Monsanto Company F1Q10 (Qtr End 11/30/09) Earnings Call Transcript

 |  About: Monsanto Company (MON)
by: SA Transcripts


Greetings and welcome to the first quarter 2010 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.

Bryan Hurley

Thank you, Rob, and best wishes to all of you for the New Year. Welcome to Monsanto’s first quarter earnings conference call. I’m joined this morning by Hugh Grant, Monsanto’s Chairman and CEO; by Carl Casale, our CFO; and by our Chief Technology Officer, Bob Fraley. Also joining me are Will McAndrew, [Manny Cruise] and [Ruben Maya], my colleagues in Investor Relations.

I’d like to remind you this call is being webcast and you can access it at The replay is also available at that address. For those of you who would like to go to our website, the slides for the call are posted on the Investor Information page.

We’re providing you today with EPS measures on both a GAAP basis and on an ongoing business basis. In those cases where we refer to non-GAAP financial measures, we’ve provided you with a reconciliation to the GAAP measures in the slides and in the earnings press release.

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, 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 contained in our most recent 10-K and in today’s press release.

Today’s conference call features our sixth annual review of our R&D pipeline results. Carl will start things off with a review of the quarter, of guidance and of seed orders. Hugh will expand on the outlook for 2010 and Rob will take you through the pipeline update.

Because our time is short today with the R&D update, I will now turn the call over to Carl.

Carl M. Casale

Thanks, Bryan, and good morning and Happy New Year to everyone. Our first quarter is a small quarter and it’s a quarter that reflects very little of the business that will ultimately determine our fiscal year outcome, but it’s an important first step in delivering on the milestones and commitments we’ve outlined for the year.

But before I get into the detail of the results, let me give you my view of how this first small quarter fits into our full year outlook. First, as you’ve heard our team say many times before, our guidance is a commitment not an aspiration. Importantly at this first milestone, we closed out the quarter with EPS and free cash flow results ahead of our preliminary guidance. As show on Slide 4, if I combine the early data points from the first quarter with our evaluation of remaining variables for the year, I feel confident confirming our full year EPS and free cash flow targets today. That’s our commitment.

Second, fiscal 2010 marks the return to our normal earnings pattern as a result of the reset of the Roundup business. This can be seen on Slide 5, where all of our earnings this year will occur in the second and third quarters. The small first quarter magnifies anomalies and some key measures, particularly our corn margins. I’ll address these directly as they skew the quarter, but we would expect to see the total season genomics segment margins normalize for the full year.

Third, this quarter yields the first data points in the two areas I get the most questions on at this point; our confidence in our Roundup outlook for the year and what our order book tells us about the important U.S. seeds and trade season. These are still early indicators at this point, but both continue to track well and reinforce our confidence in our ability to deliver on our fiscal 2010 commitment.

Moving to Slide 6, let’s walk through the first quarter results. As expected, the year-over-year decrease in our first quarter results clearly reflects the resetting of the Roundup business. Against that, we delivered an ongoing EPS loss of $0.02 per share for the quarter, down from earnings of $0.98 per share in the prior year. On an absolute business, SG&A declined year-over-year, while R&D expenditures were slightly higher than the prior year as we managed more projects in the latter phases of the development cycle. While we anticipated certain discrete tax benefits that would be reflected in our full year tax rate, several of those occurred in the first quarter and represented a $0.03 benefit realized in this quarter. Given the first quarter loss, those discrete events add up to an effective tax rate of 56%, although the full year rate should still be in the 30% range.

We also ended the quarter slightly ahead of our free cash flow expectations. Free cash flow was the $1.6 billion use of cash in the quarter compared with $124 million source of cash this time last year. The reset of the Roundup business accounts for roughly 30% of this shift. A little more than half the cash decrease is a result of some prudent working capital management changes that altered the timing of cash flow in the quarter. This was primarily driven by a change to move up payment terms from our seed licensees which had traditionally been collected in the first quarter and our now collected in the fourth quarter. The remaining balance in fiscal 2009 came from the proceeds from POSILAC divestiture, which was $300 million.

In terms of cash deployment, we continue to use our cash to fund our current three year, $800 million share repurchase program. We spent a little over $60 million repurchasing shares in the first quarter, bringing us to about 40% of the way to completing our full authorization.

Likewise, while anticipating lower overall earnings than we had in fiscal 2009, we have maintained our dividend and continue to see funding our dividend as a priority for free cash generation in 2010.

If you move on to Slide 7, in the segment detail we can step through both the quarterly drivers and the indicators for a full year performance. The largest driver in the overall first quarter results is the expected shift in Roundup. Gross profit for ag productivity declined significantly as we lapped the peak in the supply/demand imbalance in Latin America last year.

More important is the progress we’ve made against our plan to generate $650 million to $750 million in Roundup gross profit this year, on the way to a sustainable $1 billion in gross profit by 2012. We’re executing on our 2010 Roundup objectives to reduce branded prices to bring premiums more in line with historical norms, increase overall volumes and optimize our low cost production advantage.

Even at this early juncture, worldwide branded net selling price is in the $10 to $12 per gallon band that we’re expecting for the year. In Brazil and Argentina, our branded pricing is squarely in that band as in other parts of the world there is still significant generic competitive presence in the channel to work what we’ve sold and with the second season ahead in Brazil, we have achievable volume targets for the region.

In the U.S., the season still lies in front of us, but the early fill in U.S. prepay portions this season provides early indicators that the season is shaping up as we would have expected. The channel response to our price reduction has been good and there’s very good channel support reflected by the products we have in position at this point in the year.

The clearing of generic inventory is still underway, keeping farm gate generic prices depressed. While its still early days and we’ll monitor the spread on our branded price, we believe our price move and incentives put us where we need to be at this point in the season.

Moving now on the seed and trade side of the business, given the small quarter a couple of timing and mix effects had a magnified impact on both our gross profit and gross margin. On the gross profit side, total season genomics declined $81 million to $597 million for the first quarter in 2010. In particular, gross profit in corn season trades was down 25% to $304 million. At an absolute gross profit level, the decline in corn seeds and trades predominantly reflects a shift in timing of our corn business in Mexico as we mentioned in our November investor day. In order to create a localized corn distribution model more on par with the rest of North America, we’ve helped distributors have on hand inventories and that moved up roughly $40 million in gross profit into our fourth quarter. Since this was a structural change, this revenue pattern will be reflected in our fourth quarter.

The remainder of the decline largely reflects the decrease in planted acres for corn in Brazil and Argentina, where dropping commodity prices depressed acres issue. In both Brazil and Argentina, we project planted acres declining roughly 15% to 20%. With the second season still ahead in Brazil, we may see some rebound in total acres but we still expect all implanted acres to be down for the year in both Brazil and Argentina.

On the margin side, overall season trade margins were down 4 points to 58% for the quarter. This is driven by corn margins which are down 11 points from 64% in the first quarter of last year to 53% this year. The margin effect we see in the quarter is driven by a shift in our mix in the U.S. as our business evolves and is magnified by limited corn sales in the first quarter. Our total volume in absent gross profit from the U.S. corn was up in the first quarter but the margin was off by 11 points. The reason is straightforward. In a small quarter we are seeing the mix effect we saw in a greater portion of branded seed versus licensed seed. With the growth in our branded seed business, we sold more branded seed in the first quarter than we ever have historically. That’s a positive in the fact that it contributes more gross profit dollars for bottom line, but has a lower overall blended margin because it includes the seed plus the trade as opposed to the higher margin, trade only royalty from licensees.

If we step back and look at the full year, aggregate seed genomic gross profit margins are tracking with our targets, although we may see some shift in the composition by crop.

With corn, we’ve talked about the strategic investments we’ve made in 2010 to drive the accelerated three year ramp up of Smart Step, including incremental launch year production costs and the targeted price reduction to drive triple stack penetration. As we’ve indicated before, those investments raise the average cost of goods per unit this year. However, despite the fact that our branded trade penetration more than doubled in Brazil and our double stack mix was up again in Argentina, the overall corn acreage reduction in Latin America limits an upside to offset this launch year effect in the U.S.

Factoring in the other crops however, our overall blended margin proceeds in trade business is still expected to be relatively flat year-over-year. Likewise, we remain on track for our $5.1 to $5.2 billion in absolute gross profit for seeds and trade. Thus the value of our crop portfolio approach that allows upsides and downsides to offset each other.

That brings me to the last element of our seeds and trades outlook, the order border book. Given our expectation that 2010 sets the tone for SmartStax and Roundup Ready 2 Yield acceleration, the logical question becomes how are actual orders tracking in the order book for this year? Hugh and I personally reviewed the order book at calendar year end, so I’ll give you both the data and our read on the how the order book translates into our operational milestone.

First, by December 31 a good portion of the seed is on order but not all. In a usual year, the selling season wraps up by mid to late February, and that’s still likely to be the case even in a late harvest. The significant portion of the selling season still ahead, this represents an early look.

Second, despite the early look, pre-payments track a year-over-year cash received from independent dealers are approximately 20% above the pre-payment levels at the end of December last year. Cash in hand provides the best barometer of pace and reliability of orders and the fact that this year we are seeing better pre-pays and a later season is a signal of good overall order patterns.

Third, the order pace bodes well for introductory volume of SmartStax and Roundup Ready 2 Yield. At our November investor event, we increased our expectation for launch year SmartStax volume to more than 4 million acres, as shown on Slide 8. More than half of our SmartStax target was spoken for before farmers had the benefit of knowing the specific hybrids available. That’s a function of a late harvest, where hybrid qualification was later than usual, meaning we didn’t have our lineup of commercial hybrids into the hands of our sales force until early December. But given those orders, early adopter uptake in this first year has been good and that gives us confidence we’re on pace to meet our 4 million acre target.

Likewise, in Roundup Ready 2 Yield, our accelerated 8 to 10 million acre ramp is on pace. There’s no denying that we had to cut through the chatter and sell the performance of our class of 2010 variety, but like Smart Stack, placement of our early adopter volume is happening and we’re on pace to deliver our 2010 commitment. For both Roundup Ready 2 Yield and SmartStax, our realized selling prices continue to be in the expected ranges as we’ve previously discussed.

As I view fiscal 2010, our task is execution, and at the start of the fiscal year we’re executing against the plan on the critical areas that influence the quarter, particularly our Roundup strategy and the corn trade opportunity. And perhaps more importantly, the early signs are in place that give us confidence that we’re meeting the milestones that drive our season trade opportunity in the U.S.

With that, let me turn the call over to Hugh for a further look at the outlook for these milestones for season trades in 2010.

Hugh Grant

Thanks very much, Carl, and let me also wish everybody on the phone the very best in the coming year.

Just two short months ago, nearly 200 of our investors met with us to see our newest research facility in North Carolina. And during those couple of brief days together, we laid out for you the operational path that walks us through 2010, ’11 and ’12. So you might be asking what’s changed in the last 60 days or so.

First of all, some things haven’t changed at all. If you look at Slide 9, our opportunity in the three year bridge from 2010 through 2012 is a reflection of the positive mix lift that we’ll get from new product upgrades, like SmartStax, Roundup Ready 2 Yield and our corn biotech traits emerging in Latin America. Our job continues to be to deliver innovation to the farm and give farmers a compelling choice to upgrade to this next generation technologies. If we do that and we do it well, the upgrade and the value of our product offerings will speed us to our path of doubling our gross profit in 2012 from our original base in 2007.

Secondly, where we have made the points since November, this served to strengthen our confidence in our products and in our strategic plan. In particular, we announced our final yield results from a wet to late harvest that confirmed what we’ve always believed, that our technology and our gen plasma advancements deliver greater value to farmers, regardless of the variability in growing conditions. I’ll let Rob speak to the specifics from our yield results, but these results reinforce my confidence that farmers will see the unmatched value propositions from SmartStax and Roundup Ready 2 Yield this year.

Likewise, our progress with corn trades in Latin America is tracking right on plan. With the benefit of larger seed footprints in Brazil and Argentina than we have in the U.S., we’re seeing corn rate penetration move at an accelerated pace. In fact in just the second year of commercial availability, roughly 50% of our branded seed in Brazil is YieldGard Corn Borer. In Argentina, we’re now on track to sell more double stacks reaching roughly 70% of our portfolio and demonstrating the conversion speed in this technology hungry market.

And I think one final update for this category is over the last month we’ve had conversations with our licensees and other stakeholders around our plans for the transition and stewardship of Roundup Ready 1 soybean technology as it comes off patent in the middle of this decade. We’ve been planning for this expiration point for a long time and we took the initiative to clearly express our intentions, giving growing confusion in the industry. We recognize our leadership role in establishing a protocol for handling product transitions, since our Roundup Ready technology is the first broadly used biotech event to approach patent expiration. So in a year where the topic of competition in agriculture promises to remain a part of regular industry conversation, we remain focused on delivering the grower innovation, and we’ve clearly expressed our path in three brief points.

Number one, for Roundup Ready 1 soybeans, our original soybean product will remain available through and beyond Monsanto’s U.S. patent term, which expires in 2014. Global regulatory support for this product will be maintained for at least three years beyond that point. We also announced that seed company licensees would be extended through the patent period to avoid any confusion regarding access to seed supply from multiple sources.

Secondly, for Roundup Ready 2 Yield soybeans, Monsanto’s commitment to higher yielding next generation soy products remains clear, with an intangible 2010 seed class already emerging. And this will be broadly licensed throughout the seed industry as is our standard practice. This new product platform in soybeans will be the base for future products such as dicamba tolerance, healthy oils and our drought tolerance in soybeans.

And finally number three, it remains clear that seed companies may choose to sell either or both the original soybean products or the new generation, higher yielding soy technologies.

So if I step back and I think about where we are relative to what we expected in November, it all leads me to my final point, 2010 is a really important year. It’s the foundation year for SmartStax and Roundup Ready 2 Yield, and that makes it the foundation year for our operational plans. Given not all of our book as Carl has reviewed, I feel very good about the accelerated plans for both products. And since we don’t think of fiscal 2010 in isolation, but rather in concert with 2011 and 2012, we feel very good about our operational plans through the 2012 timeframe.

If I bring all of this together, let me tell you how I place this quarter into the context of the year and ultimately into the landscape of the progression towards 2012. First of all, these are early days. The year is young in Brazil and Argentina and hasn’t really started yet here in the U.S. Before the seed goes in the ground, there’s still a lot that will happen. That includes the usual annual pattern of games of trying to guess the total planted acres and the last minute switch-outs from corn to beans and then back again. But our broad expectations would suggest that corn acres bump up over 2009 levels to about 88 million acres and soybean acres are probably down a bit, around 75 million acres. We will certainly watch this, but we expect little impact on our three milestone targets, even if the acres do shift around some this year.

Certainly we’re off to a really good start. This as a year for execution for Monsanto is critical, and I can assure you that that reality isn’t lost on us. Our commitments are clear and the organization’s focused. If you cut through the noise that cluttered the late harvest, the reality today is that our sales teams are armed with game changers in the form of SmartStax and Roundup Ready 2 Yield, and that alone brings excitement and energy to all levels in this organization. And it gives me the confidence that we can deliver on our operational plans through 2012.

Finally, SmartStax and Roundup Ready 2 Yield become real case studies in innovation. I’ve always been very proud here at Monsanto that our scientists’ cutting edge but as Rob will always tell you, it isn’t science for the sake of science. Everything that we do is oriented around creating commercial value that’s tangible to our customer, the farmer. The SmartStax and Ready 2 Yield exemplify when you put the industry’s best R&D capability behind things that create real value for farmers that in turn creates real opportunity for our company and for our share owners.

It’s one thing for me to tell you that I’ve never seen our pipeline broader or deeper. I think it’s another thing to hear it from the team that lives it and sees it in the [inaudible] every year at this time.

So with that, let me hand the call over to Rob for our annual R&D pipeline update.

Dr. Robert T. Fraley, Ph.D.

Thanks, Hugh. Good morning and Happy New Year to everyone on the line.

Over the past few months we’ve shared a great deal of data with you on the path to 2012 and how the game changing technologies emerging from our R&D pipeline are the key enablers to that success. I’ve also shared a sneak peek at our pipeline and our long term prospects at Research Triangle Park in North Carolina last November.

But today is all about progress. And this year is particularly special, and I’m pleased to tell you that for the sixth consecutive year our biotech pipeline progress is accelerating. So let’s begin on Slide 11 and I’ll tell you I’m as excited as I’ve ever been for one of these updates. Simply put, our trait pipeline progress is flat out compelling and in our sixth year of doing these annual updates, we’re still establishing some important firsts that propelled this acceleration.

Let me highlight the ones that excite me the most. The first, 11 projects advanced phases in the pipeline and this is two more than we projected when we previewed this year’s pipeline in November at Research Triangle Park. And it’s in fact the single largest volume of project progress we’ve seen since we’ve been doing these updates. I think even more exciting is that five of the 11 are new projects, just being added to our pipeline from discovery, and I think that’s a testament to the breadth of the portfolio.

Second, we’ve had multiple advances in every phase. This is the most balanced advancement class I’ve seen. We had four projects enter Phase IV, three projects enter Phase III and three projects make the leap into Phase II. And just as importantly, these represent projects from all of our core crops and from platforms ranging from better yield to better weed and bug control to consumer oriented trait.

Third, our Phase IV advancement put us on track for some major commercial perks. In this class, we have our first ever trait developed for the international market. We’re also moving the first two biotech traits for healthier oils onto a commercial track. And with our SmartStax, refuge-in-a-bag concept, we have an extension of this blockbuster product in Phase IV before the first SmartStak acre is even planted.

Finally, while we won’t focus specifically on breeding, I’ll tell you that our breeding pipeline is really humming. You know just last month at the American Seed Trade Conference, the ASTA Conference in Chicago, we gave you the final corn breeding results and demonstrating once again our competitive advantage is expanding. Today we have one significant update and that is our cotton germplasm where again we’ve shown our next generation Deltapine and varieties are outyielding the best that we and the competition have to offer.

So you said it and I’ll reiterate it, our research progress is phenomenal. But what’s exciting is not that we have great research but that we can turn that research into great products for farmers. On Slide 12, you’ll see that this value translates into business opportunity as we launch new products and upgrade our mix. Specifically, you’ll see the value of our pipeline represents in 2020 farmgate sales, where we conservatively expect to generate $8 billion from our base biotech germplasm and disease pipeline. What you see is our science meeting agricultural needs and helping farmers around the globe improve their profitability.

So as we dig into the update on Slide 13, you can see how our progress this year maps out on our actual pipeline. A couple of the key points I’d draw your attention to. First you can see the volume and balance in the Phase movement I described in the orange bars. To put it into perspective, in the last two years approximately two-thirds of the projects on this chart have either been added or advanced. Now that’s the acceleration that I’ve described.

Second, we actively manage our process to make sure that the last dollar invested returns the same as the first. And to be fair, this year we removed a couple of smaller projects like high oil soybeans, which while compelling could not compete with the higher value projects.

Finally, we continue to make great progress in our yield and stress collaboration with BASL. However, as we sat down with the BASL team this year, we made the decision to keep all of the yield and stress projects in phase for at least another year of testing before new advancement. As you know, this was one of the wettest years in a decade, and frankly it’s hard to test things like drought and yield in a particularly wet year like we saw this year.

To put it into perspective, more than 75% of our drought tests had more than adequate moisture because of rainfall. And because field testing is an important validation point, and I think that this is really important, as the market leader we see an obligation to have robust data backing our performance before we make any product advancement.

So while we did not officially advance any yield and stress projects during 2009, we clearly added to our data set and expanded our pool of candidates, which you can see on Slide 14. The twofold increase of candidate genes compared to just three years ago fuels our joint pipeline with second generation product. And I’d highlight a couple of developments here.

First in the early phase projects like our nitrogen utilization corn and our higher yielding corn, the biggest advantage of the BSF collaboration is the identification of leads that will populate the successive generation of products in each family. In both cases, we identified and tested a significant wave of new leads this year that we’ll be evaluating in 2010 in the field. In fact, we have more leads in our yield and stress pipeline now than ever before.

Second, our most advanced projects, drought tolerant corn and higher yielding soybeans, made some important strides in their first year in the advance phases. Because these will be the first yield and stress projects we’ll commercialize, it’s worth sharing with you those updates. So on Slide 15 you can see the 2009 results for our drought tolerant corn. As our lead project in this family, this product is focused on improving yields under periods of water stress for low moisture markets such as the western cornbelt. Ultimately, this also builds the platform as we extend the drought family into water replacement and insurance opportunities across the cornbelt. So relative to the commercial track, drought one is in Phase IV and we have now completed 12 regulatory submissions this year.

From a performance standpoint, despite the excess moisture of 2009, our lead product performed well in stress [plats] as we expanded trialing into our elite germplasm. So we continue to validate the very best gene by hybrid combinations and are pleased with the continued strong results we’ve seen in our drought testing.

Likewise I think the higher yielding soybeans on Slide 16, where I’m struck by is the consistency in performance we’ve seen year in and year out. As we enter the era of yield focus product, a step change in performance will translate to a more consistent yield improvement experience on the farm. Higher yielding soybeans, which were advanced to Phase III last year, have added 2009 as the fifth consecutive year of strong performance, demonstrating an average advantage of approximately four bushels at 95 test locations. This represents the most significant near term soy yield product and we plan to combine it in the first soybean triple stack, with Roundup Ready 2 Yield and dicamba tolerant, offering U.S. growers unprecedented yield and weed control flexibility.

The opportunity to stack our yield to stress pipeline with our next generation agronomic traits is the perfect transition to the updates in our broader pipeline. So on Slide 17 we’ve highlighted the projects in our pipeline advancement chart that I’ve covered today. Now given the breadth of our research and the quality of the data we’re generating, there’s an awful lot to share and I’ll focus on just a few of the projects that advanced and ones that I think are particularly interesting from a data perspective for this year.

So when you talk about momentum and industry leading innovation, I don’t think there’s a better place to start than with our refuge in a bag enhancement, the SmartStak. That’s shown on Slide 18. Now SmartStak on its own is a blockbuster product because of the refuge reduction opportunity, but I tell you, and I’ve heard this echoed many times from growers, that I believe the refuge in a bag benefit might be even more eagerly anticipated by farmers. As you mentioned earlier, we crossed a major milestone for refuge in a bag or RIB, in just the last few weeks. With our partners at Dow AgroSciences, we made a full, regulatory submission to the EPA on a snowy day in December, putting us officially on the commercial track for the industry’s only 5% RIB product. And of course, this is now pending EPA approval.

As you know, farmers love the convenience allowed with a RIB product and that’s exactly why I think our two step strategy of gaining reduced structured refuge to 5% with SmartStak and then making our RIB submission was so important. Simply put, the best way a RIB concept works for a farmer without hurting his yield is to deploy RIB at a 5% refuge level. In particular, in a high insect pressure environment, the benefit of a 5% refuge product over a 10% refuge product I think is going to be obvious and that’s why we think it’s the best approach. So I’m pleased to tell you that our field testing conducted over the past three years confirmed the benefit as shown on the graph. At the 5% level, farmers see comparable yields to what they would have seen with no refuge. And I think this is a significant breakthrough. Growers are going to be able to experience fence row to fence row planting and that convenience without a yield penalty or the hassle of planting a separate structured refuge.

So if we move to Slide 19, we can see one of our early phase products in corn. Grower choice and continual improvement of efficacy is a core tenet of our portfolio strategy, and I think this is highlighted with our next generation of corn agronomic traits. Here I’m focusing on the advancement in dicamba tolerant corn, which will be launched as a triple stack with Roundup Ready and glufosinate tolerance. The photos here are really amazing as you see the improved efficacy and broader application windows at more than 2x the more application rate, giving farmers again expanded choice in weed control and more tools to handle difficult to control or herbicide resistant weeds.

The grower choice of agronomic controls is also seen in soybeans and our first biotech project for an international market is advanced to Phase IV as shown on Slide 20. Insect protected, Roundup Ready 2 Yield soybeans for Brazil will represent our first stack soy product and a huge step forward for farmers, eliminating two insecticide applications with this broad acre trait. As with the past several seasons, the higher yielding, bug protection generates huge yield gain including 11% this year under a year which had pretty medium insect pressure. And that advantage is recognized with the customers in Brazil. Even at this very early, pre-commercial stage, we’ve licensed 95% of the germplasm providers, giving you I think a glimpse of the strong interest in this hit project.

Our soybean advances don’t stop there. As we’ve added our two value added, consumer health platform soybeans, Vistive Gold and SDA Omega-3 into Phase IV. Both are important because they represent a glimpse into the next generation of biotech products that can bring direct health benefits to consumers. On Slide 21, you can see Vistive Gold, which will be the commercial product name for our Vistive III product. This will be our first broad acre biotech, oil improved product, and we’re now proving that Vistive Gold can provide food companies with a healthier, more stable soybean oil for frying and baking that contains significantly lower levels of saturated fat and eliminating trans fat.

And our food testing is bearing this out. In testing with french fries, Vistive Gold reduces trans fats to 0 and saturated fats are reduced by 48% versus traditional soy oil, delivering a significantly healthier consumer product and providing the food industry with a great tasting, durable product that is food label friendly. Again this is more than just lab work. In November we completed the regulatory submissions to the USDA for Vistive Gold, starting our final run before commercialization where this value added trait will be stacked with our high yielding, Roundup Ready 2 Yield platform.

One of the surprises of this year’s pipeline review is the phase transition of our DGT cotton on Slide 22. DGT is short for dicamba and glufosinate tolerant and this project advanced to Phase III after only one year as a Phase II product. DG cotton has demonstrated excellent performance again in the field in 2009 and we plan to launch it stacked with our leading Roundup Ready Flex product in our leaf cotton germplasm. DGT plus Roundup Ready Flex will offer growers the ultimate in efficacy, durability and flexibility for controlling difficult weed infestations, all with no yield impact.

So as I round out the biotech pipeline updates, we obviously didn’t cover everything that advanced, but I think that’s a further indicator to me that the progress we’ve made this year is so unprecedented that we can’t cover all the highlights in this session. And to that end, the head of our biotech team, Steve Padgette, will have a series of further pipeline updates next week that will provide more detail and more color and describe a couple of other research gems that will build on the update that I’ve given you this morning. I hope many of you will be able to join him in person either in New York or in Boston or via webcast for those updates.

So as we wrap up, I know there’s no advancement discussion that’s complete without an update on the graduating class. So on Slides 23 and 24, you can see the final yield data we’ve published for Roundup Ready 2 Yield soybean and SmartStax corn. Now Ted Crosbie and I shared this data with you at the ASTA meeting in Chicago in December, so I’m not going to go into great detail, but I think it’s really worth reiterating that both products are step changes in the value we offer to farmers and the yield data certainly supports that.

So for the last update, I don’t want to lose sight of the fact that our breeding pipeline is just as important to the commercial opportunity. Again, we’ve reviewed our corn germplasm for performance with you in December at ASTA, so Slide 25 only reinforces to you that again in 2009 our performance lead has extended. The yield advantage that we have, coupled with our industry leading dry down advantage, creates the most value on farms and places us clearly in a position to declare that our lead is expanding and our products give farmers the best opportunity to maximize yield and return.

Now I promised one further update and that’s on Slide 26, and of course while corn gets a lot of attention, our breeding efforts in cotton are also showing phenomenal results. You’ll see that the new varieties we’re launching in 2010 are consistently outyielding the competitors, they’re outyielding the class of 2009 varieties we had in the marketplace this year and I think perhaps most importantly they’re outyielding Deltapine’s famous Triple Nickel variety. And so with performance like this, what we’ve seen in our breeding program, I think we’re entering really a new era where cotton growers should be able to see the same steady yield improvement from breeding that has become expected in corn.

So if you move to Slide 27, I can summarize how I think about the pipeline and our opportunity. First, what we’ve seen over the last decade and a half of biotech is really just scratching the surface of this business opportunity. Our biotech pipeline, our breeding gains, the stacking possibilities with all these traits have the opportunity to revolutionize agriculture once again.

Second, the pace of change is accelerating along with the pipeline. New genotyping methods and high through put sequencing are going to open doors to predictive breeding and new types of biotech gene discoveries. And I think we’re just at the beginning on the fringe of understanding that.

Third and perhaps most important, all this leads to productivity gains for our farmer customers to meet the ongoing challenges of doubling yields and increasing on farm profitability. I think it should be clear that our pipeline isn’t standing still. If you move to Slide 28, we are advancing and launching solutions for the farm in a record pace and truly reducing research to practice across a broad spectrum of crops. 2009 was a phenomenal year, with two blockbuster products set to launch and a record 11 biotech advancements. But as I’ve said many times, we’re really just scratching the surface of the potential for our science and the farmer solutions they create.

So thanks for your time. I look forward to seeing you with the teams next week. With that I’ll turn it over to Bryan for Q&A.

Bryan Hurley

Great. We’d now like to open the call to your questions and 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 with that, Rob, if we can open the line for questions, it would be great.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Kevin McCarthy - BofA Merrill Lynch.

Kevin McCarthy - BofA Merrill Lynch

First question for Carl on corn seed, your gross profit there declined nearly $100 million or about $40 million more than the sales decline. I was wondering if you could elaborate on the reason for that and comment on to what extent if any you experienced some deferral of sales into the second quarter given the late harvest in the United States.

Carl M. Casale

Thanks Kevin. Yes, I think if you take a step back and you just do the year-on-year comp for the quarter, you know the quarter is exactly $1 less than it was last year, $0.90 of that $1 is Roundup, a dime of it is basically corn because it’s Latin America. If you take that dime almost exactly half of it or a nickel is basically a business model change that we implemented in Mexico. Traditionally we ship seed basically in the fourth quarter to third party warehouses and then we would basically ship it out to our distributors in the fiscal first quarter. And the business model change we made down there is we now ship directly to distributors in the fourth quarter. So that benefited Q4 ’09 and then since it’s a structural change in the business, that’ll benefit us again in Q4 in ’10. Thus that’s a timing issue but not 1 to 2; it’s basically 1 to 4.

The other nickel’s basically just a reduction in acres that we saw in Latin America and Brazil and Argentina. You know we really like what the mix did down there from a trade standpoint but we’re just soft on the acres down there and so that’s basically where the other nickel went in the first quarter.

Kevin McCarthy - BofA Merrill Lynch

Carl, did you have any 2Q versus 1Q timing issues in soybeans?

Carl M. Casale

We’ve seen a little bit of shipment movement from 1 to 2 because of the late harvest, but that would’ve been more reflective on beans than it would have been on corn, Kevin.


Your next question comes from Jeffrey Zekauskas - J.P. Morgan.

Jeffrey Zekauskas - J.P. Morgan

Can you remind us about your aspirations concerning market share gains and soy and corn in the United States for the coming year?

Hugh Grant

Yes. We said in our DEKALB brands we were shooting for a 1 to 2 point gain this year, Jeff, and in soybeans I think we were looking for a 1 point gain.


Your next question comes from David Begleiter - Deutsche Bank.

David Begleiter - Deutsche Bank

Hugh and Carl, on SmartStak is the pricing that you put forth back in November, $130 for acre, is that being realized or is there some discounting going on to get the 4 million plus acres launched?

Hugh Grant

Thanks for your question. It’s being realized. I mean its 4 million acres, so it’s a pretty small base this year, but it’s being realized. I think the encouraging thing in SmartStax and Carl made the point in his opening remarks, I’ll maybe ask him to expand on it, we’ve half of the product placed before we even had the hybrid selections in place. Carl, I don’t know if you want to talk about that, just the significance of it.

Carl M. Casale

Yes, the demand is strong and bear in mind you know at 4 million acres we’re targeting the early adopters for the technology, so you know the pace of orders that we see on SmartStax is very consistent, David, with what our expectations are. So we feel good about the 4 million acres for the year.

David Begleiter - Deutsche Bank

Are you seeing any further discounting by other competitors, more or less aggressive than last year in corn seed?

Hugh Grant

Early days but nothing much to report.


Your next question comes from Mark Connelly - Sterne, Agee & Leach.

Mark Connelly - Sterne, Agee & Leach

A question for Rob, with respect to the weather stress issues, does this decision not to advance things given the weather we’ve been experiencing, does that put you at a risk that we might lose an entire year in bringing those products to market? I mean it sounds like a lot of, you know, good things are still going on but do you need to see a lot of stress and if we don’t get it it’s going to postpone those products?

Dr. Robert T. Fraley, Ph.D.

Well, it’s obviously hard to assess drought stress and some of the yield traits with the kind of, you know, weather. I mentioned on the drought. We could do all of the tests that we want to in the growth chamber but we’ve still got to get it out in the fields to identify the commercial lines and [fit]. Yes, obviously this was a tough year. As I said, 75% of our drought trials had too much rain and too high of moisture for stress, but you know this was an unusual year. This was probably one of the most unusual agricultural years I’ve ever seen, so I don’t expect that to repeat, and we’ve also taken actions to further expand our field testing for this year. So I think we’ll be in fine shape.


Your next question comes from Vincent Andrews - Morgan Stanley.

Vincent Andrews - Morgan Stanley

Carl, you know there’s no segment gross profit guidance in the slides and you made some comments about things moving around a little bit, so I’m just wondering if you can expand on that particularly as it relates to corn and soybeans.

Carl M. Casale

Sure, Vincent. You know as we look at specifically corn, you know we were expecting some upside from mix and acres in Latin America and we lost that with the decline in acres. And basically we’ve already talked about the increase in COGS that we’re going to see this year in corn due to the winter nursery costs associated with SmartStak, so, you know, it’s early. We lost one offset so you know we’re not willing to say that margins are going to be off on corn because we need to see what’s going to play out with the majority of the market. But you know that is a possibility, but you know we’re off basically the nickel is 1% of our total gross profit that we’re projecting for our season genomic segment for the full year. We’ve virtually the entire business to go.

So our experience has been when you have a portfolio like we do, the upside and downside tend to offset each other and we might see some potential upside either in corn, veggies, cotton or beans that could potentially offset, you know, any decline that we may see, although we don’t know yet that we would see it in corn. So in aggregate, while there may be some shift around, we think we’ll be fine on margin and mix for the year, in aggregate.

Vincent Andrews - Morgan Stanley

Just to understand paraphrase that, you’re basically saying you’re missing $0.05 worth of gross profit in corn, everything else is tracking in line with the previous expectations, then there’s a possibility that the corn business itself in the rest of the year would make up that $0.05. Is that correct?

Carl M. Casale

The corn business may in and of itself do it, Vincent, and if we don’t see it in corn, certainly with the size of the business and the mix in the portfolio our expectation is it would be made up elsewhere.


Your next question comes from Lucy Watson for Laurence Alexander - Jefferies & Co.

Lucy Watson for Laurence Alexander - Jefferies & Co.

What are your expectations for average selling prices this year in corn and soy?

Hugh Grant

It kind of ties to the earlier question on, you know, how have we seen price in SmartStax. You know so far so good, but it’s still early in the season for competitive price and pressure. Usually you see tumultuous pricing activity as we kind of grind towards the planting season. But I’d say at this stage, with the price sheets that we’ve sent out and the order flow and the progress in all of our book, Carl, we’re tracking pretty much on plan.

Carl M. Casale

Yes. And we feel real good about the pricing we have in the marketplace right now because our order book isn’t tracking against, you know, what we would expect on the late year. It’s tracking against what we’d expect to see in a normal year, so that even gives us more confidence that our pricing is where it needs to be.

Hugh Grant

Yes, that’s a good point.


Your next question comes from Christopher Shaw - Ticonderoga Securities.

Christopher Shaw - Ticonderoga Securities

I want to ask about glyphosate Roundup and I guess particularly in South America in the quarter but I think it’s more broadly. I mean have the volumes been picking up yet due to lower prices or is it just sort of volumes are somewhat similar or have we seen any increases yet?

Hugh Grant

I’m going to say a few words and then ask Carl to comment on a little bit more detail. But I’d say we’re tracking pretty much exactly on plan. Our pre-fills in the U.S. would be, we’d be encouraged with the [type] that we have seen in pre-fills, genetic cleansing, so all the old, cheap stuff is still flushing through the system Chris, but we said you know price bands at $10 or $12 and we’re tracking right inside that band $12 range. So early days in the northern hemisphere but I’m encouraged by what we’ve seen there. Carl, do you have anything to add?

Carl M. Casale

Yes, I think if you think back to what the original strategy was that we laid out last fall we said we’d get our price right relative to generics and then we would basically put one time price incentives in place to restock our position within the distribution channel. And that’s exactly what we’ve seen occur. I mean our customers have bought into this strategy, which despite the fact that we’re still seeing depressed generic prices because the inventory hasn’t fully cleared, you know, with the incentives our distribution system is restocking us with the knowledge of what those generic prices are. So volumes are moving as we would have anticipated, given what the plan was. We feel real good about it.


Your next question comes from Donald Carson – UBS.

Donald Carson - UBS

Rob, a question on breeding and how it relates to biotech. On Slide 12 you know you outline a revenue opportunity between breeding and biotech by 2020 and you know germplasm contributes almost as much value as biotech. Two questions there. One, in the near term can we expect an acceleration in the number of hybrids that were developed through molecular breeding? And if so, would that lead to an acceleration in your yield gains versus competitors? And just in terms of how you quantify the split between these two, on a product like SmartStax where a lot of the benefits coming from improved genetics, does that all show up as a biotech revenue opportunity or are you splitting it with breeding?

Dr. Robert T. Fraley, Ph.D.

Don, thanks for the question and greetings in the New Year. You know basically what we’re seeing is the acceleration of yield as a result of the mapping and sequencing technologies that we discussed pretty extensively in North Carolina. And basically the value reflects in terms of incremental yield and incremental share, both domestically and internationally, as a result of the enhanced germplasm performance. So it’s not a double count with the trade. It’s incremental to that performance.

Donald Carson – UBS

Just as a follow up, I mean you haven’t had many products come out of molecular breeding yet. I think corn was less than 10% last year.

Dr. Robert T. Fraley, Ph.D.

You know we started our molecular breeding efforts about six or seven years ago and we’re just seeing right now the very first of the molecular breeding based hybrids working their way through the pipeline. And that’s going to accelerate, you know, prolifically here over the next several years.

Donald Carson – UBS

And so would you expect your yield gains versus competitors to accelerate as well or?

Dr. Robert T. Fraley, Ph.D.

Yes, I would expect our overall yield gains to accelerate, you know, based on the briefly enhanced predictability of hybrid and variety selection and the use of all our automated tools in the breeding cycle.


Your next question comes from P. J. Juvekar – Citi.

P. J. Juvekar - Citi

A question on double stack and triple stack, first on double stacks how many acres of double stack [pro] with refuge [reduction] do you expect and the same question for triples?

Hugh Grant

Yes, so on the double, P.J., it was really a test market for us this year. It was a probe or live market research, so we had the gorgeous opportunity of putting some doubles out there that had refuge reduction. And we put them in some of the boundary areas where we had seen share erosion. On triple stacks, I think we were in the region of about 30 or 31 million acres in this season. So that’s a lot more substantial and as Carl mentioned in his comments, order book is tracking well and it’s tracking particularly well in the end of a wet season. So I think the VT Triple Pro story has been extremely positive and very strong feedback. Doubles, early days. I’d treat that more as real time market research and we’ll decide how much of that we do next year based on how this season shakes out.

P. J. Juvekar – Citi

Just as a follow up, specifically has there been any price competition in the fringe area that you mentioned which is where you are targeting this double stack product?

Hugh Grant

I’d say nothing beyond normal but it’s all still a [inaudible]. Here’s how I frame it, P. J., versus our price sheet, particularly as we’ve been placing these new technologies, we’re seeing the season play out as planned. But I’d feel a lot better if we had another six or eight weeks under our belt, but I’m encouraged for the early movement.

P. J. Juvekar – Citi

And just a quick question on Roundup, you know with all the cost saving that you had announced with headcount reduction and all that, Carl, you didn’t see much operating expense reduction. There was a $25 million reduction but it wasn’t big. I was wondering why you aren’t seeing more cost reductions come through to the bottom line?

Carl M. Casale

I mean it’s the pace of basically those reductions hitting against the restructuring, P. J. but when we look at it in aggregate from an SG&A standpoint we’re on plan within the business.


Your next question comes from Mark Gulley - Soleil - Gulley & Associates.

Mark Gulley - Soleil - Gulley & Associates

I know sometimes you’re unwilling to dive into regulatory issues, but I want to try it anyway on refuge in a bag. Given the December submission and given the normal pace of regulatory approval in the past for similar products, when might farmers see refuge in a bag from Monsanto?

Hugh Grant

Yes, you’re right, we’re always reluctant to speculate on regulated timelines because you know you’re depending on an agency, but maybe I’ll ask Rob just to kind of ballpark how he sees reg coming through.

Dr. Robert T. Fraley, Ph.D.

Thanks Mark. So as I said we just made the submission, Dow and Monsanto made the submission in the last part of December. You know given the typical timing for EPA reviews, you know, my anticipation is we have a decent shot at 2012 for refuge in a bag, but it all depends on the regulatory review process and the EPA timing.


Your next question comes from Peter Butler - Glen Hill Investment Research.

Peter Butler - Glen Hill Investment Research

Hugh, a couple of years ago you made the statement that we’re just now seeing the tip of the iceberg on research technology developments and I’m wondering how you see it now, now that you’ve got the Smart Stack under way and the Roundup Ready 2 Yield. Are we seeing more of the iceberg or how do you see it?

Hugh Grant

I think we’ve seen a fragment of the iceberg breaking off and kind of drifting in commercial reality, which is really encouraging. You know for a technology company to have two blockbuster products out there in launch in the same year is a big deal. So I’m very pleased with the graduating class. I think the best is still ahead of us in terms of yield improvement and I’m going to ask Rob to say a few words on how he sees the iceberg now that we’ve got the first two graduates out there.

Dr. Robert T. Fraley, Ph.D.

Peter, good morning. We’re seeing more than the tip of the iceberg but I think the other thing is the iceberg is getting a lot bigger because you know the power of our breeding engine with all of the markers and moving to sequence based breeding is going to, you know, really drive the acceleration in yield and breeding even farther, faster than we can do with markers. On the biotech side with the collaborations and the deals and the partnerships, we’re looking at more genes than ever before. You know I mentioned in the call that we now as a result of the BASF collaboration are testing more yield and stress genes than we ever have.

And I think to the point that we covered a little bit in November, you know, SmartStax is barely out the door when we’re looking at the next rendition of refuge in a bag. And I laid out really another whole series of next generation bug and weed control products in corn, so I think we’re still very much at the beginning of this technology cycle from both a breeding and a biotech perspective and that’s what I think makes this such an exciting time for the company.

Peter Butler - Glen Hill Investment Research

Looking at China, they appear to have a super ag macroeconomic story, but they also have high barriers to entry from Monsanto and other multinationals. I’m wondering is there any room for collaboration with Chinese companies like Origin Agritech? These guys seem to be the leader in seeds and traits in China and I’m wondering is there any room for you guys to do things together?

Hugh Grant

I haven’t looked at them specifically. We’ve formed partnerships with other Chinese companies. We’ve just announced an investment in a major R&D facility in China in the last month. And I think the encouraging thing that we see, it will take time, but the encouraging thing is in the run up to the winter break as China green lights biotech plantings. And I think strategically that makes a big difference on how the country sets up for the future and how they secure food production domestically, Peter, so I think it’s going to be about partnerships. I don’t know Origin, but we’ve built partnerships with a number of companies over there.

Carl M. Casale

Yes, we just opened this fall a very sophisticated R&D lab outside of Beijing and put in place our partnerships and relationships with many of the Chinese research institutions. And you know we clearly see an opportunity to share information genes and value and look forward to building on those opportunities.

Bryan Hurley

And Rob, this is Bryan, I think in order to be respectful of everyone’s time and our commitment on the timing of this call we probably have time for one more question before Mr. Grant’s closing remarks.


Your last question comes from Robert Koort - Goldman Sachs.

Robert Koort - Goldman Sachs

I have two real quick questions. First, I was trying to reconcile what happened down in South America. I understand acreage was down maybe 15% in corn, but the penetration for biotech went up dramatically, so just trying to get a sense of how big that business in in the prior quarter here. Because I would have thought maybe you’d fared a bit better with that penetration lift.

Bryan Hurley

If you take a step back and you kind of think about the acreages there, you know, you’re leading one there is Brazil and that’s where you’ve made some significant advancements in a first generation trait, but if you look at where we’re really highly penetrated in the double in Argentina that’s actually a pretty small acreage. And you see both reductions in Brazil and Argentina in each of those planted areas, and that probably offset some of the upside that you would have seen from the trait penetration in total.

Robert Koort - Goldman Sachs

And then Carl, should we read any tea leaves from the balance sheet the deferred revenue line? Because I noticed it was down about 40% year-over-year. Is that a leading indicator of any sort or why would that be so different relative to say November ’08?

Carl M. Casale

Yes, I think the biggest driver of that is change in timing on pre-pay, Bob, from a cash standpoint. That’s what you’re looking at.

Hugh Grant

Thank you very much. So let me thank you. This is generally an extended call because of the pipeline update, so let me thank you for your patience and again wish you and your families a Happy New Year as we enter 2010.

As I mentioned earlier, some things have changed since we met in our bi-annual Investment Day and a whole bunch of things have not. So against that backdrop, let me sum up how I’m thinking about the early days of our 2010 fiscal year, and then the three year progression and the run up to 2012.

As I mentioned earlier, it’s about execution. There’s work ahead of us as the early days, but I feel very good about where we are, given our position with the order book in the U.S. The operational plan is strong and our progress against the early milestones that really matter will allow us, Roundup or SmartStax or Roundup Ready 2 Yield, they give me the confidence we’re turning that plan into an actual reality. So if the path to 2012 is about execution, the road beyond ’12 is all about innovation. And I think as Rob has shown again today, that innovation isn’t just continuing but as we commented on its actually accelerating. So I think today we’ve laid out that path and the early milestones allow you to view our business as we do, focused and confident on our path through ’12 and enthusiastic about our continued longer term opportunity.

So with that I wish you all the very best in 2010 and look forward to catching up with you in the new year. Thank you.


This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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