Bryan Hurley - Director-Investor Relations
Rob Fraley - Executive Vice President and Chief Technology Officer
Pierre Courduroux - Senior Vice President and Chief Financial Officer
Sam Eathington - Vice President of Global Plant Breeding
Tom Adams - Vice President of Chemistry Technology
Don Carson - Susquehanna Financial Group
Mark Connelly - CLSA
John Roberts - UBS Securities
Michael Piken - Cleveland Research
Duffy Fischer - Barclays
Paul Massou - Stifel
P.J. Juvekar - Citi
Bob Koort - Goldman Sachs
Kevin McCarthy - Bank of America Merrill Lynch
Monsanto Company (MON) Biennial Investor Event-Day 2 (Transcript) November 7, 2013 10:00 AM ET
Welcome. We will begin shortly so please take your seat. Before we get started, we would like to share with you some commercials for Monsanto’s upcoming America’s Farmers Campaign.
Unidentified Company Representative
Good morning and welcome back, well this is the official beginning of the webcast. But again let me give a little bit of the logistics before we get rolling on some of the more interesting content today, just a little bit of background there, this is the America’s farmers campaign that Monsanto is running. These are actually commercials that we’ll start running Thanks Giving so this is the first time really a big group like this has seen those commercials you’ve heard this initiative kind of referred to by a couple of the growers last night and Brett mentioned it as the part of his presentation yesterday morning the best part of our outreach to support local, rural communities and the farm communities that our customers live in.
With that let me kind of get things rolling today. I will again take care of those the required stuff before we get to the interesting stuff. Again we are in to the R&D pipeline so we are exclusively forward-looking at this point. Our forward-looking statements and our non-GAAP reconciliation information continues to be on the website and in the binders that you guys have as well.
With that, what we’ll do today is we’ll cover some of the R&D pipeline. We have a panel of some of Rob’s leadership teams some of the leaders from our technology organization here we will kind of wrap everything together in how this translates to the financials opportunity here in the near-term and over this expanding mid-term opportunity. And then we will wrap things up. As we wrap things up we’ll actually split because there is some people are headed home and some headed to our research facility. When we get to that I will come back and let you guys know how the buses and everything work from there.
So with that why don’t I introduce our Chief Technology Officer, Rob Fraley and we’ll get rolling.
It is the second time I saw those ads and yeah, I really, really like them those are pretty cool. Good morning everybody. You survived last night? Good. It’s a good evening. I thought yesterday was a pretty terrific day and it’s really cool, and you can have an event like and all in one time look at both the commercial strategy and our products and our customers and our folks. So those pretty unique, we are going to do the same thing today from the R&D side and hope you see it is going to be worth your time.
So what I plan on doing is covering our pipeline, I want to cover some of the project highlights in the pipeline. I am going to talk little bit on the yield performance and then we are going to have our research panel, some of my key R&D leads, and then finally Pierre is going to translate all of this and tell us what it means financially.
I know that our several of you are going to sign up and do the tour of Chester Field village. We are going to all be out there, it should be really great tour. I know the team has worked really hard at it and I appreciate by doing that.
I would like to just start with a couple of minute and just introduce some of the technology team that’s here and I think most of them are over on this side. So Calvin Treat is our soybean lead. I knew what is going to happen. Fong Tang, cotton. Fong stand up, come on. Alright there she is. Tom Adams, new biotech lead. Sam Eathington is right up there, breeding. Phil Miller, who leads our global regulatory function; David Fischhoff, Chief of Staff; Ted Crosbie leads the IFS; and John Chambers. John? He is over here. John leads corn. And two of them it’s Stanley. Gerry, right? There he is Gerry Ellie. Great.
So, just wanted to identify the folks and let you know who is here. So, I think as I look back it went on the records and this is the sixth biannual event that I have had a chance to participate in and in many ways, I think it's the coolest and most exciting from an R&D perspective, because the next 35 minutes, I'm going to talk to you about more platforms and more projects and more technologies than we've ever shared. But in all of that, I wanted to make the clear point upfront that the core seeds in traits platform is absolutely the foundation to our business. And whether, we're looking at our breeding capabilities or our gene discovery, in agronomic in yield and stress traits, that's the key. But increasingly I'd say the new opportunities and the new platforms layering on top of that and adding dimensionality and a system approach. And I think the bottom line is that these will help us to further extend our lead and it’s going to give a breadth and our commercial team more products and more tools to move us forward.
So, I thought, I'd start with a little bit of background and philosophy. And a couple of years ago in these meetings, I really introduced for the first time the concept that we're starting to see the conversions of biology and information in agriculture and on the farm. And I think, when you look at the accomplishments of Ted and his IFS team and I just take ten seconds and just acknowledged. And Ted has been doing this for three years and has really led the intellectual effort on the IFS platform and it was really a key driver in both our precision planning and in The Climate Corp deal and I just like to acknowledge really the innovation that he has brought to that.
But I think when you look at what the IFS team has done and what The Climate Corporation capability builds on that, I think basically the combination of the biology and the information technology has absolutely the capability of being a transformational platform for us. And as you've heard yesterday, these tools, these decision tools are going to help us not only manage variability and risk but this is going to drive yield and it’s going to give farmers I think particularly important tools when we think about the volatility of climate change and what’s happening around the world.
So there is obviously a lot of opportunity here and a lot of value and as we've talked about from both the time of planting and each of those 40 decisions all away to harvest there is an opportunity to make better decisions and put more bushes in the band. And I think at a high level these tools really differentiate Monsanto. I don’t think there is anybody else who has more capability and more ways to address benefit to farmers across more crops and more regions, so that’s an exciting part of the business.
So before I really get into the pipelines and some of the performance highlights, I’m just going to maybe kind of summarize what I think the big takeaways are. And you've heard a little bit about this yesterday but the pipeline is definitely expanded. We've increased the value of that new pipeline up to about 25 billion in peak sales opportunity and I’ll have a bit more to say about that in a second. One more time that this innovation period that we are in that really intersects biology and information, really creates the opportunity to unlock a lot of new platforms in both the IFS and biologicals really depend on that. And finally, I think as you take a look at what we've laid out, we’re extending our competitive advantage and we have, I think the deepest, and the broadest and the most integrated R&D pipeline and it’s all focused on improving yields and productivity.
And as always at this point, the bottom line and we have heard about the bottom line last night from a couple to grower is performance. And I am going to share with you some of the early harvest results that are coming in, and again that really is the proof point on our competitive advantage.
So I’m going to take a slide or two and just talk about the pipeline in general and I might be biased on this, but I’ve got Pierre right here following me, who is going to certify anything that I say here. But I am really excited about the pipeline and the value in return that we are getting on our investment. And if you, you look at last five years and you take a look at the risk adjusted value of the pipeline, it’s increased about 30% and we've reached a value now of about $25 billion peak sales.
And as I talked about in the Q&A session yesterday, there is really three drivers of that increased value. One of them is would have been very successful in advancing projects through the pipeline. As they mature, their risk profile reduces and their value increases. So we simply have more layer stage projects in the pipeline.
The second piece is there is global expansion of the pipeline. So that breeding program that had largely a few years ago focused on corn is now creating value across the Americas, Eastern Europe and soon Asia and we’re seeing a multiplier effect on a number of our technologies and then finally the new platforms. The new platforms whether it’s biologicals or IFS are not creating product concepts that are creating value that are incorporated in the pipeline. All told there is about 70 projects that are moving forward that expand a number of crops and meet grower’s needs for yield in different ways. About half of the pipeline value you can see is yield and that’s consistent with the fact that about half of our R&D spend is on breeding more width of our breeding.
And then last part of the pipeline story is just to remind all of you because I know some of you are a bit new to following a company is we have employed a very, very disciplined portfolio management tool that actually begins before each project is commissioned and every single product in the pipeline is evaluated at least once a year to make sure that it meets the financial and performance criteria. And the bottom line of all that is that that process ensures that we’re investing and we are putting our dollars in the right place that we are getting the bank for the buck for our R&D investment. And if you take a look at the left hand side of this slide, you can see what our historical R&D spend has been and that’s tracked at about a 9% CAGR, on the other hand if you look at the green bars that are going up, you can see that the value of our seeds and trades of growth rate is been about an 18% CAGR and I think that reflects a pretty nice return on the leverage of our R&D investment.
And then as you look at the right hand side of the slide, again because of the process reviews and the disciplined it’s entailed I feel very good that our dollars are moving and investing in those project that generate the kind of return that we expect and you can see many of the projects are targeted at I think the risk reward balance on 100 million acre plus our opportunities and projects that are well above our cost of capital.
So let me now jump into the pipeline, this is a new format that we have incorporated that really is based on the system’s approach to technology. And I am going to start with corn and it really steps the theme and the structure for the rest of the crops. And I think from a very practical perspective, the best way to think and look at this pipeline is to the lands of the grower and really the grower benefits that we are providing. And that’s what we have tried to layout here. So you can see yield and insect control and weed control as the targets.
And the first thing that I would highlighted is that this is really a systems approach and we probably are little bit less focus in the single technology than we are about what the combinations of this approaches and tools can provide both as value and differentiation. And in fact I think as you go into the future, I think you will see that the companies that are going to be really successful in this space, so the companies that are bringing multiple technologies to the grower. And whether they are combining that technology in the seed, on the seed, in the field that's where we see a lot of the benefit coming from. And I don't think anyone is better position to do that.
And then the final point is that you can see the types of projects and I think this the pipeline approach gives u a summary of both the value and how the value is split across the crops and targets and products and technology. So, that's the snapshot of our corn pipeline. We have a very similar focus here in format for soybean and it's laid out exactly the same way. And again you can see that we have a large and diverse set of yield insect weed and disease control products that are under development and advancement in the pipeline.
So, yesterday in the commercial presentations, you heard a lot about some of the key new soybean products that are transforming our opportunity. And both Brett and Mike talked about this has been the decade of the soybean. But actually when you go into the soybean pipeline and you look at the next generation of blockbusters and upgrade opportunities, we have potential with many of these new products to build growth and soybean well beyond that. So I'm going to have to get these guys to maybe rephrase that and talk about this has been the decades of the bean. Because I think this will carry us with next generation of intact and extend for many, many years of growth in the soybean platform.
Finally, you can see here some of the other crops that we have in our portfolio. We continue to invest appropriately in cotton, in vegetables and in other crop opportunities, again using a balanced biotech and breeding approach for these platforms and you can see some of the individual trades.
I'll tell you that I think the investment in the vegetable R&D, particularly the molecular breeding the sequencing the chipping technology has made incredible progress. And I think you’ll start to see the differentiation in those seed products and I feel very good about the potential for our R&D there to create differentiation and value to both vegetable producers and consumers.
And then the last broad pipeline slide, it’s pretty exciting because it’s outlined all of our brand new platforms. And I think this is pretty cool when you consider it was only a couple of years ago that we started talking about adding a biologicals platform, adding an IFS platform. And now as you look to the slide here you see that we have about 10 projects that are emerging from these areas across Precision Ag and across the biological space and again I think that reflects the breadth and depth of the new technologies and that the science is translating into projects and products for the future. And I'll cover several of these in detail later on in the presentation.
But now I just want to shift gears for a few minutes and focus on our 2013 field and yield performance, because in the end I think this is the key and the biggest proof point on how all of the science and technology and the pipeline data generate the results that he will move our business forward. And this is as you know we generate tens of thousands of data points to put us in a position to make the decisions on product advancement and to position those products with growers.
And to put in perspective, you are all aware that last year, a dry year, we had a early harvest this year, wet spring, a late harvest, but we’re still, we’re getting data in. I would say that we have about half of our breeding data in from crops from across the US and the results are really exciting.
So let me start with our DEKALB performance, which I would tell you right now looks like this could be the best overall yield year we've ever seen for our DEKALB genetics. We’re looking to all the data comes in, but that's what it’s shaping up at this point, probably the highest yields we've ever seen with our DEKALB germplasm.
And then the second important point that falls out from that is our results indicate that the performance of DEKALB relative to the competitors with about half the data in looks outstanding. We’re seeing about a 70% to 75% win rate in those head-to-head test and we’re seeing a yield advantage that's within the seven to ten bushel historical range that we have seen. And I’ll share just a little bit more data on that point.
Secondly I would tell you from a soybean perspective, the performance, the very strong, the blockbuster performance around up ready to yield this year has been absolutely terrific. And then finally a couple of the products have really differentiate themselves DroughtGard performance I will talk about and our FieldScripts results look very, very promising.
So that’s kind of a quick headline in terms of what we are seeing coming in from the field. Now let me dive just a little bit deeper into the corn story and just make the point I am really excited and pleased with our corn performance this year. So it is contrast from last year’s low yields to this year’s record yields. If you look at the orange bar you can see where we are tracking versus historical average yields for our DEKALB corn hybrids. And as I said right now they are on track to be the highest yields we’ve ever seen from the performance of DEKALB genetics.
And the advantage this year that we see DEKALB even in a very good year where everybody’s performance is up, the rising tide is clearly lifting all the boats that differential advantage is in the same seven to ten bushel band that we’ve enjoyed for the last decade. And I think it’s really important to emphasize that this is more than just research data. This is really the data that drives the opportunity and really drives our customers’ decisions.
And you heard that last night I mean the line that I love the relationships, but for two bushels I am going to change my product. That’s how growers look at this data and information. And I think that’s why the consistency of that performance and that yield advantage is so key because is that trust in the relationship that encourages growers to use those new hybrids and enjoy that yield advantage with the new materials that gives us the advantage with the DEKALB brand and gives us the benefit of being that performance leader.
So if you take a look at the performance advantage, this is really the core of what give us the ability to upgrade our portfolios around the world. And I always talk about that as the hidden blockbuster in the company it’s the performance of that new wave of genetics that creates that yield advantage over the products that replaces that give us the ability to replenish that 10% to 20% of our portfolio every year and giving growers the absolute opportunity for the best performing highest value hybrids that they can plant on their farm.
Now the last thing I just want to mention as we go into the corn yield is this is the US data. And the results that we are seeing coming in from the breeding across Europe, across the Ukraine is very exciting and we see very, very strong germplasm performance that is gaining that 7 to 10 bushel yield advantage in the major corn areas around the world.
I would take a couple of more cuts at corn and I wanted to highlight DroughtGard performance in particular. And we have emphasized with our DroughtGard technology a system approach based on the selection to our breeding program of drought-resisted germplasm, the use of our DroughtGard biotech trade and then many of the agronomic IFS type recommendations that would go with the enhancement of the performance of these hybrids.
Now if you recall DroughtGard was in our ground breakers last year, so 2013 this season was the first year of commercial planting of DroughtGard across the Western Corn Belt. And I think it really reflects one more time on the value of ground breakers, because the things we have earned in hybrid positioning, the hybrid selections and the yield benefits carry really right through to our first year of commercial sales.
And if you look specifically at the advantage that the DroughtGard hybrids provided versus the competitive Drought products offered by others in the industries, you can see the results from our 2013 testing. We saw about a five bushel yield advantage for DroughtGard, which again was just about what we had seen with the ground breakers last year.
So we're really pleased with these results, you heard from a couple of the growers last night about use the technology, water management is key yield under drought conditions as key. And then importantly the progress and the ability now to move this technology geographically will be important for us.
So if there is a key message here, I think it's across the industry. Everybody talks about the drought tolerance and breeding for it and they make a lot of noise about their hybrids from a marketing perspective. We actually compared our DEKALB germplasm against all of the leading competitive drought hybrids that are on the market today. And you can see that we have about a 7 bushel yield advantage for DEKALB germplasm versus the competitive drought hybrids which I think it just comes back and points to how powerful our advantage is when we talk about the combined biotech breeding and agronomic approaches that system approach to the grower.
So the corn story I think is very exciting and as we have our panel, I probably have Sam talk a little bit more about what’s going on with the international part of the corn breeding story. But, let me move into soybean and here the yield advantage is just as compelling. There is certainly no drop-off in that yield story when we get to soybean. If you look at the trend you can see that we've historically absorbed a four bushel yield advantage of the Roundup Ready 2s compared to the Roundup Ready 1s. And the fact basically the advantage has driven the Roundup Ready 2 platform to be pretty much the platform at this point that everyone is migrating to in the industry.
And you can see that this year just like in corn if you look at the dark green bar, our yields are high and so is the rest of the industry, but our yield advantage is still about four bushels advantage over the competitive products. So even in a year where all yields are high, we're delivering more yield than anybody else. So I think this year really establishes Roundup Ready 2 Yield as the platform for the industry. You can see that we've now positioned Roundup Ready 2 on just about half of the soybean acres in the United States at 43 million acres.
And I think the next question at this time becomes how does Roundup Ready 2 and our genetics compare to the rest of the industry. And you can see on the right hand side that the Asgrow varieties with our Roundup Ready 2 Yield technology outcompeted the competitive Roundup Ready 1 and Roundup Ready 2s of the rest of the industry again by about four bushels, which really reflects I think the strength of the breeding program and reflects the fact that all of the things that we've talked about, the gene mapping technology, the sequencing technology, the use of chippers has really paid off in terms of our basic investment in soybean germplasm and soybean breeding. And this has created a very attractive commercial opportunity for us in the US. We've had a very strong volume year in soybean this year, with share growth and I think you can see why. And we’re taking many of these same tools and approaches to support the breeding efforts in both Brazil and Argentina as we support the Intacta launches there.
So I think when you think about the pipeline, we clearly see it having the capability of driving the business well into and probably pass the next decade. And it’s always when you talk about leadership and doing more and better than anybody else, I can say that, I believe it, but I’d like to really give you some of the data and the facts I think that really prove it. And the points I would always come back to is the breeding program is absolutely the biggest blockbuster in the pipeline. It’s the size and scale of our genetic testing and our field testing capability. I was asking Sam if you put all of our breeding trials all of those rose of crops that we’ve planted in our breeding program out and you put them altogether, we breed 53,000 miles of crops every year to produce the new corn and soybean varieties that goes around the [Europe] twice.
So when we talk about size and scale and advantage just keep that in mind, but it’s more than just the size and scale. I talked last night to several of you that the way you have to think about what we have been able to achieve here with Ted and Sam’s leadership is that breeding has fundamentally changed. Five years ago when we had the sequenced blueprints of every single major crop and we had the markers that allow us to understand and associate the genes with the performance benefit whether it’s yields or fit to a different soil type and then importantly had the seed chipper so that we could analyze the genetics of every single seed that we breed anywhere in the world that is game changing technology and that’s what’s rolling out and has been in place for five years. So we are seeing the wave of that technology play out in our US breeding program, it’s just starting in Latin America, but that is going to drive a differential rate of breeding gain across all of our crop platforms going into the future. That is the hidden blockbuster of the company.
Second, when you talk about just really important advantages other people are discovering biotech trades and generally they are pursuing the first or second generation products, we’re focusing typically on the third or fourth generation product within those crops. And what’s exciting is it’s not just the one-off, I mean there are several of these multiple generation products upgrades in wheat control, upgrades in insect control and they are going to have a big impact on both a broad acre and global scale.
And then the last point I would make is and I think it’s really an advantage of being a market leader is the opportunity to invest in new things and new platforms. And our ability to launch IFS, our ability to move into biologics really leverages our core pipeline and takes advantage of this convergence of biology and information technology.
I really believe that the Precision Ag platform and the biologics platform to be eventually big and meaningful as what we see today with our breeding and our biotech trades. And they are really at the cutting edge of science and it’s our advantage, so as other companies are playing to catch up on that first and second generation technology, we are blazing some new platforms and I think extending our research advantage. And there is really no better example than in the Precision Ag space.
And if you go through what Kerry and Dave talked about with the Precision Ag opportunity, from a commercial perspective, what I would like to just spend a couple of minutes on is that I think it’s only a really big commercial opportunity, but Precision Ag has as big an R&D opportunity as anything else we have in the pipeline.
So I am going to focus on two areas the FieldScripts track which is on the yellow and then the Climate Pro track which is our decision tools that you’ve heard about from Dave yesterday that are on the bottom. So for FieldScripts, we have multiple upgrades that are in the pipeline that are being advanced today.
And the important thing to think about when we talk about the FieldScripts is that we are leveraging our genetic data and those millions of data points that come from those 53,000 miles of data that we're generating in our breeding and field trials every year and understanding specifically how that impacts a particular hybrid or particular soybean variety and how is that yield influenced by the conditions of the field, the moisture conditions, the fertility conditions et cetera. It's a very specific germplasm by field environment interaction that we're approaching from both the genetic and the field analysis.
And we basically determined that every different hybrid and soybean variety responds differently to these parameters and that's what so exciting. The point I want to emphasize is we’ve talked a lot about the opportunity in corn. I think the opportunity in soybean will be very, very significant, because the relative agronomic input and information in soybean is much less than corn and the need for growers to drive soybean yields, as you were talking last night with corn-based land prices and rents. There is a huge appetite to be able to drive and improve soybean yields and I think these tools will drive that opportunity.
And so effectively our goal is on literally each farm to tailor that seed prescription and really tailor it literally to 10 meter square out of the field and drive the population and the ensuing nutrition and management tools at that level of decision making.
When you think about the next logical step and it was talked quite a bit about yesterday, our FieldScripts program scripts have not had the detailed weather impact that Climate Corporation can provide. So there is a very logical supercharging of all of our scripts now based on that local weather condition impact and that’s going to happen very quickly and that will be powerful.
The next script that I think is really exciting really gets down to once you've set the specific variety or a hybrid and you’ve set the population and they read that appropriately varying the nutrition monitoring that nutrition and supplementing that nutrition to drive optimal input in yield is key and I think these tools will allow us to approach that in ways that have never been possible before.
And then finally we've talked about it now on a couple of occasions, but one of the advances though we’ll see with our precision planting efforts are to be able to now position multiple corn hybrids or multiple soybean varieties in that field and again optimize the performance and literally the yield on every meter.
So those are the advances that we're seeing from the point of view of the scripts in the FieldScript. Let me talk a little bit more about the decision support tools from Climate Corporation and their ability to track and monitor and really model weather which I think is going to really impact farmers’ decisions tremendously. And the beauty again of the collaboration is if there had been a weakness in the Climate Corp models, it’s been the absence of the specific genetic input, and again using our database that will be a tremendous synergy. Those talked a lot yesterday, we talk about all of these as part of our pipeline and talk about it in the same phase as in stages as our trades.
But you are aware clearly with the Climate Pro technology these are going to be on the scale of software upgrades in terms of timing and frequency, and so it’s going to be a much more rapid. I can tell you that the Climate Corp folks are already working on the data transfer and using our biological and genetic information to super charge their algorithms.
And I think fundamentally that combination of very, very unique and specific genetic data that comes out of our breeding and testing programs with their very sophisticated local weather assessment, monitoring and prediction capability is going to really provide growers with support tools that will drive yield in very exciting new ways.
And perhaps the best way of talking about the validity of these new decision tools is to look at this your FieldScripts trial results and Mike covered this in detail yesterday just to remind you this last year we had about 40,000 acres out of a 150 growers. Our purpose was to test that first FieldScript which is based on the recommendation of the hybrid to the field, it creates a recommendation in terms of varying that plant population to provide optimal yield and then finally to really test the wireless and electronic delivery of that script directly to the farmer’s tractor and the results were outstanding. The delivery worked well. Mike talked a lot about the satisfaction. When you get 90% approval from growers on a new technology and they are telling you they will plant 70% of their acres next year really doesn’t get much better than that. So that’s pretty cool.
I want to focus on the right hand side of the slide and just talk about the data and what we learn and we basically tested two broad types of scripts. The script on the left is a script that would be pretty comparable to what’s commercially available by other folks in the industry. It’s largely based on soil types and you can see that it gives about a two bushel an acre gain. The script on the right which will be our commercial FieldScript uses the 20 layers of data which behind those 20 layers are about 60 factors that we use in our variable rate FieldScript calculation to optimize planning and you can see that we are in that band of the 5 to 10 bushel yield increase that’s going to be part of our product concept.
So this script is the one that will go commercial. We’ll launch at this spring on several hundred thousand acres. And I think the results really confirm really the unique signs, the unique data that we have brought to this and how important that would be for the prescription. So really exciting results from our FieldScripts results from this year from Ground Breakers.
I am going to spend a little bit of time on the other new platform, the biologics platform and talk through that. I think again just like IFS which stems from our core breeding and genomics engine, the biologics is another natural extension of our core business. It really draws on our genomics and sequencing capability and gives us the opportunity to leverage our core approach with new ways of improving yield to be able to have the topical application of either a microbe or a BioDirect molecule either as a full year application or as a seat treatment. And of course what is exciting about this that these are non-transgenic, non-GMO approaches, so I think they will give us the opportunity to reach new markets and new geographies with this approach.
And again it’s a lot of leverage. Every dollar that we spent in sequencing and genomics capability now gets leveraged across the new space of microbe or BioDirect molecules. We talked about the opportunity for the biologicals market. It continues to expand and be very attractive. It’s about a $2.3 billion opportunity today and it’s enjoyed mid-teens growth. The market today is largely around insecticides and nutrient enhancement things like BT sprays or pheromone traps or other types of microbial products.
So just less than two years ago, we talked about this space and we talked about that with topical BioDirect RNAi technology, we’ve now expand that into microbes both through partnerships and through series of acquisitions. The most recently have been the acquisition of Agradis and we're building that capability and again using our genomics and testing capability to evaluate microbes that can enhance yield and performance.
From the pie charts here you can see that the microbial opportunity is very significant. About two-thirds of the value comes from microbial health and microbial pesticides and our focus is very specifically on improving yield and improving plant help.
I also wanted to cover the BioDirect which is really our lead technology in the biological space and it represents the area of R&D that we've now been involved with for the last two years. It’s really exciting for me the ability to spray an RNAi molecule and elicit a biological effect. It reminds me of the same excitement we saw back in the ‘80s and ‘90s with the ability to put a gene in a plant. And yet by using these tools and using the RNAi technology, we can create these opportunities for crop improvement with topical applications that are non-transgenic and that gives us I think the benefit of expedited regulatory approvals of much lower cost development cycle and really the ability to penetrate markets, where biotech products aren’t being used today.
So it has strong synergy but also takes us into new areas. The technology has very, very broad applicability and we've described several of the applications that we're working on. The first of these has been to use the BioDirect for glyphosate weed resistance. We've been able to understand the resistance mechanism for many of the weeds, design a BioDirect molecule that can inactivate that resistance restoring the activity of roundup or several other herbicides with that approach and those products are in Phase 1 of our pipeline.
We've added now several other products for insect and virus control and they’ve moved from discovery into Phase 1 and that includes controlling insects like the Colorado potato beetle or some of the viruses in the vegetable crops. So these are still early stage projects in Phase 1, there is a lot of work to do, a lot of science and advances that we need to do, but the results are exciting. And if we can continue to make the progress, this is a game changing technology. I mean this is a technology that could be very transformational to the company. So we're very excited about the pipeline of products, that’s coming from the BioDirect research.
I want to take a few minutes now and just highlight a couple of the other projects in the pipeline where we've seen nice advancements or there is or announcements in advances to highlight and the place I’d like to start is with the work we're doing on yield and stress. And as you recall the yield and stress area is one that’s really based on the combined research capabilities of both Monsanto and BASF. We've had a longstanding research partnership in the space. This was an exciting year for yield and stress because we had the first commercial launch of DroughtGard, that’s the first biotech trade in the world based on enhancing drought stress and I talked about it in a few minutes ago.
And I think this does two things, it certainly establishes and validates the opportunity with yield and stress and I think it also points to the fact that yield and stress is part of an overall system of seed, genomics, trades and agronomic practices.
So now that we have DroughtGard approved, we have the ability to expand it. So our work is based on expanding the breeding and efforts to move DroughtGard technology from the western market to fit on many of those midwestern and southern corn production acres where it may not be the heat and drought stress that you would see in the far west, but because of soil types or weather conditions, those products will have a fit.
I think when you dream out a little bit into the future, when you have those planters that can plant multiple hybrids, a lot of farmers across the Midwest and the south would like to have that high yield in performer on the best part of their fields and that drought resistant defensive hybrid on the sandy part of their fields of the hilltops that will help protect yield and that's a really an area that we see as possible within the next few years.
So looking ahead in our corn pipelines, the next lead product is our higher yielding corn that product is in Phase 3, that's provided a consistent yield advantage in a broad set of genetics. Beyond that we’re working on other trade stacks would be step for a yield and stress. I continue to see this as a very exciting area and I think success with DroughtGard has reinforced our excitement.
And I think in many ways we’re uniquely positioned because of the capabilities and regulatory and in field testing to bring this pipeline of multiple yield and stress products into the marketplace and it’s a nice complement to our overall agronomic trade platform.
On the agronomic trade pipeline, the project that I’d highlight is the advances that we have in corn Rootworm with our Corn Rootworm 3 technology, as you know that is also based on incorporated and RNAi gene into the corn plants. We advanced this technology last year, it’s in Phase 3 of our pipeline performance of the gene alone or in stack has been very strong. We’ve done lots of field testing this year. Performance looks very good. I think the new news that I just highlight here is we’ve been working hard to expedite the commercialization of this on a fast track. We’ve just now been able to submit into the U.S. regulatory agencies and several international regulatory agencies the first request for the regulatory approval for this product. And that’s the Corn Rootworm 3.
In addition to that in January, we highlighted that there are other RNAi based corn Rootworm products that are being developed in the pipeline and those have now advanced to Phase 1. So this is going to be an area of research, it’s going to generate multiple insect control products for corn and I think that’s really important given the challenges of resistance and enhancing performance and the requirement for multiple modes of action. This gives us new tools that I think will both solidify the durability of our pipeline and add incremental value. And importantly from a grower perspective, it gives farmers confidence that we can meet their long-term needs for insect control and give them the choice between some great unique and proprietary modes of action for insect control.
I think another key trade to highlight and really the one that we talked a lot about yesterday is as increasing in value in our pipeline as it nears commercial launches, the round that pretty to yield extend system. This is a product that we featured heavily in soybeans but as I mentioned yesterday, we are advancing this technology in cotton, we are advancing it in corn, canola and we are looking at other crops as a very outstanding synergy between Roundup and dicamba in terms of simplification of motive action.
And I think as we see weed resistant challenges this product will be able to address large market opportunities. This technology has a fit on the 150 million acres of soybeans across the Americas. This year on our Ground Breakers program, if you look at the left hand side of the panel, you can see the feedback from growers and that big red bar there is growers recognizing the broad spectrum of performance of this product. I mean this was a big year where growers had a chance to use and employ the technology and see the benefit and the feedback has been very, very positive.
We have done a lot of work on the trade and breeding. What I want to highlight today is talk about is the outstanding work that the team has done on creating new dicamba formulations that have dramatically improvements in being able to reduce the volatility of dicamba. And we have products now that we branded as XtendiMax and with VaporGrip technology, where our scientist have seen formulations with dramatic reduced volatility. If you look at the chart on the right, you can see the volatility measured in humidome based on dicamba, originally formulated, when it was launched at Banvel, Clarity and now the new XtendiMax with VaporGrip products. This is a great breakthrough and I think we'll enhance both the performance in the adoption of the technology and importantly these low volatility glyphosate dicamba formulations have excellent weed control efficacy and residual activity.
And the final thing I just update and note on the slide is we're progressing towards commercial launch both in the U.S. and internationally moving forward dramatically. In Argentina we have gotten already the dicamba trait approval. For Canada, we're on track to get the over-the-top chemical application in Canada, sometime later this year. I think it’s likely that Canada will be one of the first countries where we commercially launch and that could happen later on this year. So, progress to the marketplace moving forward.
Last area that I would talk about as a specific product is the Intacta platform, you’ve heard a lot about Intacta and the impact that it's having on South America. It’s really a nice reflection again on the Ground Breakers approach and building grower awareness and the base of experience and that’s really given us the momentum for an outstanding launch, the biggest launch we've ever had in soybean in Brazil this year and that same approach is going to catapult in Argentina, in Uruguay and Paraguay and it really moves us to achieving the 100 million acre opportunity for this technology across South America.
The point I want to emphasize is that the pipeline behind that first version of Intacta is a very deep one. We talked about the second generation product based on multiple insect control trades this last year and that’s been advanced. We're also now advancing the third generation of Intacta which is in Phase 1 behind that. So we see lined up the second and third generation advancements in Intacta and that’s what gives us the long runway of I think decades of innovation as we think about the performance of these products in the South American market.
So by the end of this decade we will have multiple mode of action bug and we control products in the South American market. And I think this is important because of the South American market, heavy insect pressure, tropical environment, insect control, insect resistance is top of mind and these are going to be very, very important tools for farmers.
So I am going to wrap up, I want to leave you with three takeaways from the presentation. The first one is, is that pipeline leadership is absolutely key. I mean, the research pipeline is the heart and soul of this company and I think we're absolutely expanding that. I’ve talked about the $25 billion of peak sales opportunity, but more importantly I think it’s a pipeline that takes this company well into the next decade with its opportunity and growth.
Second, I hope you get the sense that the leadership is backed by some really incredible performance and that the advantage that we talked about if anything I think is extending. I think you can see that in another very exciting year of harvest data, you can see it in the results of our Ground Breakers programs on new technology. I’ve highlighted several products that I think are breakthrough products in the pipeline and then new platforms with IFS and biological that will drive this forward.
And then lastly, this theme of the conversions of biology and information technology and how that is coming together so quickly on the farm, I think we've moved to position ourselves to take advantage of that next field of increment of yield opportunity that this is going to provide and that the breakthroughs that we are seeing with FieldScripts, the breakthroughs that I think we’ll see with Climate Pro decision tools are the examples of really moving into this really I think technology platform that can transform the company. So that's a pretty exciting stuff. Bryan?
Thanks guys. I appreciate the time.
With that we’ll make a relatively quick transition here. We’ll have Rob and some of his technology leadership team. So I’ll ask them to come down. We will have a panel discussion here again. We will have multiple microphones stationed throughout the audience. We have about half an hour here set aside for questions and answers. And once we get everything set up, we’ll let the technology team get set here and let Rob get everyone introduced and then we’ll start getting questions going. Good, let me turn that over to Rob real quick and let Rob get everybody introduced and then (inaudible) have microphones again.
Okay. Starting with Ted who is running IFS, Tom Adams, Biotechnology and Sam Eathington runs our Global Breeding program. So you guys are going to run the mics and we’ll try to observe the same rules of short questions and quick answers. I think we will go back first.
Don Carson - Susquehanna Financial Group
Don Carson. A question for Sam on the breeding side, recent research out of Iowa State and University of Illinois showing that basically new hybrids in soy varieties extract a lot less nutrients from soy. Have you seen in your work? Is this something you breed for? And it strikes me that it’s a transfer of value from fertilizer to seed but you are not really promoting that as one of the benefits of your seed.
Yeah, great question. We actually have been clearly that newer hybrids for example are taking up a lot more nitrogen, actually take it up a lot longer through the flowering season and say hybrids 15, 20, or 30 years ago and we’ve also seen how our hybrids are much better at utilizing that nitrogen. So when you look at how much nitrogen we need to produce a bushel of grain, it’s what used to be, and to think there are too many, look at (inaudible) lot more efficient than we used to be. We haven’t tried to attract any value out of that, that is hopefully some extra value to the growers and so this is something that we breed through our system, we are breeding for that continue improvements, so something we will continue to do with new hybrids.
I think just a couple of quick points to hammer there is the FieldScripts for variable nutrient applications, it is really important because it’s not only the special location of those nutrients after rain and after weather but it’s also the placement of those nutrients during the crop cycle in that scenario where there is a tremendous amount of interest both from a optimization of inputs from an environmental perspective but also an optimization of yield and that’s a really exciting area for research and it’s really embodied in the IFS script.
Before we are going to next question I just wanted to handle one quickly. There is a couple of people that needed to leave it and if you guys needed to do that they are shuttle out there ready to do. So with that, let’s get back to the questions, Mark. I apologize.
Intacta, a lot of excitement on Intacta of course by Monsanto, but can you talk about the durability of the trade given the fact that I guess those creditors down there reproduce to have multiple generators faster. What is the lifecycle of Intacta one? How does it compare to let’s say some other trade you have? Are you able to develop new trades to stay ahead of that upcoming resistance?
Yeah, I mean our second and third generation Intacta products are based to have multiple modes of action for caterpillar control. So, it's top of mind topic for both ourselves and for the growers. And we'll be in a position to be put into the decade that have multiple mode of action products in that marketplace.
I guess two quick questions, one on the RNAi and biological platforms. Do you see any areas where in the longer term you could displace crop protection chemicals at the baseload protection for the crop? And secondly, as you look across your R&D pipeline. In terms of the CapEx and R&D dollar spend per bushel of yield gain, is that going to be coming down over time over the next five to ten years, the way your mix is changing or are there factors like regulatory hurdles that are going to offset that?
Good. I will tackle the first one. The question was about the biologicals platform and its relationship to chemistry. I think what we see predominantly is a really nice complimentary with chemistry. So for instance, what the picture that Rob showed of using BioDirect plus a glyphostate first Roundup, we're able to control a weed that wasn't controlled before. So there are some cases, where it might completely replace the chemistry like the Colorado potato beetle control, where by itself, it's able to control Colorado potato beetle, but really more frequently kind of an combination and spreading the strength of chemistry, maybe allowing to reduce the overall use of chemistry though.
And then the question in terms of investment basically it's per bushel of yield. I don’t think we've ever looked at it that way. My guess would be that since we're leveraging the same sequencing and genomics and genetics databases across multiple platforms that we would see the benefit that you suggest.
Just add to that that as we're rapidly putting more molecular breeding technique so we have to invest in molecular breeding, but actually trying to breed for yield it’s cheaper to do it through a molecular breeding approach in a lab than it is trying to continually grow which you guys do in the field. So while we had make an investment there long-term that was the scale of the breeding site in a cheaper pace and just adding more plus income by the other field.
Unidentified Company Representative
Rob, I think you've got over here.
Mark Connelly - CLSA
Mark Connelly, CLSA. Farmer reaction to DroughtGard does seem to be good but they also are looking at it sort of a starter product. As you think about the evolution of the DroughtGard family, are we going to see the spread overseas before it’s reached sort of your idea of maturity in the U.S., how do you think about the evolution of DroughtGard within corn?
Both really, I mean there is international opportunities and there is certainly geographic expansion. We started with DroughtGard in the dry land markets where there is going to be everywhere predictable drought pressure for those growers and that was a great place to test and launch. But as I indicated, there is an opportunity to expand DroughtGard into more Midwestern and Southern genetics and there is certainly international opportunities and we're looking at incorporating DroughtGard as we bring other trade upgrades to corn production areas. So Sam I don’t know from breeding program you want to talk you some of the incorporation of the trade and where we are going?
Yes. The way we got it into the system, we've also been breeding germplasm and (inaudible) with the economic piece that to create sort of an advancement of that system for drought and so we've been expanding that concept into other regions and of course in lot world regions, especially are breeding more predominantly for what you would see in the western market right. If you go to parts of Europe, Hungary for example, there is more of a consistent droughts for us, we go down in Argentina, while those acres little more drive wins trust and even parts of Midwest. So the breeding program around the world are repositioned, working on that and we've enhanced that with our testing networks and then we can bring in the traits and agronomic practices that's we want to explore that around the world.
Mark Connelly - CLSA
Rob, (inaudible) you’ve recently spent your collaboration with [Evogen] first of all was the [Evogen] think to you in terms of capabilities and expertise that you don’t have? And secondly how do you assess could work with from outside R&D effort in terms of skills, expertise, what your criteria to work with outside entities?
Great, I’ll let Tom jump into the detail, I mean as a starting point, one of the things that we really emphasize and we have really a dedicated team that mines data and partnerships and collaborations literally around the world. I think the last time I checked our database we had something like 4000 licensing agreements, so I would like to make the point that we want to extract every bid of advantage that we can out of our own internal R&D efforts, but there is bright people in small companies and universities and large companies around the world and so we have put a real premium on partnering with [Evogen] really talented group of scientists who come up with the gene mining algorithms that feed directly into our yield and stress pipeline and we’ve been very pleased with them as a partner and have extended that relationship. Tom I know you worked with them closely.
I would echo what Rob said that the [Evogen] team has a really well organized data mining approach that identify genes involved in traits relating from knowledge coming breeding from genomics from other tasks and they have been a very positive influence on our pipeline a lot of genes from that.
John Roberts – UBS Securities
John Roberts, UBS. Rob, can you give us a timeframe on when Roundup ready, we even Roundup ready sugarcane move to Phase 3? And Sam could you tell us how big is the breeding program in China right now and do you put anything in the NPV from breeding in China?
(inaudible) talk little bit about, I focus largely on the U.S. breeding program. You might want Sam take a few minutes talk about international and performance and where we are going and we’ll come back to the other question.
So just specifically about China over the last couple of years we’ve been increasing our investment in China. We’ve had a presence there. We’ve had a JV. We’ve been looking to expand that JV. We’ve actually moved a lot more germplasm into China to give us a lift in product performance and we put it up from ways that we feel comfortable with intellectual property. So we look at China as great opportunity obviously being the second largest corn market. As we get our JV expanded we will bring in the genetics and (inaudible) the same sort of parallel as a lot of our U.S. or European product performance. We are seeing a lot of strength in the initial genetic that we have brought into China.
To go around the world to other places, if you go to eastern Europe, we have seen a very great performance there in Ukraine and Hungary and very similar to what we see in the U.S. as 7 to 10 bushel, yield advantage and we continue to expand our market there. I think we’re probably going to see some of the largest growth we’ve had in that region.
And if you go down to South America first, of course in Argentina we’re something like 70% genetic footprint. We have a long history there and typically 10 bushel yield advantage and it will be lineup. And in Brazil if you go into Sabrina market and which is the largest growing market again lineup is outstanding performance are getting close to that 10 bushel advantages.
So when you look at corner around the world, we actually had a great position to leverage the strength of our genetics and opportunity, the same thing in soybeans we look at South America, we’re really expanding and driving our soybean performance down there.
And just briefly on the other question, we have done our first field testing weed of some of the herbicide (inaudible) good protest look promising still 7, 8, 9 years away from market launch of the biotech trade and we sugarcane will be a little bit faster made nice progress with both the around the BT technology.
Unidentified Company Representative
Mike, I think you have question right there in the middle.
Michael Piken - Cleveland Research
Michael Piken, Cleveland Research. Just a question on (inaudible), could you talk about kind of where you are from the regulatory standpoint and once you do get regulatory clearance, I mean how quick of a ramp up could we see on expand and how would you compare that to maybe Intacta or some of the other big launches you've had in recent years?
Yeah. I think everyone here knows that we're working to complete the EIS on opening that will the progress has been good, I think we have an outside chance of 2015 launch with the product. I think outside the U.S. we have seen I have mentioned the progress in Canada, we're doing advanced commercial work in Argentina as well. This is a technology that I think is going to have a broad fit in soybean and as we advanced the technology in other crops. So, it's really a incredible complement to round up in terms of the effectiveness overall on broadly if control the additional benefit of the residual. On a wet spring like this when farmers could finally get into plant if they could had a dicamba and provide another two weeks of residual weed control would have been particularly beneficial, also obviously the benefit it provides to take out control resistant weed. So, I think the excitement that I would see around the technology building with growers is comparable.
Michael Piken - Cleveland Research
What's your thought process on timing of South America for that product?
I think, there is a reasonable chance that South America may move ahead of the U.S. in terms of launch timing.
Michael Piken - Cleveland Research
Yeah. Looking at the rate of return chart on slide five, but also other slides we're reminded of both the blessing and the curse of corn and bean being a big and as high return as they are. Have you think about the rest of the crop power, particularly looking at that chart pretty weak returns relative to those the big two from cotton other vegetables and feeds and wheat and other things fit into that given that everything pills by comparison.
Yeah. That’s a challenge and that’s always part of our portfolio analysis so we adjust our spend in the other crops accordingly and look for those projects that are strategic, but also meet our financial thresholds. They may not have the absolute growth potential of corn or soybeans, but I would like to remind folks that cotton is now still the third biggest crop in the portfolio and vegetables are aging up on it. So these are important cash and margin contributors to the company, but to your point I think we've been really smart and used our portfolio tools to make those decisions that make financial sense for supporting a pipeline.
Michael Piken - Cleveland Research
Maybe just to add that, you get ability to leverage technology also right, so we’ll invent something for corn and soybean, seed chipping technology new molecular platform IT tools and then really what’s the lot of small tweaks you can apply those to cotton or vegetables or other crops and really get a lift in those without putting the investment in those. And I think we've done the similar things the biotechnology.
Unidentified Company Representative
Yeah. I think without overdoing it I mean the energy is all focused on the launch of Dicamba soybean which it should be at this point in time Roundup Ready Xtending cotton as a game changing technology. It will be transformation for cotton. So but we’ve picked up appropriately and I think the team’s done a great job of picking those projects within those smaller crops, it make a lot of sense.
Duffy Fischer - Barclays
Duffy Fisher from Barclays. Just to understand the Dicamba stack for a second and talking to some of your licensees this summer, on the formulation with your partners BSF. They talk about made a lot of progress on the drift issue, but if there were still some meaningful issue around volatility. So kind of where are you with the formulation to date, you think that as far as you need to get or do you need still to make some moves forward? And then just the second one is around the commercial side of it, because you are delayed with the government study, longer than you thought originally now your competitor’s going to come out with their 240 stack potentially at the same time, does that change your want should all around that product?
Unidentified Company Representative
I think if anything, we've used the additional time and expanded groundbreakers program to really sort of through the genetics of the vital conversions of very strong line up of genetics that when we launch we would be able to launch literally from north to southern U.S. with strong performing varieties.
We've been able to do a huge amount of work. And the team’s just done a great job on the educational parameters, which nozzle’s prey that was mentioned to a few of you last night, developing the absolute that grower can press an app for their field and figure out what the wind direction is and whether they should spray or not on a given day or time, it’s been a tremendous amount of stewardship that goes into this and the advance on the formulation for volatility is terrific. So I think the work that our company has done, the work that BSF has with their formulations I am absolutely confident that when we launch this product it’s going to be a product that growers can use with a great deal of confidence and tremendous performance benefit.
Paul Massou - Stifel
Paul Massoud, Stifel. On the account and the regulatory approval process I guess it seem to be peculiar that USDA preemptively asked for [DIS] studies for that (inaudible). And so just curious do you see that as the way business is going to go looking ahead for your products do you think this is more of an exception?
Unidentified Company Representative
I think although the indications we have as we are going through the DIS is that this was a unique case for the Dicamba and the 240 technologies and we don’t expect that to be the standard for approval for biotech trades in the future. Unique issues here with some of the chemistry topics that we’ve talked about that are addressed with the DIS.
P.J. Juvekar - Citi
Rob, P.J. Juvekar. First question is biological, because it’s non-GMO it seems that the barriers to entry are low and even traditional like chemical companies like FMC are talking about it. So can you just tell us where you are relative to your competitors, who is coming just talk us through that?
I would let Tom has been leading that effort. So I will have him give you the full detail, but the way you have to think about the biological and part of the reason that we have really seized the opportunity to invest is there is two things that have gone on that have changed the game. So first of all from a genomics capability that corn plant or soybean plant may have more bacteria in or on it than plant cells, but now ability to sequence, you can sequence and really microbe on the plant. So the breakthroughs in technology that like you use the genomic footprint to really understand what bacteria are there and which ones can help nourish or protect the plant is completely different than what have been possible five years ago.
The second part of it is the testing network we have. Our ability to test the yields benefits or the disease protection benefits through the lands of the company that breeding 53,000 miles of testing every year is really unique. And I think the last piece that ties to it is part of the reasons in the past that there has been variable performance to the microbes, I think ties very nicely into the Precision Ag story of understanding the variability of those populations in different parts of the field and using again that information base to tailor the right microbe to the right seed product in the right field.
Tom, I don’t know where as you want to carry on that.
I would just add to that I think that this is, it might relatively straight forward and you have seen companies in the past bring microbes out of this products, they tend to be relatively niche products that what Rob is talking about and our ability to test broadly, working with my friend Ted and testing in an IFS type of format that we can really understand how the Genomics comes together with the microbiome to improve performance of the plant.
P.J. Juvekar - Citi
And I have a quick question. I know you didn't talk much about output traits. It seems like the opportunities set for output trait is much smaller than what we thought five years ago. Can you just talk us through that?
Yeah. I think that's a fair assessment. I mean, I think what we've realized, we had a long, long collaboration with Cargill, but specifically on output traits is that the when you look at most output traits, the best solution to more output is higher yield so if you want to extract vitamin or a nutrient or amino acid having another ten bushels per acre changes the economics. So you really have to create unique differentiating value with that output trait. We're still working to advance the Vistive Gold and the other technologies in soybean with Omega-3s. I think those are really the exceptions to that.
Now in contrast in our vegetable research area using molecular markers, we're mapping and tagging a number of the biochemical pathways that are involved either in variable nutrition or consumer appearance or taste or texture. And that's all done non-GMO, but done with very sophisticated gene tagging mechanisms that are going to create that new combination of colors and flavors and tastes in the vegetable crops and that maybe where we see really some of the output enhancements in terms of vegetable quality and nutrition.
Bob Koort - Goldman Sachs
Hey guys Bob Koort with Goldman Sachs. And maybe these will be quickly answered questions. Rob, I think you put a chart up there that if we through pioneer in there would suggest maybe you get 10 or 15 million acres left to converts Roundup Ready 2, would you expect all those acres to convert?
The curve for adoption so far has been pretty prolific with the pioneer agreement, I think they have a lot of enthusiasm for the transition, so I would say, yeah, I think it’s highly possible. The yield advantage is triganic. I mean four plus bushels in beans is a huge incentive for conversion.
Bob Koort - Goldman Sachs
And I think if I understand correctly in the past you've talked about doing your breeding and putting your best Germplasm on the Roundup Ready 2 platform and the data you gave I think compared to your Roundup Ready 2 against your competitor’s Roundup Ready 2 and 1 so what if we did Roundup Ready 2 to 2 and more broadly are you gaining yield advantage so that we’ll start to see some brand market share acceleration in Asgrow?
Yeah. I mean I think you’ll see our numbers this year that we are well on our way to that volume and share advancement. Sam you want to talk a little bit about what we've done and the tools we bringing into soybean breed.
Yeah. I think the simple way to think about it is we used all of our tools like molecular breeding, seed chipping technology to get from 1 to 2, all right. But we did that five, six years ago and so now we've been able to use that technology to focus on how do we just enhance yield potential of the soybeans we already have given we already have 2 in the base and a lot of other companies right now are still trying to get 2 in. So, we think yeah we're seeing how our technology is letting us get a little more yield lift out of base genetics.
May view worth a comment, because using those same tools now as we are stacking Roundup Ready Xtend and where that plays out in terms of launch.
Yeah. So Xtend was nice and that we actually had a little more time to bring it in. And so it’s a lot easier just to add in a new chemistry trade like Xtend versus when we had to do Roundup Ready 1 and Roundup Ready 2.
The old way of breeding that was (inaudible) breed with Roundup, you can’t do that anymore. So you got to have molecular tools and seed chipping to figure out which gene has given the plant that phenotype, so you know which one to select and which one to discard. Xtend is a lot easier for us because we already 2 in our base, now we added in and we can go back to spraying with that, came over to top, select for it, use the tools to continue to drive yield and other defensive trade to give us a yield left.
But I think in step and say that the yield advantage of 2 and the performance advantage of Xtend bodes well for volume growth and soybean.
Bob Koort - Goldman Sachs
And then last quick one I’ve read some stuff where there it’s expecting maybe a worm starting attack the Brazilian soybean, does Intacta defeat that test?
I think the answer is yeah, the (inaudible) come in, probably come in through some sort of cotton an areas who knows. If you go down there and you see after the spread fields, you just see literally inches, of this insect layering on field. So it’s very aggressive early results, looks like impact in I think green health studies and as we've done looks very good at controlling that. And our Bollgard II cotton product that we’re introducing this year looks very good at controlling that so we think we’re going to be give multiple options to growers down in Brazil.
Unidentified Company Representative
And that can see second generation product as even better.
[Bill Yeoh - Kinspeak]. Rob could you give us a little more flavor on the regulatory process when you compare the biotech products versus the microbes and also the RNAi? And secondly along same lines what kind of reception are you getting in places like Europe where they are not too interested in slowing their own GM crops, are they interested in using these new approaches?
Yeah. I will let Tom has been leading those efforts so I will let him give you the details. I mean in general in the U.S. the government agencies have looked at this space and the concluded it BioDirect as naturally occurring molecule that’s found in all living organisms should, be regulated like all other biochemical products, it would be regulated like the other biochemical pesticides which means it would be unexpedited approval compared to testing regime compared to the GMOs. And that’s pretty much been decided. And that’s the regulatory path we’re on.
Tom is there anything from a European perspective as you have had conversation around the BE products and…?
Yeah. I think Europe clearly very much favors biological products, but they are still working through their regulatory rules and I think it’s not quite as clearly as in the U.S. where they put together a particularly bio pesticide panel that addresses things that fit into this category Europe has approved many things, but they don’t have much more complicated politics.
Unidentified Company Representative
I think the only other thing I would add is I think either late this year or early next year we will have an SAP in the U.S. that will lay out I think the final details of RNAi type molecule approvals and that’s great to get that science decided upfront.
Unidentified Company Representative
I think we have time for couple of more questions.
Kevin McCarthy - Bank of America Merrill Lynch
Yes. Kevin McCarthy, Rob if we look at the cal U.S. yield data that showed obviously the absolute level of the yield is quite a bit higher and you are saying you are relative advantage of 7 to 10 bushels is about stable. And so I guess one of the consequences of that is that your yield doesn’t look quite as large in percentage terms. So couple of questions, why that is it simply function of the lack of stressed that we have experienced in the market this year? How do you think the differential will trend when the other half of the harvest data comes in I guess in different geographies and if it looks the same at the end of the day are there any thoughts around implications for pricing on market share looking ahead into next year?
At a high level I think we heard the growers last night. Relationships are great but 7 to 10 bushels will decide my seed purchase I mean I think that kind of sums it up. It’s a huge advantage and it’s probably an even bigger advantage in the year where our commodity prices are down. Sam I know you have been into all of the data collection and you know what we have and what is coming once you comment a little bit about where we are at and what you expect?
Yeah, so maybe I think your second question was about maybe what’s going to happen in the second half of the data that’s still to come into our system. And most of that is our northern cornbelt, as we get into Dakotas, Minnesotas for a region where historically Dicamba has had really outstanding performance. So we see anything that will continue to probably strengthen this a little bit.
But really when you think about it, if you go back and look at the last two years right, they're rolling out 200, 210 bushel corn and you got a practice given the 7 to 10 bushels. But if you went back to Illinois last year, you're getting a 100 bushel corn and you're still getting a 7 to 10 bushel advantages. That consistency, that stability across the years that advantage is really worth an awful lot to growers out there to make sure they're going to be profitable every year.
Unidentified Company Representative
Good. So, with that I'd like to thank the panel. I think we're going to move on to our next transition so that we get to Pierre. As we're kind of moving through the transition period, I just wanted to point out everybody. We left some parting gifts on everybody's places, when we came in. Part of that is actually that the emphasis on weather that we have talked about a little bit here and a lot yesterday. So there is a personal weather station in each of those. If anyone didn't get the gift, we do have more upfront and we're happy to get that to you.
What we'll do now is as we kind of make this transition, we'll do Pierre kind of wrapping everything up into how it comes together into the financials, how that really translates into the guidance this year and into the midterm opportunity. And then we'll kind of wrap things up and I'll come back and I'll tell you how to get to the shuttles and everything from there. Thanks.
Good morning. So, let me now summarize what we have covered over the last two days. And tell you all I think about it's from a financial perspective and what it really means in terms of earnings opportunity and obviously capital deployments.
And the place to start, these are confirm guidance for FY14. So I see two things in this guidance. The first thing I see is definitely the momentum coming from our core business. But the other thing I see which is really interesting for the future is the only ramp up on some of the new layers of growth we've been talking about over the last couple of years and that you've seen we're going to be seeing this year starting to play a role.
So let me emphasize couple of key things. First, the expected growth is coming from the Seeds and Genomics business. And it is coming from the same core drivers that have driven our growth over the last few years and I am thinking about the pricing opportunity from germplasm of grades, I am thinking about the mix benefit coming from technology acceleration and I am thinking about the opportunity for global volume growth.
The second point that I’d like to make is that our growth now is reflecting a more balanced, a more global portfolio from a geographic perspective. As we see now the acceleration of the contribution from regions like Latin America and Eastern Europe and we see this acceleration both in volumes, but also and maybe more importantly in value. And the third point I wanted to make is not only do we see a diversification of our portfolio in terms of geographies, we also now see a broader product portfolio with new growth layers coming online this year and this is Intacta, the launch of Intacta in Brazil. This is the expanded opportunity and we just talked about it for our Roundup Ready 2 business in North America where now we can access 100% of the available acres. And it’s the emergence of the first IFS product and we talked a lot about it yesterday, but the first IFS products from our entirely new Precision Ag platform and I hear products like FieldScripts or [Climate Pro].
So looking at the guidance into just a little more detail the core operational growth that we've been talking about over the last two days definitely translates into the financials and the place look at is the gross profit line.
Now that we have pretty good visibility on the year, we see our ag productivity business as basically a steady contributor. There is some chance for some upside, but it’s going to be moderate. So really the growth is coming from our Seeds and Genomics business. And it’s going to be the biggest driver of our GP growth.
Actually, we’re looking at mid-terms growth in FY14 for our seeds and genomics gross profit. And this growth is coming from corn and soybean and in both cases. It is coming from margin expansion. In corn, the margin expansion will be the result of improved cogs and we've talked about it, but also the price mix upgrades that we are looking at year-after-year. And in soy, the margin expansion is a direct results of the two newly added sources of revenues. So this is Roundup Ready 2 yield in U.S. and the early impact of revenue in South America.
So if you combine those two key drivers of gross profit together with the rest performance of the rest of portfolio, and you add to that the disciplined approach we take to spendings we are looking or expecting those operational deliver mid to high teens EBITDA growth.
So as discussed during our fourth quarter call, this business growth will be somewhat diluted at the EPS level because of the dilution related to the acquisition we just made of the Climate Corporation. But what is really important is that if you exclude for a moment this dilution, our growth rates from an EPS perspective would have been right at the mid teens levels we’ve been talking about. We also expect that this earnings growth in turn will translate into strong cash from operations and actively allocate $930 million to the acquisition of the Climate Corporation and $1 billion to a $1.2 billion to our CapEx plans, we will still be in a position to deliver free cash flow of $600 million to $800 million.
So before I share with you some my thoughts regarding midterm trends that will drive our business let me maybe share with you some of our financial approach and how it drives an influence of strategic decisions. So our financial approach is based on financial discipline. And with the goal of achieving two key things, one is to support and drive business growth and the second is to be in a position to consistently return value to our shareholders.
And as a company focused on technology innovation I think it is really important to keep the financial discipline as a priority and this is something I do not take lightly. So throughout organization we applied this discipline while making investment decisions, whether R&D investment decisions are over commercial deployment decisions. And this translates into the numbers and it translates for the combination of the business growth that we achieve, for the discipline investment that we make, the strong return on capital and the strong free cash generation and this free cash generation in turn allows us to further funds growth and return value to our owners.
So let me now try to put some color on our midterm growth potential. And as you know when it comes to overall guidance, we committed to taking its one year at a time. So I am not going to go too far, but I am still going to try to give you some color on how we think about growth and what are the drivers that an help you think about our growth with us. So let me share with you a couple of metrics.
Our core business continues to be the most important factor driving our growth and within our core business, corn continues to be our largest opportunity. So let me start with covering some of the key drivers that I see impacting our corn business growth in the next few years. Fundamentally, the mix benefit that we have been taking about is what drives the margin expansion opportunity. So when it comes to 2014 we have said we anticipate the margin list of three points, two coming from cogs and one or one more coming from those mix benefits. And this is what is going to drive 2014.
Now as I look at the mid-term, the continuation of the germplasm and trait upgrade is expected to continue to drive margins up. And we're looking at an expansion of another four points. So when you take it together, this means that over the next five years, we expect roughly seven points of margin expansion throughout our corn business. And what gives me the confidence that we can achieve this margin expansion is that once again the biggest driver of that price mix lift comes from what we do year-after-year. And this is the portfolio upgrade to new and higher value germplasm.
To put things in perspective maybe, in the last five years, the global corn germplasm has delivered over $1 billion in additional branded sales. And when I look at the next five years, the benefit of the germplasm mix lift alone could unlock similar sales growth. So if you combine it with a continued trait upgrade think about South America, we expect, so if you combine it with the trait upgrade and the volume growth we expect from regions like Eastern Europe, our corn portfolio clearly appears as a very significant opportunity for growth for us.
The next area I wanted to highlight is around soybeans. And as Mike and Brett described, we are anticipating a re-acceleration of our soybean's platform in 2014. And this comes directly because of the [neurology] stream from the past that as I said give us access to the potential, the 100% of US markets in terms of soybeans and the early Intacta sales that are now inline in Brazil. So both of these and I think we talked about that yesterday both of these our high margin opportunities and when they come together we expect now to see soybeans margin in 2014 to improve by 6 to 8 points. But what’s really interesting about this trend is that it’s not limited to 2014. As we continue to grow those two platforms we're expecting significant mix improvements there as well. And if you add to that the introduction of expand you can reach an idea of the potential we have in terms of margin expansions in soybeans.
So as a consequence and for the mid-term, I am very confident that we're going to see an approximately another 8 points of margin additional to what we're going to be delivering in 2014, which means that practically we are looking now at 14 to 16 points of margin improvements over the next five years.
There again maybe to put thing in perspective, in the past five years our soybeans platform, our soybeans business has grown sales by $0.05 billion. The expected growth in the next five years is more than twice that. And it creates more than $1 billion of opportunity. Intacta is the most significant driver of this mid-term opportunity and with the launch this year in Brazil we're starting to penetrate the $100 million opportunity in South America.
The third point I wanted to touch on in terms of the business opportunity is Precision Agriculture segment. Yesterday Kerry showed this progression more from a milestone, commercial milestone perspective. Today I want to tell you how I think about it from a financial perspective.
As Kerry mentioned, this chart is mostly directional and is not describing a specific financial projection. But I think it helps to outline how we think about it for you to get a feel for how we think about this growth potential from a financial perspective. The thing we've said when we acquired the Climate Corporation is that for deal of that size, the financial opportunity has to be important. And if we are able to deliver on the accelerated plans, we could, the Climate Corporation could contribute to earnings as early as in two years.
In 2014, both the Climate Corporation [NISS] contributing to our earnings is not going to be significant. What is really critical for us in 2014 is that we generate some revenue out of the free key business lines to create a base for commercial progression. As we get to two to four years out, we expect significant contribution from this business and we need to make sure things come together in the next two years.
So what do we need to achieve? Number one, we need to successfully roll out the first generation of our FieldScripts, so that the abduction curve can accelerate and ride revenue contribution. Number two, and although this wasn’t the reason we acquired the Climate Corporation, we are planning for continued sales growth in the Climate Corp’s entrance business. And it represents a very nice opportunity to build on an existing base. And the third element, we anticipate as a meaningful commercial contribution is from the decision support tools in Climate Pro and like FieldScripts these create value on each acre so fast penetration is critical to ramp up revenues.
So let’s now shift to how we see these above the line growth translate into EPS. And to do so the next place to look at is the trend we see in operating expenses. Once again strategically we will continue to be prudent in our deployment of resources. And we will continue to take a very disciplined approach to spending and this is what enables earnings leverage. But we will also go through a very conscious decision making process to make sure we do not starve the investments we just made and to make sure we can deliver the growth.
So looking out and looking at the next few years, I expect to see spend increase and to see spend increases to fund our new platforms like IFS and like our biological platform and also to continue to enable our commercial expansion. But as a result of our disciplined approach, I would still expect to see continued earnings leverage as we definitely evaluates resource allocations based on milestones both on the R&D and the commercial side.
So let me now move to the cash flow statements. Here again you will see a continuation of the same financial discipline. And I will begin with a look at working capital. Over the last few years I am very proud to say that we’ve been able to achieve growth and aggressively manage our working capital resulting in significant cash flow benefits. Going forward we intend to stay very discipline when it comes to managing our working capital and I think the elements are in place there.
So from an inventory management perspective, our goal is to maintain our inventory in these high-teens to low 20s as a percent of sales. And in terms of receivable we expect to see in the mid-teens band as a percent of sales with continuous focus on DSO on the one hand, but maybe even more importantly now that our business is growing outside of the US on credit risk management. So this is one of the key reason on top of why we really focus on working capital, we will focus on our receivable because it’s a key element of credit management there.
So there again although we will be very disciplined, we will not starve growth and we will be ready to deploy our capital where and when needed to emphasize growth. But we are once again committed to manage our working capital in a way that favors free cash generation.
So let me now shift to another key element of the cash flow statement and focus on working capital, on CapEx sorry. So as my friend described yesterday, during the 2008, 2010 frame, we deployed significant capital to be build a manufacturing capacity in North America. And we are now enjoying the benefits of this investment with recent volume growth we have seen.
In FY14, CapEx is expected to be in the range of $1 billion to $1.2 billion. As we did in the past, we will deploy this next wave of capital to further build our seed production capacity to support the growth trends we see outside of the US like in the Ukraine, like in Brazil, like in Argentina. The other area we will invest and just talked about it is in our Chesterfield facility to support our expanding R&D platform and our expanding R&D capability. These are investments that we evaluate very carefully, but in both cases these are investment that provides the highest returns in our portfolio.
So let me now combine all the financial drivers we covered and take a look at free cash generation. Over the past few years, with strong earnings growth and working capital discipline, we've been able to generate strong operating cash. When I look at the next few years, I believe we're in a very good place and all the elements are also in place for us to continue on that path. This ability to generate consistent and growing operating cash is really what gives us the flexibility to make growth investments such as the Climate Corporation acquisition to increase our capital investments such as what we're doing right now in terms of manufacturing capacity and still be in a position to return value to our owners.
So the combination of business growth and financial discipline that I have just described all comes together and it's reflected in our very strong return on capital performance I have shown on this slide. Over the past three years, we've seen very significant improvements in our return on capital and very strong performance. And return on capital is a measurement that personally I feel lot of attention to. But as a sole indicator, it can at times lead to wrong decisions in terms of long-term growth and we certainly don’t want to see that.
So going forward the way I think about our business capital deployment is based on efficiently balancing three things; business and earnings growth, free cash generation and our [seed] maximization. And those three imperatives in my mind are equally important. And we are very conscientiously evaluating each of our decisions through those three lenses, which sometimes complete, but we are in the end always aiming at delivering the best short and long-term return for our owners.
So speaking of our owners, over the course of the last fiscal year I spent the time laying out the way we think about capital deployment strategy and meaning that I’ve emphasized a couple of points. The first one is our prime focus on funding growth in the business. And I think that this year you see that playing with the acquisition we just made and the aggressive capital plan we have. Second, we stay committed to maintaining the strength of our balance sheet and from that perspective I feel we're in a very, very good place. And the third point is that we would use any additional cash to more aggressively fund the return to our owners through buybacks and dividends. And in FY13 we've clearly demonstrated that as we've used nearly used 100% of the free cash we generated or about $2 billion to return cash to our owners and I continue to see this as a priority going forward.
On Monday, we have taken advantage of the favorable debt market and raised $1 billion of debts largely to fund our recent acquisition of the Climate Corporation. But having done that, really gives us the flexibility to maintain dividend and buyback as a priority in FY14. So even after we have made the sizable growth investments, we continue to aim to use the buyback program to reduce share counts all these overtime. And we look to align, our dividend opportunity with our business growth and there again overtime. So this is the way we’re thinking about our capital allocation strategy.
So with that I’d like to wrap up by coming back to where we started. And by once again emphasizing the financial discipline that drive our overall strategy. We apply a very disciplined approach to drive business and the earnings growth, but we do so in a resource and capital efficient manner. And based on the strength of our co-business and some of the mid-term of working things we’ve been sharing with you today, I have full confidence in our ability to continue to deliver strong growth.
I also believe that our discipline allows us to continue to generate strong cash, which in-turn allows us to make investments to extend the runway of our growth and also to continue to return value to our owners through buybacks and dividends. Thank you very much.
Unidentified Company Representative
Thank you very much, Pierre. I will be brief in my wrap up. We will be with you or those of you who go on the tour today so get a chance to catch up one more time as we visit the research center. Let me begin by thanking Brian and his team, the meeting services team that pulled it together and the farmer guest who joined us (inaudible) it was a fun, Ethan our farmer guest, Brian, thanks very much.
The logistics and this allows us to concentrate in the business and I always tell Brian is like organizing a society [wedding] every two year. So he has really well done. I am going to wrap up where I began yesterday. The demand curves in agriculture are alive and well. And that it’s kind of unique to our industry because they are predictable and they continue to rise. I told you yesterday that in corn we anticipate 500 million to 600 million new bushels of corn will be needed every year as a conservative estimate versus the last 10 years. And I told you that there would be about 200 million bushels of new soybeans needed every year going forward.
The difference says, the next 10 years versus the last 10 years is going to be a little bit different, because in the last 10 years you remember 9 billion bushels of corn 70% of that was produced through new acres, the next years that isn’t going to happen. It’s going to depend much, much more on innovation to leverage increased yields on the same acres. Those new acres aren’t there to the same extent that they have been in the past. And what that says is and our planet is going to be warmer, drier, more clouded, hungrier and frustrate, agriculture become disproportionally more important and the technology application in agriculture becomes disproportionally more important.
So it’s a good thing to be in agriculture, if you have technologies that leverages yields. And I think that’s our investment [hype] officers it’s also our vision. And the vision of Monsanto is how do we double yields in the next 20 years and significantly reduce inputs on the same acre. So that’s what we wake up thinking about every morning about most mornings.
So that leverage is amplified and I think we have this succinctly last night for some -- that leverage is amplified in times of world commodity price because they are looking at how you produce more bushels to mitigate potential loss and we see that leverage in seed and the technology around seeds more than they do in many of their other commodity inputs. And I think we summarized that very, very clearly last night.
If you think about the last day and a lot of conversation on our updates, I think there was three takeaways and I would suggest, I would suggest those three takeaways and I think Pierre did a masterful job in laying out the couple of these. One, our Monsanto or our plants are clear, they’re very clear. And our growth opportunity is strong and as is realistic. The second one would be the core growth, our core business opportunity. When you think about margin upgrade in the next five years, the core business looks strong.
Now let me, you can never anticipate what’s sort of in the corner that’s agriculture, but the core growth opportunity looks strong. And the third and final one I would have highlighted as, our new platforms are transformative. And Rob touched on the margin platform of our biological, still early days, but I think real opportunity. And then Dave and Greg came in from San Francisco and we got a chance to talk in detail about the transformative nature of Climate Corp and how that fits into our vision of Precision Agriculture.
And the fact that this is a Biennial event is, I think he is right because nobody in 24 months you can see progressed particularly in the new platforms. And I would suggest that when we come back in two years time there are people in this investment community is going to say, I remember back to 2014 that was another one of those change points for Monsanto, because we're moving from the seed, from the bank to touch those  decision points and how they drive yield as we strive to double that in the next 20 years. And improving the quality of decisions and insights of the grower represents tremendous leverage we believe and increasing yields in the midst for longer term.
So you have seen Monsanto and many of you have lived this with us, you've seen Monsanto change from chemistry to biotech to a seed company. And this acquisition that we've made and the integration of these technologies represents the next pattern for our business as we start moving beyond that seed and start looking at the broader spectrum of decisions that are made on farm. The key point in this is, this will take partnerships, this will take collaboration, it will take us working with the machinery companies, with the traditional chemical companies, with the satellites or businesses and with our trade partners and customers to build out this platform substantially.
And I look forward to updating you in the March towards the next by Biennial Investor Meeting as we build out this platform. So I am really, really proud to be a part of this team. I am delighted that we had a chance to represent Monsanto on a whole bunch of the team lead got the opportunity to spend time with you and on behalf of them I’d like to thank you for your patience, your support and your interest and also the people that listened in on the webcast and I thank you for hanging with us.
I look forward to catching up with some of you at our research center for those of you that are heading off back to family and loved ones, travel safe and look forward to catching out with you as the season progresses. Thank you very much for your support.
Unidentified Company Representative
I think now we’ll make our last of our big transitions logistically here, as everybody is going I recognize there is a big chunk of people that need to get to the airport, we have shuttles out the main door, two sets of shuttles. So be aware, they are well marked, but there are two sets of shuttles. One set of shuttles will take us directly to the airport. So anybody needs to go to the airport, hop on those shuttles, get your bags and hop on those shuttles. A separate set of shuttles are set up for the research tour. Again take all your luggage there and we’ll have storage out there, but as long as you guys go out the main door you came in there should be sets of shuttles and plenty of people to help get you in the right direction.
For everybody that’s going on the tour, our teams will be there and we’ll get you settled in and get you really organized once we get out to our Chesterfields facility. Thanks again.
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