Monsanto Company (NYSE:MON)
F2Q13 Results Earnings Call
April 3, 2013 9:00 a.m. ET
Bryan Hurley - IR
Hugh Grant - Chairman and CEO
Brett Begemann - President and Chief Commercial officer
Pierre Courduroux - CFO
Ashley Wissmann - IR
Manny Cruz - IR
Don Carson - Susquehanna Financial
Jeff Zekauskas - JPMorgan
PJ Juvekar - Citi
Vincent Andrews - Morgan Stanley
Frank Mitsch - Wells Fargo Securities
Michael Cox - Piper Jaffray
Mark Connelly - CLSA
Kevin McCarthy - Bank of America Merrill Lynch
Mark Gulley - BGC Financial
Lawrence Alexander - Jefferies & Company
Tim Tiberio - Miller Tabak & Co.
[Bill Yeoh - Kinspeak, LLC]
Greetings, and welcome to the second quarter 2013 Monsanto Company earnings conference call. [Operator instructions.] It is now my pleasure to introduce your host Bryan Hurley, investor relations lead for Monsanto. Thank you Mr. Hurley, you may begin.
Thanks a lot, operator, and good morning to everyone. Thanks for joining our second quarter earnings update. I’m joined this morning by Hugh Grant, our chairman and CEO; by Brett Begemann, our president and chief commercial officer; and Pierre Courduroux, our CFO. Also joining me from the IR team are Ashley Wissmann and Manny Cruz
As usual, this call is being webcast, and you can access the webcast and supporting slides at monsanto.com. The replay will also be available at that address. We're providing you today with EPS measures both on a GAAP basis and on an ongoing business basis. Where we refer to non-GAAP financial measures, we reconcile to GAAP in the slides and in the press release, both of which are posted to our website.
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, the company's actual performance and results may vary in a material way from those expressed or implied in any forward-looking statements. A description of the factors that may cause such a variance is included in the Safe Harbor language in our most recent 10-K and in today's press release.
With this call, we’ll focus on our second earnings guidance increase in as many quarters. That’s a function of a strong quarter and continued strong business performance. Hugh will start today with an overview of our strategy and how we’re thinking about growth this year and for the long term. From there, we’ll have Brett Begemann walk you through the operational drivers that underscore our business performance. And finally, Pierre will bring that together in the translation to our current financials and our guidance outlook.
With that, let me hand it over to Hugh.
Thanks, Bryan, and good morning to everybody on the line. The second quarter is always an important quarter for us. This year, I tell you, this second quarter is more important, both because our business results confirm the early momentum that we saw building and because we achieved breakthroughs on a couple of key strategic targets that reinforce the runway for our long term opportunity.
I’ll let Brett walk you through the details of the operational milestones. I want to focus on our business today fits into our overall strategy. There’s four areas I want to emphasize. First, in the near term, an earlier than typical sales season has created a better line of sight that allows us to raise our full year outlook for the second time.
That comes together on slide five, as we raise our earnings guidance range today to $4.40 to $4.50 of ongoing EPS. That provides an earlier than usual punctuation mark on the year and it reinforces our expectation for a third consecutive year of growth above our original projections.
That growth also comes after we’ve previously excluded from our outlook the historical range of approximately $0.20 to $0.25 of full year EPS associated with the Brazil Roundup Ready 1 soybean trait. So, our bottom line business outlook today means the momentum that we anticipated in our first quarter has clearly carried through into even stronger business results for the second quarter.
And that really sets up my second point. As we look at our business results this year in context of the longer term, we’ve turned the corner as a global business. We’re a yield company, so what propels us today is the strength of a truly global business, not just one driver, and you can see that on slide six.
We have good momentum in the U.S., we’re on the front edge of some significant acceleration in Latin America, and we’re bringing a couple of new layers of growth into our business each year. And the strength in our global portfolio in fiscal ’13 reinforces our confidence in the growth opportunity that continues beyond this year.
Thirdly, we’ve always focused our strategy on those elements that we can influence, and this quarter we made some strategic moves that reduce uncertainty, provide clarity, and reinforce key elements of our ongoing growth.
The biggest of those were our efforts to take a step forward with our deal with Brazilian customers around the Roundup Ready 1 technology and most recently our deal with DuPont, adding them as a new licensee for our Roundup Ready 2 Yields and Roundup Ready 2 Extend platforms in soybeans.
The Dupont agreement is a major breakthrough that allows us to put the marketplace noise behind us while we expand customer choice by making our innovations available to more farmers and more brands. Strategically, the deal validates our Roundup Ready 2 Yields and our new Extend technologies and it expands the total opportunity for both of these. And that’s backed by the financials, as we have a long term customer that consolidates a key piece of the growth that we’ve anticipated.
And lastly, as good as I feel about this year, I feel equally good about the opportunity that comes as we take the concept of a total package of yield to the next level in our pipeline. Today, we have more platforms that will drive yield than ever before.
You can see that in slide seven. This year, we make the first step into precision agriculture as our first integrated farming systems offering moves into groundbreaker trials in the U.S. Behind that, we have significant pipeline upgrades to broad acre traits, other completely new platforms, like our BioDirect technology, and an increasing powerful package of new technologies that we expect will step up yield every year from now through the end of this decade.
I’ll end on the point that agriculture provides a compelling stage for innovators like Monsanto. If you set aside the usual back and forth on annual acres, yields, and prices, what becomes a pattern is the prospect that the growing global demand for grain is creating an opportunity for us to create a lot more cumulative value in the next decade.
We are well-positioned to do just that. As I look at what we’ve accomplished so far this year, we have clarity in this quarter and that enables us to raise our EPS guidance range, the high end of which would represent a third consecutive year of greater than 20% ongoing EPS growth. That’s an important indicator of our momentum and our performance.
But it’s also the foundation for a strategy going forward, as we have the global business strength to add even more layers to our opportunities over the next several years. I have to tell you that I’m delighted with the trajectory of our global businesses, and I’m confident we’ve got the right balance of innovation, continued increased customer focus, and operational execution to propel our profitability forward.
So Brett’s right in the front line of those opportunities, so he’s in the best position to walk you through these drivers in a bit more detail. Brett?
Thanks, Hugh, and good morning to everyone. As Hugh said, my focus is on driving growth in our global business. I’ll anchor on one point Hugh made: We’ve turned an important corner as a global business, and that global growth is exactly what is driving our strong performance this year. So it’s worth highlighting how we see it come together, not just for this year’s results, but also for the strategic opportunity it creates going forward.
Part of the strength of a growing business is the supporting ensemble, and for us, that’s the advantage we realize from our ag productivity segment. Ag productivity and the Roundup business in particular has emerged nicely from our strategy reset a few years ago. Our strategy allows us to capture the upside of a rejuvenated market environment while significantly reducing the impact of volatility of the historical, cyclical side of our business.
But what really drives the incremental opportunity in our business is when we deploy our portfolio to create yield and value for our farmer customers on a global scale. You can see that best back on slide six. We are continuing to drive yield in core geographies, taking that proven success into emerging markets and unlocking completely new sources of growth through our unmatched R&D pipeline.
If we zero in on our 2013 drivers, we can see how this plays out in the momentum we’ve talked about in our business. Start with the single biggest driver of our performance this year, our corn business, and make no mistake, this is one of the most global businesses which really is highlighted as you skip to slide eight.
With the Southern Hemisphere seasons largely in hand, and early insight into the Northern Hemisphere corn season, there’s no doubt that our corn business is having an extremely strong year. Here are the metrics that matter.
We’re growing our global volumes. In fact, we expect to hit record total volumes in our corn business in 2013, driving a key increment of our growth. I believe that’s a direct outcome of our conscious focus on our farmer customers. We’ve taken the feedback from our customers to heart, staying true to our deliberate approach to pricing and are focused on providing the best performing products. It also is important over the long term as this modest pricing approach means we’re not pricing to the highs and lows of a commodity price market that is certain to fluctuate over time.
The second benefit that shines through is the power of a global upgrade, which you see prominently on this same slide. Every year, we upgrade a significant portion of our portfolio across the largest geographies with the newest, highest value hybrids. That annual refreshment has the effect of lifting our corn portfolio prices on a global level every year. This annual germplasm refresh allows us to grow price and volume, and together, that creates a blockbuster effect, generating more than $2.3 billion of corn seed sales growth across the key geographies in the last decade.
If we focus in on the drivers for 2013, our second quarter now reflects the conclusion of the second season in Latin America, and that punctuates the strong results we saw in Q1. If you go to slide nine, in a country like Brazil the power of our corn story lies in the compounding upgrade as we expand both the trait penetration while simultaneously upgrading to next-generation traits.
As the Brazil season wraps up, we saw a record safrinha planting season, and record volume for our business. That acreage growth in safrinha likely continues over time, and that’s a positive for our business as we’ve historically done well in that season.
This opportunity also shows the trait trend isn’t a one-shot benefit. We’re in the first phase of introducing traits into Brazil. Coming behind today’s traits are additional multi-trait stacks that we’ll add on top of today’s best products, creating a runway for upgrades we expect carries over the next half decade.
Those same core drivers show up in the Northern Hemisphere, and in particular in the U.S., on slide 10. We made an earlier than usual call on our view on acres on particular with last year’s 96 million to 97 million acres. Now within range of actual planting, that early call feels spot on, something reinforced in last year’s USDA outlook.
Without last year’s head start, and with some of the rain and snow in the last few weeks, farmers won’t be able to get in the fields as quickly this year, so the conditions through the planting season will be important in getting to the final acres. Obviously, last year’s drought will also play out in this year’s crop, and going into planting, farmers still need to replenish a lot of moisture through the season.
Likewise, with the drought negatively hitting last summer’s seed production across the corn belt, it’s a tight market across the industry. We’ve worked with our distribution and we feel good about having the portfolio of seed to meet the needs of our farmer customers against that projected market. One of the benefits of our portfolio is the broad availability of RIB products, giving farmers even more flexibility and speed in getting their acres in this year.
Importantly, the strength we saw in our early order book is also apparent in the financials this quarter. This is setting up to be another strong year for our U.S. corn seed business, as we project another year of growth.
The biggest driver of that growth is the mix benefit coming from our upgrades, and those have been in high demand. In fact, we’re on track to be at the high end of the original target of 36 to 38 million acres in our Reduced-Refuge family. And within that, there’s a compounding benefit, both the upgrade from the older products to the Reduced-Refuge family, and the upgrade within the family, as highest-performing, highest-value products are most in demand.
In particular, with the good yield performance last year, we’ve seen strong demand for our top-tier Genuity SmartStax product, as it now is the largest-volume product for the Reduced-Refuge family in our own brands.
The other major factor that straddles our current core markets and new emerging opportunities is the soybean business, on slide 11. With Genuity Roundup Ready 2 Yield and Intacta Roundup Ready 2 Pro, we’ve talked about the key elements of soybeans. However, we’re on the verge of seeing the cumulative power of our next-generation soybean platform drive our financials.
On this slide, you see that there are 200 million acres of soybeans planted in North and South America. With a [fit] on every one of those acres, we expect the successive platforms of Roundup Ready 2 Yield and Intacta and then Roundup Ready 2 Extend, to come together as a multi-billion dollar driver in the next five years.
This year, we’ll touch more than 40 million acres with Roundup Ready 2 Yield in the U.S., but only about 20% of this opportunity. That means in the next five years, we expect to see significant upgrades that have a practical fit on the remaining 160 million acres.
Here’s how I think about that rollout. Going into the U.S. this season, our soybean business is in a very strong position. The early order book is translating well into shipments, and we’re positioned to see the next step up of Roundup Ready 2 Yield. Just as we’re seeing with the Reduced Refuge family in corn, the strong demand for Roundup Ready 2 Yield means we now expect this year’s acres to come in at the high end of our original 39 to 41 million acre range.
This is also the primary area where the strategic breakthrough that Hugh mentioned reinforces our opportunity. I’m pleased to have Dupont on board as a customer for Roundup Ready 2 Yield and Roundup Ready 2 Extend.
Strategically, it provides an important confirmation of the platform status of these technologies for the industry. Just as importantly, it immediately expands the U.S. opportunity for both Roundup Ready 2 Yield and Extend, confirming the first phase of this multiyear runway. And financially, it carries more than a billion dollars of value that dovetails in for the U.S. soybeans and reinforces the growth on that element over an extended period of time.
The next significant phase of that runway comes as we take another step closer to commercializing the first of our new 100 million acre soybean opportunities with Intacta in Brazil, on slide 12. Ahead of Intacta, we also continue to put our effort behind an orderly wind down of Roundup Ready 1 soybeans in Brazil. I believe we’ll continue to see back and forth on Roundup Ready 1, but I think we’ve made the right strategic steps to help transition, work with our customers, and direct our focus to Intacta.
Intacta is the opportunity I tell my teams to spend their energy on. The reason Intacta is so compelling is because it’s a step change in performance, and the new data we have today in the early results from our second year of groundbreakers data in Brazil. Just like last year, we’re seeing the performance we expected, with a better than four bushel per acre advantage on more than 1,000 locations, double the number of locations that we tested last year.
With two years of data on real customer fields, it’s clear that the performance is there, and the excitement among customers is tangible. That sets up very nicely as we look to take Intacta to the first increment of commercial scale in Brazil’s summer season. There’s still some work to do, but we’re in very good shape to move on this 100 million acre $1 billion plus opportunity.
On the heels of Intacta will be our Roundup Ready 2 Extend technology. It moves into groundbreakers this season in the U.S., and we really see this over the next five years as another increment that adds to the Roundup Ready 2 Yield and Intacta bases to top off that big soybean opportunity in the Americas.
Taken together, this is really the first time we’ve talked about the cumulative opportunity for our next-generation soybean platform, and the total opportunity makes this one of our biggest growth drivers, and the early milestones are right on track.
The same core point would be true as we look at the whole business. Our milestones are on track and the momentum we anticipated has clearly materialized. The last couple of years have been important in confirming our strategy and reigniting growth, so I am pleased to see that play out in fiscal ’13 as well. That’s a function of the effort we’ve made to connect with our farmer customers, and that continues to be a priority for me and my teams.
With that, let me have Pierre walk through how all of this comes together in the financials. Pierre?
Thanks, Brett, and good morning to everybody on the line. Hugh and Brett covered the strategic business drivers that influence our full year guidance, so I will now concentrate on a focused review of some of the key year to date financial elements, and how they translate [unintelligible] to our original plans.
But before I go into the details, let me highlight, on slide 13, how I think about the full year outlook at this point. First, we are very pleased with our results, both on the quarter and for the year to date. This year has been unique in providing us an earlier than usual view in our first two quarters, and that’s what gives me confidence as we take our full year guidance higher today. We’ve locked in the key increments of growth we expected from South America and in the early U.S. season, and that really sets the course for our full year growth.
Second, the results really show the power of an increasingly global business. This is the most significant factor I see in the results. Operating a business in agriculture, we will be facing variability that ranges from weather effects to geographic swings every year. So having a leading business in multiple geographies and built on multiple technology platforms matters. If you look at our financials this year, that geographic balance is apparent, as we continue to be on track with our full year growth, split roughly equally in between the U.S. and international.
And lastly, as the strong business performance also translates into our cash flow statements, we’re evolving our cash deployment approach as we look to return more value to our share owners. If I translate that overview into the specifics of the financials, the best way to see the portfolio effect I just mentioned is to focus on the year to date numbers.
Start with year to date sales, which increased more than $1.2 billion, driving the top line growth that sets the tone for our overall earnings. That translates into a gross profit growth as well, as year to date GP was over $4.4 billion, an increase of approximately 18% over the same point last year. As we increase our full year guidance today, it flows through from our combined full year expectations for GP, which we would expect now in the range of $7.7 billion to $7.75 billion.
Consistent with our strategy, and as we’ve become a bigger company, EBIT has become the most relevant metric to monitor our overall growth. Importantly, we see leveraging EBIT as we grow our above the line components faster than our operating expenses. As a result, year to date EBIT margins have grown nearly 3 points, and that puts us on a trajectory to grow our overall EBIT margins for the third consecutive year.
If you look at what drives year-to-year growth, there are a couple of clear factors. First, on the seed and genomics side, the largest overall contributor, and the largest driver of growth, is our global corn business. Year to date corn sales have grown by 19%, reflecting the strength of our overall business and the uptick we saw in our early order book. That is nearly two-thirds of the overall sales growth for the company, which reaffirms the role this key driver has in our over portfolio.
It also puts us in a very good position at the halfway point for our expectations of meeting full year strong growth for corn. This corn performance is really a function of our global footprint, as we are seeing the cumulative volume gain and mix benefits from Latin America from our core U.S. business and from other key geographies like Europe.
Practically, for the full year, we expect double-digit gross profit growth in corn, and I also expect margins to [unintelligible] pretty well, in line with last year, or up slightly. And this, even in a year where cost of goods come in at one of the highest points in the last decade, reflecting the impact of last year’s drought and winter production costs. These cost pressures impact our financial, but give us the business flexibility to make sure we have the seed to supply our farmer customers.
That corn upside is complemented by the continued benefit we see in ag productivity. Fundamentally, the benefit that we saw in the first quarter continues to track in this quarter and in our full year outlook, and we project full year GP to further increase, putting it in the range of $1.35 to $1.4 billion.
The upside continues to be driven by glyphosate pricing, as a result of the earlier increases in generic prices. Now that we’re well into the U.S. portion of the volume, we feel very good about the outlook for the ag productivity segments. While we recognize the current strong environment will subside some over time, the current sales levels give us a good view on the continued contribution through the end of the year and a solid line of sight for ag productivity into our fiscal year ’14.
If you look at the other earnings drivers, both above and below the line, they are tracking in line with our early expectations. The second quarter is relatively small for other businesses within seeds and genomics, but all fit with our [unintelligible] expectations.
Within that, the area to highlight would be soybeans. As we covered in our first quarter call, our guidance excludes the historical range of approximately $0.20 to $0.25 of full year EPS from Roundup Ready 1 soybeans in Brazil, and you can see that effect in the soybean gross profit for the quarter.
In the second quarter, we have seen strong growth in the U.S. as we’ve seen the mix benefit from the upgrades on Roundup Ready 2 Yield, but that positive effect was offset as the second quarter, along a Q3, is one of the two large quarters where the Brazil soybean contribution would historically flow through our P&L.
Below the line, our total operating expenses track very well against the targets we gave with our initial guidance. As a result, we see no changes there, and would expect to see the continuation of positive earnings leverage.
As I look at the remainder of the year, it also tracks in line with our previous expectations. As we balance the continued momentum in corn and ag productivity against the effect of Roundup Ready soybeans in Brazil and the expected lower overall cotton acres, this gives us a clear line of sight for full year growth, reaching a third consecutive year of greater than 20% on the high end.
From the standpoint of cash, the strong business results position us for another year of strong cash generation, as reflected on slide 14. With the early flow of cash resulting from the strong economy and the early ordering season in the U.S., our year to date results keep us on track to meet our guidance range of $1.8 billion to $2 billion of free cash for the year.
That strong cash position creates an opportunity for us on cash deployment. I’ve said that my first priority is to aggressively reinvest in the business to support the continued growth opportunity. We’ve been true to that commitment, investing approximately $2.4 billion in total over the last three years on capex and targeted investments.
Strategically, we have begun to step up our capex investments this year in those areas Hugh noted as having the best growth potential within our seeds business. This capex is important for our next round of global growth and offers some of the lowest risk, and highest return on the investment, for our cash deployments.
The next priority for me is the strength of our balance sheet, which matters, as I want to maintain the resources and flexibility to be in a good position to address the cyclicality and potential variability inherent to agriculture. And in fact, today we’re at a point where further strengthening our balance sheet wouldn’t create further meaningful benefit.
Based on our analysis, and with feedback we’ve gotten from many of our owners, we are now moving to use the cash over and above our current levels to further prioritize our share buyback and dividend programs. We continue to view dividends as an important element of our cash deployment strategy.
Over the last three years, we’ve increased our dividend by more than 40%, and as we continue to grow our business, dividends will remain a priority. Most directly, our historical practice has been to use share buybacks to offset dilution. As a function of our available cash, we are shifting to using our buyback program more opportunistically, in a way that we expect to begin to reduce share count.
We back this new approach with our early actions. We bought back $300 million of shares in the second quarter as we aggressively make progress against tour current $1 billion share buyback authorization. We will continue to focus on this tactical buyback and expect to see the early share count reduction in this fiscal year.
Taken together, we’ve used approximately $3.3 billion of our free cash on share buybacks and dividends in the past three years. That’s almost three quarters of our total free cash flow during that period, and I continue to like our ability to be a company with strong underlying growth that generates a strong cash stream we can use for additional capital return.
Let me conclude by stepping back from the numbers for a moment. I’d summarize by telling you that there are two things I take away from this quarter. First, the quarter is an important punctuation mark. It confirms the momentum we anticipated, and gives us a unique line of sight to be able to raise our full year guidance and lock in our expectation for a third consecutive year of strong growth. And second, this strength is a direct result of a growing global business.
That business performance sets up nicely for a strong year, for our continuing growth opportunity, and for the ability to return compelling value to our share owners. Thanks for your time, and with that, let me turn it over to Brian for Q&A.
Thanks, Pierre. We have Hugh, Pierre, and Brett Begemann here as we open the call to your questions. As we typically do, I’ll ask that you please hold your questions to one per person so that we can take questions from as many people as possible. You’re always welcome to rejoin the queue for a follow up question. So, operator, I think we’re ready to take any questions that may be on the line at this point.
Thank you. [Operator instructions.] Our first question is coming from Don Carson with Susquehanna Financial. Please proceed with your question.
Don Carson - Susquehanna Financial
Question on your gross profit guidance. You’ve gone up $50 million to $100 million from your previous guidance, yet Roundup’s gone up by more than that. So I’m just wondering, what’s happening in the seed genomics business. Is the Brazilian loss larger than you thought on the last quarter? And then just how sustainable is this surge in Roundup?
I’ll maybe ask Pierre to give a little bit of color on gross profit, but overall, delighted with global corn performance. A bit of softness in Brazilian beans, but completely in line with what we anticipated in the first quarter. And then I’ll maybe come back and say a little bit on Roundup as well. But Pierre, on the seed side?
Regarding our seed gross profit and looking at the second half of the year, the way I’m thinking about that is it’s positioned within a year where we’re going to, for the third year, grow earnings by 20% and a year where at this point in time, nothing has been planted yet in the U.S.
Regarding the second half specifically, we expect the key drivers of growth that we saw in the first half to continue and prevail. So ag productivity still being strong, and obviously our corn business driving growth.
And the point which I want to make here is that if you normalize the second half of the year for the impact of Roundup Ready 1 in Brazil, knowing that a large part of the $0.20 to $0.25 of EPS that we excluded from our guidance would be coming in the second half. So if you normalize our numbers for the large part of that’s Roundup Ready 1.
And also, remember that the cotton acres that we’ve been projecting this year and cotton is an event that we sell mostly in Q3, we’ve been anticipating a reduction of those cotton acres of 2 to 3 million acres in the U.S. So if you take all of those elements together, actually the second half we are projecting represents a fairly nice growth coming from the key drivers that we have seen in the first half, including corn and ag productivity.
We’re pleased with where we are. We’ll feel better when we get some seeds in the ground. On the glyphosate piece, real briefly, just to put it in context, tracking well with the strategy that we had laid out. We’ve seen some price increases this year. Glyphosate, Roundup, would now be tracking in the $10-$12 a gallon range, and would be on the upper end of that $10-12. And Brett, maybe just a little bit of color on how the 300 million gallons is panning out?
Yeah, exactly. And as our approach has been for the last few years, with our new strategy, is to focus on selling about 300 million gallons a year, and we’re very much on track to do that. Also, the emphasis of moving as much as we can to our branded business versus third-party sales, and that continues in a favorable march.
And I’d also add, on the ag productivity, specifically the Roundup side, that what we’re really seeing from acid prices in China is a range of $4 to $5 and something on the acid, which is substantially less volatility than what we saw years ago. So I feel good about our strategy and how it’s playing out. Recognize that there could be some volatility there, but not like what we’ve seen in historical patterns.
Our next question is coming from Jeff Zekauskas from JPMorgan. Please proceed with your question.
Jeff Zekauskas - JPMorgan
If I could start with one more on glyphosate, have you sold more than 150 million gallons so far in the first half, or less?
Yeah, we would have sold more than the halfway mark in the first half.
Jeff Zekauskas - JPMorgan
And then secondly, when would you need Chinese approval for Intacta in order to ship for the second Brazilian soybean season?
We would, as a rule of thumb, if we had it before fiscal year end, so the back end, August, we’d be feeling good for this year. The first year’s going to be small shipments, or relatively small shipments, anyway, but getting over the line before fiscal year end close would be good news.
Our next question is coming from PJ Juvekar from Citi. Please proceed with your question.
PJ Juvekar - Citi
You have been consistent with your price discipline, raising your base [unintelligible] prices by 5-10%, I guess over the last few years. But this new pricing model is not tested in an environment of falling prices. So if corn were to go down, corn prices were to fall because of yields or whatever, do you think you can raise base pricing 5-10% without upsetting your customers?
Thanks for the question. I think it’s a truly strategic question. I would remind you that in previous years, we didn’t chase the peaks on our pricing. So when corn was set at $8, we never aspired to chase that. We’ve been consistent in our pricing philosophy.
We’ve spent a lot of time discussing that with growers, and the feedback from growers, both in terms of how they’ve responded and how they’ve voted with their pocketbooks, I think underscores the consistency that we’ve been stressing. So our world, we’ve been doing our budget and our forecast, on a $4-6 corn world. So we were never [unintelligible] those peaks, and we were never pricing against them.
I think when you look at the whole ag spectrum, the seed business is in a good place, as you look at some of the commodity pricing that is potentially unfolding. So you know, never say never, but you look at the early days, when corn was $2 or $3 a bushel, we saw some of the strongest technology penetration curves in that timeframe.
So I think, you know, the position that we’ve taken, and the fact that we’ve stuck to that over the last two or three years, I think has been recognized by our grower customers.
PJ Juvekar - Citi
Thank you, and I just have a clarification question. Have you licensed Intacta to any other company?
Yeah, we’ve licensed a number of companies in our space, and we’ve followed the same doctrine that we’ve been pursuing for the last 12, 13 years. So we’ve been very open about that licensing model.
Our next question is coming from Vincent Andrews from Morgan Stanley. Please proceed with your question.
Vincent Andrews - Morgan Stanley
Can you just talk about the cost of goods sold this year and the movement, or the leverage, or lack thereof, between sales and gross profit and season traits? Assuming that the seed production costs, logistics costs, next year are less, if you have a somewhat normal crop and production, do you think that leverage will show up next year? Or how should we be thinking about those costs this year versus next year?
There’s a lot of insight there coming off of the, you know, one of the driest production years in the last decade or so, and it did squeeze us on cost. But Pierre, maybe you can key off that and how you’re thinking about next year and a more normalized environment?
I mean, the way I’m thinking about that Vincent, I’m just looking at our performance this year in the first half, and how we think about the whole year, and what we see is actually that our strategy is working, because you can see specifically regarding corn, we’re looking at top line growth of 19% year-to-year, which means we are growing volume and our pricing strategy is working. And that’s really the key for us.
However, as you noticed, this year we are hurt by higher cost of goods, and this is not a surprise, because we knew that coming out of the summer we had last year, where drought definitely impacted our production yield and actually pushed us in using more winter production that in a normal year.
So I think your analysis is exactly right. This is something which is not structural. This is something which is definitely linked to this unique drought situation that we faced last year, and actually the results we see right now, especially on the top line, where we see volume growth and the leverage we get from price, makes us feel very good about our ability to continue growing. I mean, the strategy is definitely working there.
Vincent Andrews - Morgan Stanley
But how much were costs of production or logistics above sort of what it should have been normally. Can you give us any sense of what the hit was this year?
It’s difficult to evaluate and really quantify, but at this point in time, we’re looking at margins that are roughly flat from a year-to-year perspective, so I think when we were talking about the price lift we were expecting early in the year, I mean, you can back calculate where we should be, hadn’t we had those cost of goods penalties.
Thank you. Our next question is coming from Frank Mitsch from Wells Fargo Securities. Please proceed with your question.
Frank Mitsch - Wells Fargo Securities
Hugh, you said at one point that we’re at the front edge of significant Latin American growth, and I just wanted to get an update from your perspective as to what’s going on with the Brazilian farmer situation. I know you signed an agreement in terms of forgiveness of the $0.20 to $0.25 on Roundup Ready 1, in exchange for the full royalties on Intacta, but there’s been some farm groups lobbying against that agreement. So can you give us an update as to where that stands and how you think that plays out over the next year or so?
I’ll maybe ask Brett to do the high-speed refresher, but I think the headline news is this is all about Intacta. We have done another year of groundbreaker trials. We’ve now got 1,000 growers, and so about 2X the number of growers that we had in last year’s groundbreaker trials, more geographically diverse, and we reconfirmed a 4 bushel gain versus the old technology. So the gold ring in this, the piece that we’re chasing, is getting impact out there as fast and as broadly as we can. But Brett, maybe just to Frank’s point, just a quick recap and then what you’re hearing in Brazil from growers?
Yeah, I think I’d step back, and if you think about that front edge, what’s that the front edge of? Let’s talk about corn. Two big things happening in corn at the same time, and I know they’re hard to parse out, but we’ve never fully penetrated Brazil corn with biotech.
So we have an acceleration of penetration of biotech traits across all the corn acres, and at the same time that we’re doing that, we’re upgrading those biotech acres to a new higher-value biotech trait. And that’s going to carry on for a number of years. We have a lot of runway in front of us there. The same to a lesser extent happens in Argentina with Double PRO going to Triple PRO.
Then, in soybeans, as Hugh was describing, I would tell you that as we talk with farmers, you know, any time you’re going through a transition like this, you’re going to find various perspectives in the marketplace. I feel really good about where we’re at there.
Here’s where we’re at. Every farmer in Brazil that’s interested in soybeans finds themselves in one of two places. They’ve either signed an agreement or can sign an agreement to move on from Roundup Ready 1 and focus on Intacta, or we’ve deferred the billing and they won’t be paying until there’s a court resolution. So every farmer is covered in regards to Roundup Ready 1 in Brazil, and now the focus and energy is on Intacta.
And I can’t overstate the excitement of a second year of significant performance coming in on Intacta, as Hugh said. And I will tell you, as I talk to farmers across South America, the conversation is about Intacta, it’s not about Roundup Ready 1. So I’m really excited about where their focus is. And yes, there’ll be some noise, but we’ll make that transition, and I’m excited about where we’re at.
Thank you. Our next question is coming from Michael Cox from Piper Jaffray. Please proceed with your question.
Michael Cox - Piper Jaffray
My first question, or my question, is on glyphosate, and I know that a number of questions have been asked about this. But I’d be curious what sort of supply response you have started to see, or anticipate seeing, given the price movement in glyphosate, both the wholesale and retail level.
Michael, can you say a bit more on supplier response?
Michael Cox - Piper Jaffray
From the generic producers, particularly China?
I’d say so far, and in an unpredictable world, it’s been pretty predictable so far, and the spread, what we’ve done with our new strategy over the last few years, we’ve focused on narrowing the spread between us and the generics. So we’ve moved price that should keep track with that generic volume. We are about half of the world, the Chinese suppliers are about the other half. So that’s why I say it’s predictable.
But if you look at the volatility in the size of the spreads versus our last experience, as Brett made the point earlier, that’s a lot tighter this time around, Michael. So still early days in the season, but feeling, with the volume that’s out there, we’re feeling pretty good, and I think we get visibility into ’14 from where we sit today.
Our next question is coming from Mark Connelly from CLSA. Please proceed with your question.
Mark Connelly - CLSA
Hugh, you’ve made it pretty clear where the big growth is coming from. I wonder if you could help us understand what the outlook is for the U.S. corn market. When I look at slide 7, I still see a whole bunch of things in the pipeline there. Do you look at the U.S. as sort of a steady growth market now, or how should we think about that? And similarly, if you could just remind us of the timing of vegetables, because you had indicated over the next couple of years that was going to start to hit.
Yeah, so on corn I’m really pleased with the performance this year. You know, the 36, that 8 million acres, we’re continuing to break through hard goals, and I think there’s some continued steady upgrades there. The first question this morning was around our germplasm and prices in germplasm. That’s been a sleeper, but all the feedback that we get from growers is they continue to look for performance regardless of commodity price.
And as we continue to drive that performance through the germplasm as well as the traits, we’re rewarded on price. This year’s a great example. We sell out of our best performing products early, and we sell out of them every year early. So growers are focused on performance, and I think that will be the steady drum beat in the U.S. I don’t know, Brett, if you’ve got anything that you’d add beyond that?
No, I think you’ve nailed it. I think that’s their focus, and I would remind you that we didn’t talk a lot about it today, but that IFS is a very interesting concept that fits corn, and we’re going to be doing groundbreakers with IFS, and that will be an option for us in corn in the U.S. too.
And then veggies, nothing much to report. Feeling better about it than a year ago, but you know, demand is still soft in some of those world areas. As we look long term in veggies, I think, and we’ve been talking about this for a couple of years, but as we see the front end of that pipeline emerging, a lot of this in the coming years is going to focus on our ability to add value through pricing, to improve performance on the molecular markers and the improved breeding technologies that we’re seeing coming out of our labs in California, but it’s still ahead of us, I think.
Our next question is coming from Kevin McCarthy from Bank of America Merrill Lynch. Please proceed with your question.
Kevin McCarthy - Bank of America Merrill Lynch
With regard to the U.S. corn seed market, you’re now pointing to the high end of your 36 to 38 million acre range for the Genuity corn seed family. It sounds like the USDA’s planting intentions numbers were pretty consistent with your expectations. So in that context, would you comment on what is driving the move or your confidence to achieve the high end? Is it having to do with market share expectations, availability? Perhaps you could provide some color along those lines.
I think you’ve answered it, Kevin. We took the unprecedented step of putting our estimate on acreage out there, and you know, there’s still a lot of vectoring on continued drought, but some good moisture later season, but an earlier sell in. So there’s kind of multiple moving parts. But the bottom line in this is it looks a lot of like 96 to 97 million acres, and given that 96 to 97 million acres, we’ve been seeing a strong build in the order books, and a preferential pick within that order book for these technologies. And I think that’s what gives us the confidence and it backs into our production numbers. So I think you kind of, what do they say, asked and answered? Brett, I don’t know if you’ve got anything else to say on how that’s shaping up?
I’d just add two things to what Hugh said. Number one, the Refuge in the bag convenience has really gone over great, and everything we offer in the Refuge Reducing family is Refuge in the bag now. And that convenience factor is huge, and I would argue going to be really important this year with what could be a compressed planting season as we see the moisture across the Midwest, and not getting in the field as early as last year.
The other piece is that, and I highlighted it in my comments, is the outstanding performance of SmartStax last year. And as you look across that corn belt and the challenges farmers face with insects and continue to face, SmartStax is core. And it’s now our top-selling product out of the Refuge Reducing family, going right at that root worm. So that’s helped move us in that direction as well, Kevin.
Our next question is coming from Mark Gulley from BGC Financial. Please proceed with your question.
Mark Gulley - BGC Financial
Since this is the first time you’ve had to talk to us post the Dupont settlement, I was a little surprised that maybe you didn’t take the opportunity to raise your long term earnings growth estimate, because after all, as Brett points out, you’ve secured a very large customer for a long period of time. So it seems to me your long term growth rate could easily be above 15%. How should I think about that?
We are delighted to have the deal done. We’re pleased to welcome Dupont Pioneer as a new licensee to our soybean technologies. And I think as you look… You know, I never talked much today about ’14 and ’15. As you look into ’14, I guess I’d say it increases the certainty or improves the clarity or confidence as we look at those growth rates with Dupont incorporated in there, and some of the other growth drivers that we talked about this morning, but frankly, at this time of the year, maybe it’s tradition, maybe it’s common sense, but at this time of the year, we’re more focused on getting seed planted, and getting the season nailed that looking further out.
But I take your point. I mean, it was a sizable deal, it’s significant, and it brings strength to the portfolio, and it gives clarity on longer term growth opportunities. So I think that’s a conversation that we’ll have as the year pans out, rather than pre-spring, I think.
Mark Gulley - BGC Financial
Just a quick follow up. If it’s a play on words, you’ve talked about Monsanto being a yield company. I’m wondering if you could also apply that to the financial side, maybe. While you talk about share repurchases today, it would seem to me, given the share price move, and given the earnings visibility, that a sizable dividend increase could also be in the cards.
Well, so we’re blessed, and I think it’s more than a play on words. I think one begets the other, right? So it starts with bushels, and ends with dollars, and our ability to deliver bushels with consistency in our pricing improves our [pick] with growers. It favors our opportunity to win, you know, each spring when we sit down at that kitchen table. As Pierre outlined in his comments, and I’ll maybe ask him to say another few words, we’ve looked at this from buybacks and dividends, and as our financial strength increases, we, you know, it’s our share owners’ money, and we will aggressively repatriate it. But Pierre, I don’t know if you want to underscore that.
No, I think that’s exactly right, Hugh. Our first priority always is to be reinvesting in our business and we feel we’ve done that, and we are on the verge of doing that again. However, as I mentioned this morning, we feel extremely good about our balance sheet right now, so we’re going to move towards returning more of the cash we generate toward our owners, and absolutely dividend is one of the two tools we will be using. The way we are thinking about it is obviously on a year by year basis. But the way we think about dividend is obviously as a long term commitment.
So the balance between dividend and buyback is something that we are always very careful about, and very considerate when making those types of moves. And obviously working with our board in those types of decisions. But what I can tell you today is that we’re going to be more aggressive returning the cash we generate to our owners, because we feel very good about the position of our balance sheet.
Our next question is coming from Lawrence Alexander from Jefferies & Company. Please proceed with your question.
Lawrence Alexander - Jefferies & Company
First, did you have any kind of assumption for a settlement with Dupont in your mid-teens guidance before the announcement? And second of all, as you look at the cadence of profit margin improvement in corn over the next few years, do you get a better pricing position with your next-generation drought products if we remain in the kind of environment we’ve seen recently, or are you neutral on the environment and the climate conditions?
I’ll take the second piece. I think we’d say we’re neutral. It’s nice to have that opportunity, but you can’t speculate. I’d say we’re neutral. And the Dupont question, it’s [unintelligible]. So some of that was baked in, because we continued to expect growth in beans, but it’s nice to have, to the earlier question, the certainty around that rather than the speculation of outcomes and courts and appeals and protracted processes. We’ve all of us, over the last 10 years, tried to reach a business resolution, and I’m pleased to see that we’ve finally got to that. And we’ll broaden the choices for growers. They’ve now got the chance to choose brands by technology options. And some of that’s going to be, obviously, incremental growth to where we were forecasting. But I think the way I would think about it is it’s clarity, it’s certainty, and it strengthens the portfolio in the next couple of years.
Our next question is coming from Tim Tiberio with Miller Tabak and Company. Please proceed with your question.
Tim Tiberio - Miller Tabak & Co.
I’m looking at the Intacta yield data that you provided. Obviously you have not provided any guidance on final pricing, but maybe you can just walk us through how you’re thinking through that process. Will this be strictly pricing the new yield data on the basis of that $80/acre value capture, or will you be looking at 2014 futures at that point and then coming up with maybe an average of the yield between the initial yield groundbreakers and then the 2012-2013 data?
Good question. I’ll maybe let Brett say a few words. The algebra and the trigonometry isn’t that precise, because we’re pricing once a year. So in reality, we’re pricing forward, and the point of being consistent, you have to kind of stake a claim and then stick with it. I think it’s going to be fast on this ramp. There’s tremendous demand, and the good news is we’re reconfirming, you know there’s four new bushels coming up on the farm, and that’s a really big deal. But Brett, as you talk to some of these massive growers down there, what’s that price talk, and how’s that philosophy playing out?
I think it’s important to go back to what has been our pricing philosophy, and we’re going to stick consistent with that philosophy. It’s how much incremental value has been created, and this year confirms, again, for the second time, that it’s in the range of $80, based on assumptions, of course, and that comes from improved yields, reduced insect control costs, etc. So we’ll look at that, and we’ll look at that in conjunction with the offers that we have available in the marketplace. And we’ll shoot for a percentage sharing of that.
But at the same time, not only will we be thinking about Intacta and the sharing around Intacta, we’ll be thinking about the pipeline that Rob talked about in the first quarter call, where we’re going to be looking at Intacta 2 and Intacta 3 coming behind it, and how do we build a trajectory into those. So this is about the long term approach to soybeans, and as I mentioned, soybeans becoming a significant billion dollar driver for our South America business over the next five years. And that’s how we’re thinking about this, is in a whole strategic approach to that. We’ll be more specific with that as we get final approvals and get those conversations done with our farmer customers.
Tim Tiberio - Miller Tabak & Co.
And from a timing standpoint, how should we think about that? Can that be finalized prior to the Chinese import approval? Or is that potentially a gate?
Well, we’re in conversations with farmers all the time about how we’re seeing the value, and they are as well. And we’ll build it into our overall process. But what I would remind you of is, as much as I’d like to have a whole bunch of Intacta to sell next year, we’ll be limited biologically on how much we can produce. So of course the Chinese approval will be a significant part of how we choose to take that new technology into the marketplace, but it won’t be the driver necessarily on how we think about our pricing. But it will be closer to planting time than where we are today.
And operator, I recognize we’re getting near the end of our call. I think we probably have time for one final question. Then I want to leave just a little bit of time for Hugh to wrap things up.
Certainly, sir. Then our final question today will come from [Bill Yeoh from Kinspeak, LLC]. Please proceed with your question.
[Bill Yeoh - Kinspeak, LLC]
Maybe you could fill us in a little bit on your outlook for market share in soybeans here in the U.S. I think you’re at number two now, and you’ve got your Roundup Ready 2 Yield, etc., Extend coming out. What do you see this year, and what do you see going forward?
The good news is on our forecast we’re seeing, as Brett mentioned, 39-41 million acres of Roundup Ready 2 Yield. So it’s only a few brief years ago there was a question on whether Roundup Ready 2 Yield would ever make it. And it became the key technology player in soybeans, so very pleased with the progress. 39-41, who knows where the market is going to land, but nice growth.
And as a couple of questions have come up here with the recent deal with Dupont Pioneer, and welcoming them onto that platform, we now pretty much license the industry in the U.S., so growers are going to have their pick of brand by technology. So nice growth. And I’m always a little bit nervous until we get that seed planted in the ground, but if you look at strength in order book, you look at our forecasts, and you look at the way the season is setting up, we’re feeling pretty good with the opportunity and the growth in the segment.
So I’ll maybe just say a few words and wrap up. Thanks for your patience for a couple of minutes over today, but it’s an important quarter. I started by saying that the quarter of Q2 is important because of the look that it gives us, not just this year, but as a few of the questions came up, it gives us an early indicator into next year and beyond.
And I think I’d reemphasize that notion as we close by just summarizing three points that I would take away from this unique vantage point as you look towards the remainder of this year and beyond. First of all, we raised guidance today. We’re on track, because of that, for a third consecutive year of strong growth with our range reaching greater than 20% ongoing EPS growth, if you take the high end of that guidance range. And I think that speaks to our momentum, our performance, and the continued improved relationship that we’re seeing with our grower customers.
Secondly, as Brett mentioned in this call, we have the right drivers in place to drive our growth going forward, and that speaks to our focus on customers over the last few years, and our opportunity as a company dedicated to yield in the broadest sense of yield. And then finally, and thirdly, our results show the power of an increasingly global business, particularly in the Americas.
So we’re very focused on turning that opportunity into results, and I look forward to reporting on progress with you this year once we get the U.S. crop planted this spring. So thanks for joining us again on the call this morning, and thanks for your continued support.
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