the same. Corteva champions climate positive agriculture, utilizing carbon storage and other means to remove more carbon from the atmosphere than it emits without sacrificing farmer productivity or ongoing profitability.

Royalty Payments

They are still paying Bayer (Monsanto) for the licensing of their traits, but this soon could actually create a revenue stream for them by licensing out their new traits like Enlist in the future:

The company’s seed segment currently has certain third-party biotechnology trait license agreements, which require up-front and variable payments subject to the licensor meeting certain conditions. These payments are reflected as other current assets and other assets and are amortized to cost of goods sold as seeds containing the respective trait technology are utilized over the term of the license. The rate of royalty amortization expense recognized is based on the company’s strategic plans which include various assumptions and estimates including product portfolio, market dynamics, farmer preferences, growth rates and projected planted acres. Changes in factors and assumptions included in the strategic plans, including potential changes to the product portfolio in favor of internally developed biotechnology, could impact the rate of recognition of the relevant prepaid royalty.

At December 31, 2020, the balance of prepaid royalties reflected in other current assets and other assets was $426 million and $459 million, respectively. The majority of the balance of prepaid royalties relates to the company’s wholly owned subsidiary, Pioneer Hi-Bred International, Inc.’s (“Pioneer”) non-exclusive license in the United States and Canada for the Monsanto Company's Genuity® Roundup Ready 2 Yield® glyphosate tolerance trait and Roundup Ready 2 Xtend® glyphosate and dicamba tolerance trait for soybeans (“Roundup Ready 2 License Agreement”). The prepaid royalty asset relates to a series of up-front, fixed and variable royalty payments to utilize the traits in Pioneer’s soybean product mix. The company’s historical expectation has been that the technology licensed under the Roundup Ready 2 License Agreement would be used as the primary herbicide tolerance trait platform in the Pioneer® brand soybean through the term of the agreement. DAS and MS Technologies, L.L.C. jointly developed and own the Enlist E3TM herbicide tolerance trait for soybeans which provides tolerance to 2, 4-D choline in Enlist Duo® and Enlist One® herbicides, as well as glyphosate and glufosinate herbicides. In connection with the validation of breeding plans and large-scale product development timelines, during the fourth quarter of 2019, the company accelerated the ramp up of the Enlist E3TM trait platform in the company’s soybean portfolio mix across all brands, including Pioneer® brands, over the subsequent five years. During the ramp-up period, the company is expected to significantly reduce the volume of products with the Roundup Ready 2 Yield® and Roundup Ready 2 Xtend® herbicide tolerance traits beginning in 2021, with expected minimal use of the trait platform thereafter for the remainder of the Roundup Ready 2 License Agreement (the “Transition Plan”). The rate of royalty expense is therefore expected to significantly increase through higher amortization of the prepaid royalty as fewer seeds containing the respective trait are expected to be utilized.

*emphasis mine

The pre-paid aspect seems to signal that on a per seed basis the royalty will increase until the agreement runs out.

Biologicals

Corteva has made numerous partnerships and announcements in the last few months around biologicals.

From the April 4th 2021 Edition of Upstream:

Corteva has been on a run of partnerships in the biological space. Earlier this year they announced partnerships with Dadelos specific to biostimulants and Simbiose Agrofor biostimulants and biopesticides in Brazil.

They are now collaborating with Gingko Bioworks to work on crop protection technologies. Gingko is a company that specializes in using genetic engineering to produce bacteria with industrial applications. Their technology is used in the Impossible burger, but they do have a connection to agriculture already through Bayer Cropscience and their joint venture being Joyn Bio. 

Corteva seems to be spreading out their options for biological based discovery, formulation and geographic options for partners and products. In a space that is as open as the biological one this can be a good play to ensure they aren’t putting all their eggs in one basket so to speak. BASF and Syngenta have acquired bio based organizations prior or lately, and Bayer has a JV in Joyn Bio. Corteva has focused on numerous partnerships. Will we see Corteva focus on acquiring a group like other big 4 counter parts? Or continuing on the partnerships? 

I do think at some point we will see them acquire the right partner (or partners).

From the 2020 report itself they stated this:

We took steps in 2020 toward further accelerating our innovation capabilities and strengths in high-margin end-markets, such as biologicals, where we anticipate increasing growth over the longer term.

This has been a pointed focus and it appears it will continue to be for the foreseeable future. In their ESG report they commented on a focus around soil health, so biologicals have a core value prop in there.

Sam Eathington, CTO stated this on an investor call:

If we think about biologics a couple of things are kind of nice about that system. One is we should see faster regulatory sort of approvals. It does vary some by certain geographies but we continue to see a positive movement in being able to bring those to the pipeline quicker. And we really see them as a way to complement our synthetic chemistry, right? You can imagine a system where synthetic chemistry is used and then sort of at the end of the growing cycle or maybe a biologic is used to finish controlling a certain pest or problem that's out there for a grower.

I couldn’t agree more. This is something I have stated over and over; it will be a complementary evolution rather than an outright synthetic drop to biological adoption. The incentives for farmers and confidence in biologicals need to improve and the one way to do that will be through synthetics doing the initial heavy lifting and then the biologicals coming in for clean up. This will be in the fertilizer space too; synthetic urea nitrogen will not be dropped, however, we will see biological based products leveraged over time to improve efficiency and fix nitrogen.

From the August 2nd 2020 Edition of Upstream:

The reality is we will not see a mass shift to biological based products over night. It will be a transition where we see them used in conjunction with one another, slowly integrating biologicals in as complimentary to synthetics. This might be in tandem first with a 1-2 punch of synthetic, then biological to manage late weeds then on to a conjunctive approach where both are used in the same tank.

They also announced agreements in biologicals to further evaluate biological seed treatment applications— and for the development of novel herbicides.

Other

What does Corteva see as their strategic advantages?

I think the most compelling aspect of what they consider their strategic advantage is their variety of distribution and their new trait independence. The rest is not necessarily that different than what say BASF or Syngenta has for assets.

Their agriculture specific focus is something that is unique compared to BASF and Bayer and while this could be looked at as a downside in some ways (eg: BASF ag active ingredient business is more efficient thanks to their other chemical business) I think it does position them well as a focused player.

Other interesting points from the annual report:

Digital showed up 3 times in terms of “digital agronomy”.

Granular, their digital platform, showed up 3 times.

Soil health showed up twice.

Biologicals 5 times.

Carbon 2 times.

Starboard

In the November 1st Upstream Ag Insights I highlighted a powerpoint presentation from activist investor Starboard (who own~1.6% of Corteva), highlighting the sub par margins Corteva has in comparison to other agribusiness peers. 

That group moved to trying to actively get rid of Corteva CEO Jim Collins:

The activist investor has privately nominated eight directors to Corteva’s 12-person board, the Journal reported, adding that Starboard is aiming to oust Collins over ‘mediocre performance’.

I do not think Starboard got all of the seats, but I still think there is a good chance there is a new CEO at the helm of Corteva in the coming months.

From a recent Upstream Ag Insights:

Mike Frank has done a fantastic job at Nutrien since taking over as the CEO of Nutrien Ag Retail in 2017. Sales in 2017 were $12.1B and their FY 2020 came in around $14.74B, including overseeing the acquisition of >400 new retail facilities, expansion into Latin America and a bigger play in Australia. On top of this he initiated a digital strategy that has laid the foundation for enhanced farmer experiences through their digital portal including sales of ~$1.2B through this portal in 2020. Not to mention the acquisition of strategic assets like Agrible, Waypoint Analytic and other proprietary product companies. 

I do not typically highlight executives specifically, but I find his departure to be noteworthy. His performance and execution has been seemingly good at Nutrien and his background also includes being apart of the c-suite at Monsanto prior to the Bayer acquisition. This is of interest giving the overlapping news we are seeing currently out of Corteva with the Starboard investment group actively looking to remove current CEO Jim Collins due to their perception of his lack of performance. 

CEO of Nutrien Ag Retail is a large role and there are not many higher profile roles within this area of the ag industry (assuming a desire to stay within the crop input space) out there outside of being the chief exec at a major crop input manufacturing company, like Corteva. 

Given Corteva’s relative poor performance compared to comparables like BASF or Bayer, their unclear digital direction and the need to merge two cultures together (from the DuPont/Dow merger) making an outsider the clear choice, Mike Frank would make a lot of sense. He has operating experience, executive experience, past performance in launching and executing digital initiatives plus understands the space from numerous different levels. 

Based on this hunch, it wouldn’t surprise me to see a change at the helm of Corteva in the coming months.

Conclusion

These reports offered a lot of insights into the Corteva business. There is a lot to be excited about ion the Corteva camp and some interesting potential changes over the course of the coming year.

Sources for all quotes, images and numbers are located here:

Transcript on R&D Pipeline

Corteva 2020 Annual Report

ESG Report 2021

Upstream Ag Insights 2019 Annual Report Overview