Monsanto Company (NYSE:MON)
F2Q09 Earnings Call
April 2, 2009 9:30 am ET
Scarlett Foster – Vice President, Investor Relations
Terry Crews – Chief Financial Officer
Hugh Grant – Chairman and Chief Executive Officer
Jeff Zekauskas - J.P. Morgan
P.J. Juvekar - Citigroup
Robert Koort - Goldman Sachs
Peter Butler - Glen Hill Investors
Kevin McCarthy - Banc of America Securities
Don Carson - UBS
Vincent Andrews - Morgan Stanley
Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2009 results conference call. (Operator Instructions)
I would now like to turn the conference over to Scarlett Foster, Vice President, Investor Relations. Please go ahead, ma'am.
Thank you, [Charlene], and good morning to everybody on the line. I'd like to welcome you to Monsanto's second quarter earnings conference call, and I'm joined this morning by Hugh Grant, our Chairman and CEO, and by Terry Crews, our CFO. Also with me today are Laura Meyer, [Annie Cruise] and [Rubin Maya], who are my colleagues in Investor Relations.
Before we begin, I'd like to remind you that we're webcasting this call and you can access it at Monsanto's website at Monsanto.com. The replay is also available at that address. For those of you who would like to go to our website, the slides for this call are posted on the Investor Information page.
I need to remind you that this call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risks and uncertainty [break in audio] with the reconciliation to the GAAP measures in the slides and in the earnings press release.
Our press release highlights a reported in-process R&D charge this quarter for our recent sugar cane acquisition totaling $162 million pre-tax or $0.19 per share after tax. Please recall that Monsanto reported a gain of $210 million pre-tax or $0.23 per share after tax from the cash and stock settlement resulting from Solutia's emergence from bankruptcy in the second quarter of 2008. Both of these items were nonrecurring and are excluded from our conversation today about Monsanto's ongoing EPS.
I'd like to start with a brief review of our second quarter and first half results. Terry will cover our guidance and the outlook for the remainder of fiscal year 2009. Finally, Hugh will provide a strategic view to our 2012 commitments, with a focus on some milestones to watch for in fiscal year 2010. These include news about our launch plans for Roundup Ready 2 Yield and the trait penetration target for our Latin American corn seed businesses.
To start, let's take a closer look at the results that are shown on Slides 4 and 5. On the heels of a record first quarter, our ongoing EPS in the second quarter grew by 22% over last year's second quarter results of $2.16 per share. This was driven by a 14% lift in gross profit and an approximate 3 point increase to a 62% margin.
Breaking gross profit down by segment, we saw a 21% increase in Seeds and Traits, offset by a 6% drop from Ag Productivity, which included a 9% decline in Roundup.
Within Seeds and Traits, corn gross profit increased 20% in the quarter and gross margin improved by 1 percentage point. Most importantly, we held the value of our high-yielding corn seed and triple-stack traits in the U.S. Some 70% of the mix sold in our DEKALB and American Seed brands this year will be top tier triple-stack products.
These gains were partially offset by a $42 million pre-tax charge or $0.05 per share after tax for payments to growers in South Africa who were experiencing pollination and yield concerns with three white corn hybrids grown solely in that country. In a nutshell, these three hybrids appeared to produce less than optimal amounts of pollen. Fortunately, this hybrid issue was isolated to less than 4% of the roughly 6 million acres of corn planted there. We consider this charge part of our ongoing earnings as working with growers on production challenges is part and parcel of doing business in this industry.
Soybean seeds and traits likewise saw a lift in gross profit and gross margin in the quarter, with gross profit growing 39% and margins improving by nearly 2 percentage points. Growers have steadily been buying our higher-performing, higher-value soybean products in a year when we expect more acres of soybeans to surpass last year's record-setting crop. With that acreage growth comes a larger number of acres using the Roundup Ready trait and, hence, higher trait fees.
For both corn and soybeans, the margin improvement was somewhat dampened by greater cost of goods sold in the United States as we paid higher commodity prices last fall to our contract growers for our seed production.
Gross profit for our vegetable business was up 2%, with margins level with the prior year. These numbers include the acquisition of the De Ruiter protective culture business, the benefit of which was partially offset by $18 million of inventory step up in the first half of the year. The vegetable segment, which derives the majority of its income outside the United States, is also sensitive to currency fluctuations, as was the case this quarter.
As I just noted, the gain in Seeds and Traits more than offset a 9% decline in the gross profit from Roundup in the second quarter. As we had discussed previously, this is primarily a timing effect as U.S. customers pulled forward branded volume into the second quarter in 2008, ahead of a pre-announced price increase in mid-February last year. We are now on a more normal shipping pattern for the U.S. business in 2009. This means that the majority of our U.S.-branded Roundup volume will move in the third and fourth quarters. That said, we anticipate that as we optimize value for Roundup in the United States, we will give up branded volume for the full year in favor of maintaining our price leadership.
Branded volumes also were affected by the drought conditions in Latin America and non-branded volumes declined as third-party customers with businesses in Asia and Argentina chose to take less volume for inventory or other reasons specific to their own strategic choices.
Roundup prices were up versus prices in the second quarter last year both for the branded and supply sides of the business. Prices were particularly strong for the brand at levels higher than $20 per gallon. They were up significantly in the U.S. and Europe, both of which are entering their peak selling seasons. Overall, while gross profit for Roundup declined $41 million in the quarter, gross margin increased by 7 percentage points, led by the greater value afforded to the branded business.
Year to date, our very strong first quarter results for Roundup in Latin America overcame the effect of the timing difference for U.S. volumes in the second quarter as Roundup gross profit for the half increased by 29% and margins expanded by 10 percentage points to 58% of sales. Seeds and Traits gross profit in the first half of the year increased 25%, with a 1 percentage point lift in margin. For the company as a whole, gross profit increased by 25% and margins improved by 5 percentage points for the first six months of the year.
SG&A as a percent of sales in the quarter and for the first half was down by 1 percentage point.
R&D as a percent of sales was up, given increased activity as we advance our rich pipeline and bring multiple new products to launch simultaneously, plus integrate the R&D from De Ruiter vegetable seeds.
In total, ongoing EPS for the first half of the year increased 41% to $3.13 per share.
The tax rate was 29% compared with 33% in the prior year's second quarter. The second quarter included several discrete tax adjustments resulting in a tax benefit of $51 million or $0.09 per share, the majority of which was the resolution of several tax audits in various countries. For the full year, the tax rate is expected to be in the 29% to 30% range.
Free cash for the first six months of the year was down $337 million to $1.1 billion. There are a lot of ins and outs to free cash so far this year, but simply put, the improvement in net income was offset by a higher level of inventories. The use of cash in inventories was a function of higher commodity prices for our seed production coupled with increased corn seed volume when we plan for a larger U.S. corn market. Additionally, the same change in the timing of Roundup shipments and sales in the United States in the second quarter is reflected in more normal, and thus slightly higher, Roundup inventory.
With that, I'm going to turn the call to Terry, who's going to bridge you from the first half through the full year.
Thank you, Scarlett, and good morning to everyone on the line.
As we cross the midpoint of the year, the financial and operational results are in hand and allow us to reiterate our confidence in our ability to deliver $4.40 to $4.50 of ongoing EPS even as we cover an unexpected expense. We can point to our fifth consecutive year of greater than 20% earnings growth, as we show on Slide 6, and we will more than convert those earnings into cash.
If I could summarize the last six months I'd do so this way: We have maximized the value of our Seeds and Traits business across the board, and it has been our call and our choice to pursue the total value package of share, trait penetration and price rather than chase one piece at the expense of the others, and we've taken this same approach to Roundup. And with a strong Latin America season behind us, we're comfortable that we can preserve the total value of the U.S. business in the upcoming, over-the-top spring season.
If I could forecast the next six months I'd look at it this way: On a second half to second half basis, our Seeds and Traits gross profit will grow in the high single digits, with corn gross profit up greater than 20%. Roundup gross profit will be up by low double digits compared with gross profit in the second half last year. And while SG&A expenses are expected to be lower as a percent of sales, we do anticipate a slightly higher R&D spend because of the intensity of our pipeline and our regulatory work. We also have a $0.17 headwind from taxes, as we expect our tax rate in the second half of this year to be higher than the last half of 2008. The sum of these parts will be that we anticipate third quarter EPS growth in the single digit range and a larger loss in the fourth quarter than we experienced last year.
Let me walk you through some additional detail of how I'm thinking about the business as we complete the second half of the year.
If you turn to Slide 7, we now believe that Roundup gross profit for the full fiscal year will be approximately $2.4 billion. This is supported by the fact that we've reached the halfway mark of $1.2 billion in gross profit already.
Overall, volumes will be down for the year by some 30 million gallons. Roughly one-third of the decline is a function of the past drought conditions predominantly in Latin America and caution on our part about the start of the Latin America season this coming August. One-third represents our choice to hold value by not chasing the lowest-value acre and subjecting ourselves to the price volatility of the generic players, particularly in the U.S. and in Europe. And one-third is a function of the choices our non-branded customers have made because of their inventory levels or their own choices about how active they want to be in this market.
This volume decline will be offset by price, which we continue to believe will be maintained above the $20 range for our branded sales for the full year. That said, the Roundup business is likely to become more competitive as we move through this fiscal and calendar year as both we and the Chinese will bring more volume online and supply-demand squeeze unwinds. We'll get an early indicator in the fourth quarter as the new planning cycle begins in South America and we can begin to monitor the Roundup volume that moves across the region. So when I wrap all these factors together, it's more likely that we'll be at the $2.4 billion side of our previous range.
We now have a clear line of sight on the upcoming growing season in the United States, and our objective of optimizing value in our Seeds and Traits business is paying off with a forecast of $4.4 to $4.5 billion in gross profit for this segment. While the number of planted acres is still up for debate, we've adjusted our internal forecast to 86 million acres of corn and 77 million acres of soybeans. This translates to an updated gross profit forecast of $2.6 to $2.7 billion in gross profit for corn and $850 million for soybeans. So even with the shift in our acreage assumptions, the total gross profit for these two crops is exactly the same as it was under our previous acreage forecast.
We're still looking to grow our corn gross profit by more than 20% for the full year, with a nearly 2 percentage point lift in margins to 63%. That's down slightly from our original forecast given the effect of the South American charge. If this is an 86 million acre U.S. market, then we still expect to gain market share in both branded channels. We now believe that our market share will grow by up to 1 point for DEKALB and by up to 1 point for ASI. These U.S. market share forecasts reflect our choice not to chase lower-value seed in the marketplace to optimize the total value of the U.S. franchise.
This drive for value is supported by our margin-rich triple-stack portfolio in the U.S., as we show on Slide 8. We now believe that triple-stack corn will be sewed on approximately 33 million acres across our three channels. This represents a 10% plus increase from last year's acres, but a slight decline from our earlier estimates due to our expectation for fewer planted corn acres in the U.S.
Globally, as we show on Slide 9, we continue to target market share gains in each of the key corn-growing regions. Argentina's the only season fully behind us and we now can say that we've delivered a 2-plus share point gain there, again underscoring our considerable leadership in that country.
In soybeans we would anticipate a better than 15% lift in soybean gross profit to more than $850 million, with margins reaching the 60% mark despite the higher cost of seed production that was caused from higher commodity prices last fall.
Our cotton business is currently expected to track close to our original gross profit target of $300 million, with planted acres in the U.S. roughly flat. The second half is seasonally the strongest period for the cotton business in India and in the United States. In both world areas we'll continue to upgrade to second-generation trait products, with India Bollgard 2 acres now expected to increase nearly 33% to about 6 million acres this season.
As mentioned earlier, most of the gain in vegetables this year has come from the addition of De Ruiter's protected culture business, albeit somewhat offset by product shortages in our open field business as we continue our efforts to strike the appropriate balance in our portfolio. Our vegetable business being the most global of our Seeds and Traits business is subject to more variability from currency fluctuations, particularly the euro, and this has been a headwind to us in our 2009 results. We've modestly adjusted our vegetable forecast to $450 million in gross profit. That said, we expect margins will be in the mid-50% range for the full year, a slight increase from last year even including the effects of the inventory step up.
In short, even though there are some shifts in the pieces, the Seeds and Genomics sector should generate approximately $4.4 to $4.5 billion in gross profit, with an estimated margin lift of up to 1 percentage point for the full year.
There's some ups and downs on the other pieces of the income statement for the full year that you should also be aware of:
We expect that SG&A and R&D, exclusive of the in-process R&D as a percent of sales, will be approximately 19% and 10%, respectively.
Other expense, where much of the effect of the currency fluctuation has fallen, will be up versus last year.
Based on the first half results, we now believe the tax rate will be in the 29% to 30% range compared with our prior guidance of 30%.
As always, our focus doesn't stop just at earnings. We're committed to converting earnings into operating cash and investing that cash prudently for growth and returning value to our shareholders.
By the time we end the year I would anticipate a greater cash contribution from our tight management of receivables which will be roughly in the mid-teens as a percent of sales. I would expect also that inventories will come back into line and actually could be lower than last year at something in the neighborhood of 20% of sales. As a result, for the full year we still expect our free cash flow to be approximately $1.8 billion, with cash flows from operations generating $3 billion. This guidance also assumes that capital spending for the full year will be in the range of $1 billion as we complete our North American seed expansions and our debottlenecking projects at our Luling glyphosate plant.
Further, this operating cash flow guidance anticipates a voluntary pension contribution in the second half of the fiscal year, adding to the $34 million contribution we have made this fiscal year to date.
We continued our steady repurchase of shares in the second quarter with $199 million repurchased through February. $54 million of purchases closed out our former plan and we purchased approximately $145 million in the first tranche of our share repurchase under the new $800 million three-year authorization. So looking at it another way, we've purchased 18% of our new authorization in the first two months of this calendar year.
We've announced also another 10% dividend increase in January and quarterly dividends have now increased threefold in the last eight years.
So to summarize, through the first half of the year, we've done what we've committed to do. We've preserved value across the portfolio, which has allowed us to lift gross profit by 25%, margins by 5%, and ongoing earnings by 41%. We continue to leverage our SG&A while maintaining an R&D spend that will allow us to launch two major new products in 2010. That growth, combined with spending and working capital discipline, is also keeping us on track for more than 20% growth in earnings for the full fiscal year and allowed us to maintain our $1.8 billion guidance for free cash generation.
So at this point, let me turn the call over to Hugh.
Thanks very much, Terry, and good morning to everybody on the line.
In the last six months we've all experienced unprecedented economic uncertainty globally, but also in agriculture specifically. But even in the face of delayed grower decisions and fluctuating commodity and acreage forecasts, we at Monsanto have continued on our path to deliver an expected 20% plus growth in earnings and an estimated mid-teens growth in Seeds and Traits gross profit.
We've stayed on course because we've stayed focused. We remain committed to leadership through innovation that allows us to balance the levers of value, share and penetration in such a way that we optimize the sweet spot both for us and our grower customers.
I think it's this focus that propels us forward to our goal of more than doubling our gross profit by 2012 from our earlier base of $4.2 billion in 2007. As you can see on Slide 10, we see a business in 2012 where our Seeds and Genomics gross profit is expected to top $7 billion, approximately equal to this year's forecasted total company gross profit and nearly four times the expected gross profit contribution of our Roundup business in 2012.
So today I'd like to set out the mileposts to watch for along this journey, first, as we move into 2010 with commercial launches for Roundup 2 Yield and SmartStax and then with continued geographic expansion of our existing traits in Latin America and beyond to the upgrades that we anticipate in cotton and in vegetables. At the same time, the Roundup business, similar to Seeds and Traits, must find the sweet spot in the trade-off between volume and price as we successfully manage this product, which is currently at its apex.
On this call I really don't want to dwell on Roundup because it doesn't drive the growth to 2012, but I do want to spend a moment with you discussing the opportunities and the risks. We believe that this year marks the peak gross profit contribution for this product for the foreseeable future as supply and demand once again come into balance.
So let me be clear about the opportunity: By the time that we reach 2012, the base of Roundup Ready acres could grow conservatively more than 20% to the 285 to 300 million acre range. And the total gallons of our glyphosate by then will probably touch 300 million. We see Roundup Ready as the common backbone of every platform that we will offer in every crop for the decades to come. As a result of this, the top quality performance and the consistent reliable supply of Roundup herbicide has to be secure, for without great Roundup there's no great Roundup Ready.
Let me be equally clear about the risk. Roundup gross profit will decline and we estimate that 2009 is the peak year for its gross profit contribution, as we share on Slide 11. We've projected steady state gross profit in the range of $1.9 billion in 2012. With six short months to go in fiscal year 2009, I don't know if Roundup gross profit will reach steady state in 2010 or 2012 or if the path between them will be steep or rolling. They're all possible. What I do know is I'm confident in our ability to remain the low cost, high quality producer of this product as the supply and demand dynamics shift again.
I couldn't be more pleased with how our team has managed the product and optimized the opportunity deftly generating handsome cash flows that fuel our R&D spend and fund higher margin acquisitions.
Roundup's an essential management tool on farms around the world and it's a critical component of the success of our Roundup Ready traits, but it's not the key to grower profitability nor to our future success. As we move towards 2012, it will simply once again become the hum in the background of a business where nearly 80% of the gross profit is derived from the Seeds and Genomics platform.
When we first started talking about 2012 back in November 2007, it seemed to be a long way away. And yet today, we sit here in the midst of our seed production planning for 2010. This year marks the pre-commercial introduction of our second generation Roundup Ready 2 Yield soybeans. As the planters begin to roll in the coming months, we expect across a million and a half acres in the heart of the country approximately 16,000 growers will experience the yield advantage of Roundup Ready 2 Yield for the first time, as shown on Slide 12.
On the strength of that demand and some exceptional work by our production teams, we now see a path towards a full-scale launch of 7 to 8 million acres for 2010, expanding both geographically and by brand and up from our initial estimate of 5 to 6 million acres. While there will be some additional costs associated with off season production to support such a large-scale launch, those costs will be outweighed by the benefit of allowing broad-scale rapid experience.
Roundup Ready 2 Yield is to soybeans in 2010 what we expect SmartStax will be to corn, a game-changing agronomic platform for the traits that are yet to come. SmartStax is planned to be first multi-gene, multi-mode of action product in corn to control both insects and weeds.
We've submitted to the EPA a proposed structure refuge of 5% in the Corn Belt for both aboveground and belowground pests, as seen on Slide 13. Growers will tell you without hesitation that the current 20% refuge requirement for insect traits in corn is a real salad bar for insects and results in a 10 to 12 bushel per acre yield loss on those acres.
Our goal is to enhance overall yields for DEKALB, American Seeds and Corn States growers in 2010, when we hope to launch this reduced-refuge product across all three channels. As always, we'll need EPA approval, however, before we can comfortably discuss production plans and our launch acres.
I think leadership looks for trends and needs to be met and isn't satisfied with simply replicating what's already been accomplished. SmartStax and Roundup Ready 2 Yield both meet that criteria and will lead the transition to the new agronomic trait platforms in corn and beans.
Likewise, our need to reduce inputs in agriculture, particularly water, is critical, so I'm delighted, then, with our recent filing of the USDA regulatory package for drought tolerant corn. It's the world's first such biotech product, as indicated on Slide 14.
We've now completed regulatory submissions for the U.S. and Canada, further extending our lead on our march towards an estimated 2012-plus launch for this drought product of our yield and stress collaboration with BASF. While others talk about drought products, nobody else can show these five years of real results in real fields.
We've set out an ultimate goal of delivering corn Seeds and Traits gross profit of $4.5 billion or more in 2012, a target for one crop segment that's equal to our total estimated Seeds and Traits gross profit in 2009. To do this, we can't miss a beat in delivering these new products to the marketplace, all the while toggling the levers of price, penetration and share to optimize gross profit as we expand our lead in corn seed footprint and enrich that with traits. The blocking and tackling of breeding and introducing new hybrids must also continue unabated, for it's the combination of the best germplasm together with the best trait package that ultimately wins on farm.
Further, we have to continue our trend of increasing the penetration of our existing traits globally. While the United States gets all the attention usually, in 2010 alone we expect YieldGard Corn Bore in Brazil to reach 5 million acres. This will be more than triple the expected 2009 acres and some 50% of our branded portfolio. In Argentina, double-stack corn shifts up 10 points to roughly 65% of our DEKALB portfolio next year.
So let me be very direct about our U.S. corn business results for this year. Our goal has always been to optimize value in our seed offerings. I've always thought of this as a triangle of operational elements - one is technology penetration, two is pricing, and three as share growth. Our results today show that we demonstrated that value to customers. Correlated to that, our top value, triple-stack products will achieve a remarkable 7% penetration mix in our brands. Finally, despite significant competitive pressures, we still believe we can gain share in both our DEKALB and our American Seed brands this year.
As a brand leader, a technology leader and a commercial leader, we will increasingly be focusing on the value delivered by this golden triangle and aggressively optimizing all three points. I think this is a strategy, however, that's only appropriate for those who truly innovate and have the vision and the ability to deliver on an ever-improving base of seed technologies.
We've always tried to take the long view in our pricing strategy and return value to growers not only through the [inaudible] but also by reinvesting in new game-changing products. It's an investment and a return on R&D that's unsurpassed in this industry. As we show on Slide 15, we stand alone in our ability to launch three such game-changing technologies by roughly 2013.
As in many industries around the world, there's two kinds of players in Seeds and Traits - those who innovate and those who imitate. This year's demonstrate that each clearly employs very difficult go to market strategies.
As I've shared before, our ability to earn the right to your investment is predicated on our ability to translate groundbreaking innovation into unique products that deliver more yield to farmers on the same land at a lower cost. It's that simple.
We currently lead the industry in delivering innovative in-seed solutions and stand to extend that lead with Roundup Ready 2 Yield, SmartStax and in the near future drought tolerant corn, as you can see on Slide 16.
And if you just look at the agronomic traits in our biotech pipeline that are now in Phase 3 and Phase 4 as shown on Slide 17, you can see that we expect to launch six products between now and the middle of the next decade. This includes our first regulatory submission to the USDA for insect-protected soybeans for Brazil, which will be stacked with Roundup Ready 2 Yield. While the principal markets outside the U.S., this marks a critical first step in our ability to do the fieldwork that will allow us to bring this product to the Brazilian market.
I think farming's a process that over time rewards foresight and patience, and it usually tends to punish the sudden impulse. To succeed, farmers have to make their best economic decisions based on consistency of performance and their own brand of portfolio management. We've had the foresight, I think, to continually invest in technologies whose need isn't dictated by short-lived fans or fickle markets, but rather the more important basic elements of generating more food with fewer resources.
We're set apart today from those who've not had our singular focus on agriculture, our prioritization of technology, and our fiscal discipline, and this allows us to prosper in a very tough economic environment, and to even have the courage to set forth plans for growth while others are waiting for the storm to pass.
So with that, let me turn the call back to Scarlett for your questions.
So we'd like to open the call to your questions and I would ask that if you please hold your questions to one per person so that we can take as many callers as possible. You're always welcome to rejoin the queue for a follow up question.
And, Charlene, with that, if you'd go ahead and open up the lines, please.
Thank you. (Operator Instructions) Your first question comes from Jeff Zekauskas - J.P. Morgan.
Jeff Zekauskas - J.P. Morgan
When you look at your soybean sales, they obviously grew at a much faster rate than corn seed sales. Was it the case that you're gaining more market share from your point of view in soy than in corn or was the growth in sales in part as a result of the change in planted acreage in the U.S.?
Yes, a significant piece is a bigger market and more beans in a bigger market. And I think another piece, Jeff, is performance and we're seeing the effect today of continued improvement in the genetics in our beans. Six years ago or so we focused resources on corn and shorted beans, and I think in the last couple of years we've really changed that dynamic and you're seeing that showing through. But more acres is more sales, I think, underpinned by performance as well.
Jeff Zekauskas - J.P. Morgan
And then lastly, did your corn seed volume grow in the quarter?
Corn seed volume was about flat in the quarter, so most of the incremental value that we saw in the quarter came from price.
Your next question comes from P.J. Juvekar - Citigroup.
P.J. Juvekar - Citigroup
You know, you were adding a brownfield expansion to Roundup in Louisiana and Terry mentioned that there is more capacity coming online in China, so where do you think the Chinese manufacturing costs are relative to your new expansion?
P.J., thanks for the question. We believe - and, you know, we've been rehearsing for 35 years or 37, I've kind of lost track - but we believe that we continue to have a significant cost advantage versus the Chinese. And the new steel and concrete that goes in in Luling will continue to drive that. So I think, as we've felt for the last decade, we've got a significant edge over that Chinese production.
P.J. Juvekar - Citigroup
In the past you mentioned something like the Chinese cost is 50% higher, 5 - 0, 50% higher than your cost. Is that something that's still a good rule of thumb?
Yes, as long as you categorize it as rule of thumb, then I'll buy your thumb. For 35 years we've always been shy on laying what our cost advantage is, but I'd buy your thumb, P.J.
P.J. Juvekar - Citigroup
And just lastly, you mentioned that branded glyphosate had declined [inaudible] America. Is that because you're increasing your lower-cost glyphosate there or is that where the Chinese glyphosate is ending up in your mind?
The branded volume in the first half was down in the U.S. partially because of the price increase we had last year which drove volume into the second quarter. Overall for the year, though, we would expect branded volume to be down some in the U.S.
P.J. Juvekar - Citigroup
I'm sorry, Terry. I was asking you about Latin America.
Oh, I'm sorry. In Latin America, our branded volumes we would expect to be down as well in Latin America, the combination of the competitive volumes and our maintaining the price-value equation for our business. But I think also, too, in Latin America, going into the latter part of the year I would expect a slower start to the season there in the Roundup business as well.
And then, P.J., in the second quarter it was predominantly because of drought, so there were just fewer acres that were being sprayed in the second quarter if you're asking specifically about what happened in the quarter.
Yes, that's a good point.
Argentina and Australia had dry seasons.
Your next question comes from Robert Koort - Goldman Sachs.
Robert Koort - Goldman Sachs
I was wondering if you could give us an update on how the regulatory wheels grind in Washington relative to submitting that SmartStax package last June. Any idea when we might actually hear something out of the EPA?
Yes, Bob. No new news. I mean, we're in dialogue with them, but, you know, I think we've learned that the two things that you don't speculate on are how many corn acres is there going to be and when the regulatory packages finally get that rubber stamp. So good exchange, good dialogue, you know, continue to feel optimistic in our 2010 launch, but nothing new for you.
Robert Koort - Goldman Sachs
Hugh, maybe they've calibrated. I know your competitor on the refuge reduction product had their advisory panel not that long ago. Do you know when they put their first package in, data package, so we might try and extrapolate to your own advisory panel review?
No. I don't know, Scarlett, if you've got anything more.
Yes, it's actually two different scenarios, Bob. We are not required to have a scientific advisory panel, so the process that DuPont was going through is very different from the one that we are. You only go through a scientific advisory panel when you are making claims in front of the agency that have not been seen previously or you're challenging prior existing information and data that the agency has reviewed.
In the case of SmartStax, we are looking at a product where all of the components have already been approved and the agency has reviewed with us before with Bollgard, Bollgard 2, the request for a reduced refuge.
So these are two very different regulatory processes. In addition, DuPont was asking for approval on a refuge in a bag concept or presenting a refuge in a bag concept, which likewise had not been in front of the agency before. So they're really not comparable regulatory processes.
Your next question comes from Peter Butler - Glen Hill Investors.
Peter Butler - Glen Hill Investors
Okay, for my one question I would like to inquire about your cash flow. Obviously, your balance sheet and your free cash flow have strengthened a lot in the last year, but the stock, unfortunately, is down a lot from its high. Have you been rethinking, any new thinking, on how you might boost the shareholder values with your strong financial position?
Yes, Peter. Thanks for your question. I'll maybe begin and I'll hand it over to Terry, but our thinking - so, you know, it's a great problem when your cash flow strengthens in a troubled economy, so I feel great about the dilemma, I guess, would be the overall point, because the alternative isn't too great.
As Terry mentioned on the call, we've accelerated our buybacks. We've continued to strengthen our dividends.
And the third one that you didn't talk about is we will continue to look for acquisition opportunities. We haven't seen as yet, unlike many of the other sectors, we haven't seen evidence of distressed assets. But we continue to look for opportunities to reinvest the cash that we're generating, particularly in Roundup, back into seed platforms, either strengthen what we're doing today or extend our reach geographically.
You know, my experience in the last decade has been nothing's ever for sale until it's for sale, so we will continue to kick the tires on looking for acquisitions given the cash stream that we have. They have to make sense; we're not interested in buying junk. But when you look at the technology strength, it makes sense to continue to look for that geographic reach.
But I'll maybe ask, given the question, I'll maybe ask Terry to comment on cash utilization.
Well, I can't add much to what you said relative to the acquisition upfront and our continued reinvestment in the business on capital spending.
Just to reemphasize, we have been more aggressive on our share repurchase program. This year we've already repurchased 18% of the new plan, which only started when we concluded the old plan in January. So in a two-month timeframe we've been quite aggressive in our share repurchase program.
And just as a reminder, our two previous plans we concluded a year ahead of the original timeline that we set out, so we will continue, Peter, to look at that area and look at dividends as a way to return value to shareholders.
Peter Butler - Glen Hill Investors
I was wondering, what do you think is the appropriate amount of debt or cash to have on your balance sheet? Right now you have cash. Could that change?
Well, yes. I mean, I think that certainly we're in a very good strong cash position right now and in this environment pleased to be in a strong cash position. I think the key is is yes, I mean, the answer is we could take a higher debt position than we currently have today. We certainly don't need to be negative debt. And if we had the right opportunity to reinvest in this business to propel our growth in the future we would certainly look at leveraging up to do that.
Your next question comes from Kevin McCarthy - Banc of America Securities.
Kevin McCarthy - Banc of America Securities
My question relates to glyphosate volumes. On Slide 11 you show a forecast increase to 300 million gallons in 2012 versus 230 million this year. I heard you say in the prepared remarks that about one-third of the drop off this year was attributable to weather, but even if I were to back that out, it looks like you see a high single-digit compounded growth rate for Roundup volumes.
I was wondering if you could talk a little bit about the factors that you see that give you confidence on the longer-term volume outlook there?
Yes, Kevin, your math is right. We see mid to high single-digit growth as we reach out to 2012, and that's driven by Roundup Ready acres and the expansion - probably more Roundup Ready acres than anything else. Maybe a little bit of an increase in [inaudible] depending on what gas prices and diesel does, but expansion on Roundup Ready acres and the continued expansion in Latin America and some of the international markets.
The other thing I would just add to it, Kevin, is, you know, we've talked about our price situation. We're actually above, what, $20 a gallon on our branded side, well above $20 a gallon. But the price is going to come back down into the $16 to $18 range and we'll see a different price volume equation, so we will see some volume lift as prices move back to the band that we think they'll be in by 2012.
So I think that factor, along with the growth of Roundup Ready, will increase branded volume, and then the supply volume, of course, which is less critical, we would expect to see some of that come back with price movement as well.
I think it kind of goes to the earlier point on capacity because the key for us is ensurement of the capacity to supply the [inaudible] markets so that we're not dependent on Chinese expansion to fulfill that Roundup Ready expansion around the world.
Kevin McCarthy - Banc of America Securities
A follow up if I may on the pipeline products. I was pleased to see the higher acreage forecast in 2010 for Roundup Ready 2 Soybeans. I don't think we've heard a lot about your projected launch acres for SmartStax in corn. Assuming you get regulatory approval in a timely manner there, would you offer some comments on expected acreage and is there a reason to believe it would be any different from what you've put forth on the soybean product?
Yes. Again, it kind of links back to the earlier question on any news from the regulatory agencies. So rather than speculate, we'd rather get the green light before we comment on that, Kevin.
I think if you look at the slope of the curve, the [accelery] capacity in beans is greater than that in corn because, you know, there's more beans to a plant and so the ramp is probably a little bit steeper in beans than it could be in corn.
But having said that, a couple of years ago we declared that these were both hit projects and we'll do everything in our power to blow the doors off on SmartStax once we get the green light from the agency.
Your next question comes from Don Carson - UBS.
Don Carson - UBS
I have a question on corn seed. You know, earlier in the year you were talking about gaining perhaps 2 to 3 points, up to 2 to 3 at DEKALB and 1 at ASI. You've backed off that and you've mentioned that you've backed away from some of the price discounting in the market, but is there more to the sort of lower share gain than you thought? I'm thinking in particular that you've got a competitor who's going direct to the grower and isn't subject to some of the turmoil amongst dealers and they do appear to have somewhat better germplasm this year, so I'm just wondering if you could characterize those changes in your market share outlook.
And also, you haven't mentioned what your expectation is for Holden's or Corn States, which I believe was about 24% last year.
No. You know, let me just take you back a step and then maybe Terry will say a few words on performance in corn as well.
If you take your thumbs and your forefingers and you join them together and make that triangle, really the way we've thought about this for a number of years is you have to do the three things and you have to do them simultaneously. And if you start choosing one over the others, I think you slide into the ditch.
So we've been looking at driving share, optimizing price relative to the technologies that we deliver, and ramping on our technology penetration. And if you look at the effect of those three variables, then we lifted our profit and our margins again this year.
So I think this wasn't a dealer effect; this was a competitive pressure effect. I'm very pleased with the performance of the seed. I'm very pleased with what we're doing. And we set the platform given the triangle and what we've done around value we set the platform for 2010 launch on SmartStax.
Don, I would just add a couple of comments. First of all, just relative to the yield, I think we shared earlier this year that we think our yield advantage is about 9% over a three-year average, so I think we're still maintaining a yield advantage. Our goal relative to the channel is to be indifferent, to be able to get the same kind of value, provide the same kind of value through both our channels, both ASI and our DEKALB brand.
I think what's important for us this year, though, when we think about this whole equation, we need to get the right value established for our existing technologies in the marketplace. We need to get triple-stacks established at the right value because once you begin obsoleting the technology with the new technology, you never have a chance to recapture that value. So for us, different than maybe where we would have been five years ago when our share was lower, the right trade-off now is to establish the right value for the technology in the marketplace and grow from that.
And you always like to be able to optimize and grow all three - penetration, price and share but sometimes you've got to make the right trade-off for the long term and I think we've done that this year.
Yes, I think, you know, it sneaked up on us this last year, to Terry's point. I think we became the de facto brand leader in these segments. And as the brand leader, driven by performance and driven by that triangle, you know, the 9% performance over three years, I think, is now being recognized and attributed to brand value and that wasn't the case five years ago.
Don Carson - UBS
And can you address the issue of your Holden's or Corn States market share? Is that going to be flattish this year.
Yes. That one's a little harder for us to give an early read on, Don, because it's a compilation of so many other people, you know, 200 to 250 different companies. So we don't get as clear a look on that as we do on our DEKALB and ASI brands. That would be something we would probably know more as we move into the June/July timeframe.
Charlene, we have time for one more question, please, and then Hugh has a few closing comments.
Thank you. Your last question comes from Vincent Andrews - Morgan Stanley.
Vincent Andrews - Morgan Stanley
If I could just clarify, the $46 million charge related to South Africa was in corn gross profit, is that correct?
Yes, that's correct.
Vincent Andrews - Morgan Stanley
And then my question is if you could discuss, you know, I was a little surprised to see your triple-stack projection come down, I understand, so I guess my question is can you parse out how much of the going from 34 to 35 to 33 is a function of protecting price and how much is a function of lower planted corn acres?
Vincent, it's essentially all lower planted acres. Our anticipation is that we're going to do about the same percentage penetrated at triple-stacks, just on a smaller base than we would have before.
Vincent, it's one of those weird things where, you know, we go on one of these calls and half the discussion is how big is the corn crop going to be this year. And you can spend an enormous amount of time with a crystal ball and the reality is we'll all be wrong. So we just took the decision that we call it  and walk in the denominator, and then all the other chips fall as a result of that. And it's been successful because it's eliminated the conversation around how big is big, but then you start to look for the numerators that are thrown out by that denominator.
Vincent Andrews - Morgan Stanley
Sure. Can you articulate how much of that 33 is already spoken for on your order book?
Well, at this point right now on our branded business we pretty much know where we're going to be. It gets to the prior question. It's just looking to see where we ultimately end up on our Holden's line, other licensees, and we're not going to know that until we get closer to the end. But we're quite confident with that.
There's one other thing I just want to make relative to what's happened with corn and as a result of the decline. We said we began the year anticipating 90 million acres of corn and we've always indicated that corn and soy is pretty much of a wash for us; it's just a little bit of a downside. And I think, you know, as we modified our corn GP downward, I just want to reemphasize again we modified our soy GP upward and net-net we're about the same, even including the South African charge. So it's just the indication that we really aren't as hung up between the acreage shift between corn and soy.
So let me just thank you for joining us again this morning in the run up to springtime in the Northern Hemisphere.
I think as you've heard in this call, we made some strategic and focused operational decisions that allowed us to drive gross profit and earnings and to turn that growth into free cash, as we discussed in this call.
So whether it's Roundup or Seeds and Traits, our focus continues to be on optimizing value through innovation. And I think that shows as we complete the year and our ability to lift margins, grow our EPS, keep the balance sheet spotlessly clean, and deliver free cash back to our shareholders.
So I, on behalf of the team here in St. Louis, I wanted to thank you for your time this morning, and I look forward to talking to many of you today and in the coming weeks as the U.S. season progresses.
Thank you very much.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.
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